** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(MarkOne)**

 

**ý****  QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) **

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE QUARTERLY PERIOD ENDEDMarch 31, 2006**

 

**OR**

 

**o****  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) **

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE TRANSITION PERIOD FROM              TO              **

 

**Commissionfile number 0-19658**

 

**TUESDAYMORNING CORPORATION**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                                                     | ** ** | **75-2398532**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification Number) |

 

**6250LBJ Freeway Dallas, Texas 75240**

(Address,including zip code, of principal executive offices)

 

**(972)387-3562**

(Registrant’stelephone number, including area code)

 

**Notapplicable**

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

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  ý  No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

 

Largeaccelerated filer ý                                                             Acceleratedfiler o                                                                                          Non-acceleratedfiler o

 

Indicate by check mark whether the registrant isa shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  oNo  ý

 

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

 

| **Class**                                | ** ** | **Outstanding at April 25, 2006** |
|------------------------------------------|------------|-------------------------------------------------------|
| Common Stock,  par value $0.01 per share |       | 41,382,816                                            |

 

 

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** **

**Forward-LookingStatements**

 

*This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaningof the federal securities laws and the Private Securities Litigation Reform Actof 1995. These statements may be found throughout this Form 10-Qparticularly under the heading “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” among others. Forward-lookingstatements typically are identified by the use of terms such as “may,” “will,” “should,”“expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words,although some forward-looking statements are expressed differently. You shouldconsider statements that contain these words carefully because they describeour expectations, plans, strategies and goals and our beliefs concerning futurebusiness conditions, our future results of operations, our future financialposition, and our business outlook or state other “forward-looking”information.*

 

*Readersare referred to“Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2005, and “Item 1A Risk Factors” of this QuarterlyReport on Form 10Q for**examples ofrisks, uncertainties and events that could cause our actual results to differmaterially from the expectations expressed in our forward-looking statements. Theserisks, uncertainties and events also include, but are not limited to, thefollowing:*

 

•                  *uncertainties regarding our ability to open stores in new and existingmarkets and operate these stores on a profitable basis;*

 

•                  *conditions affecting consumer spending, such as high gasoline pricesand household utility costs;*

 

•                  *general regional and national economic conditions;*

 

•                  *inclement weather, such as the pattern of hurricanes that affected theSoutheast U.S. in August and September 2004 and again in September 2005;*

 

•                  *changes in our merchandise mix;*

 

•                  *timing and type of sales events, promotional activities and otheradvertising;*

 

•                  *uncertainties arising out of world events;*

 

•                  *increased or new competition;*

 

•                  *our ability to continuously attract buying opportunities for closeoutmerchandise and anticipate consumer demand as closeout merchandise becomesavailable;*

 

•                  *loss of, or disruption in, our centralized distribution center;*

 

•                  *loss or departure of one or more members of our senior management;*

 

•                  *our dependence on external funding sources;*

 

•                  *an increase in the cost or a disruption in the flow of our products;*

 

•                  *environmental regulations;*

 

•                  *seasonal and quarterly fluctuations; and*

 

•                  *fluctuations in our comparable store results.*

 

*Theforward-looking statements made in this Form 10-Q relate only to events asof the date on which the statements were made. We undertake no obligation toupdate our forward-looking statements to reflect events and circumstances afterthe date on which the statements were made or to reflect the occurrence ofunanticipated events.*

 

*Theterms “Tuesday Morning,” “we,” “us” and “our” as used in this Quarterly Reporton Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.*

 

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| **PART I - FINANCIAL INFORMATION**                                                                    |       |
|------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                       |       |
| Item 1 – Financial Statements                                                                         |       |
|                                                                                                       |       |
| Consolidated Balance Sheets as of  March 31, 2006 and December 31, 2005                          |       |
|                                                                                                       |       |
| Consolidated Statements of Income for the  Three Months Ended March 31, 2006 and 2005                 |       |
|                                                                                                       |       |
| Consolidated Statements of Cash Flows for  the Three Months Ended March 31, 2006 and 2005             |       |
|                                                                                                       |       |
| Notes to Consolidated Financial Statements                                                                 |       |
|                                                                                                       |       |
| Item 2 –  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |       |
|                                                                                                       |       |
| Item 3 – Quantitative and  Qualitative Disclosures about Market Risk                                  |       |
|                                                                                                       |       |
| Item 4 – Controls and Procedures                                                                      |       |
| ** **                                                                                                 | ** ** |
| **PART II – OTHER  INFORMATION**                                                                 | ** ** |
| ** **                                                                                                 | ** ** |
| Item 1 – Legal Proceedings                                                                            |       |
|                                                                                                       |       |
| Item 1A – Risk Factors                                                                                |       |
|                                                                                                       |       |
| Item 5 – Other Information                                                                            |       |
|                                                                                                       |       |
| Item 6 – Exhibits                                                                                     |       |

 

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**PART I- FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

## ***Tuesday Morning Corporation***

**ConsolidatedBalance Sheets**

**(Inthousands, except for share data)**

 
| ** **                                                                                                                                                                                 | ** ** | **March 31,  2006** | ** ** | **Dec. 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | ** **               | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                                 |       |                     |       |                    |       |
| Current  assets:                                                                                                                                                                           |       |                     |       |                    |       |
| Cash and  cash equivalents                                                                                                                                                                 |       | $                        | 5,330      |                    | $          | 43,547 |   |
| Inventories                                                                                                                                                                                |       | 252,723                  |       | 230,639                 |       |
| Prepaid  expenses and other current assets                                                                                                                                                 |       | 8,370                    |       | 7,258                   |       |
| Deferred  income taxes                                                                                                                                                                     |       | 5,071                    |       | 5,071                   |       |
| Total  current assets                                                                                                                                                                      |       | 271,494                  |       | 286,515                 |       |
|                                                                                                                                                                                       |       |                     |       |                    |       |
| Property and  equipment, net                                                                                                                                                               |       | 86,164                   |       | 87,786                  |       |
| Deferred  financing costs                                                                                                                                                                  |       | 642                      |       | 685                     |       |
| Other assets                                                                                                                                                                               |       | 4,628                    |       | 4,941                   |       |
|                                                                                                                                                                                       |       |                     |       |                    |       |
| Total Assets                                                                                                                                                                               |       | $                        | 362,928    |                    | $          | 379,927 |   |
|                                                                                                                                                                                       |       |                     |       |                    |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                             |       |                     |       |                    |       |
| Current  liabilities:                                                                                                                                                                      |       |                     |       |                    |       |
| Accounts  payable                                                                                                                                                                          |       | 79,547                   |       | 74,975                  |       |
| Accrued  liabilities                                                                                                                                                                       |       | 30,747                   |       | 42,372                  |       |
| Income taxes  payable                                                                                                                                                                      |       | 3,831                    |       | 16,520                  |       |
| Total  current liabilities                                                                                                                                                                 |       | 114,125                  |       | 133,867                 |       |
|                                                                                                                                                                                       |       |                     |       |                    |       |
| Revolving  credit facility                                                                                                                                                                 |       | 28,000                   |       | —                  |       |
| Deferred  rent                                                                                                                                                                             |       | 4,486                    |       | 4,431                   |       |
| Deferred  income taxes                                                                                                                                                                     |       | 6,267                    |       | 6,267                   |       |
|                                                                                                                                                                                       |       |                     |       |                    |       |
| Total  Liabilities                                                                                                                                                                         |       | 152,878                  |       | 144,565                 |       |
|                                                                                                                                                                                       |       |                     |       |                    |       |
| Commitments  and contingencies                                                                                                                                                             |       |                     |       |                    |       |
| Stockholders’  equity:                                                                                                                                                                |       |                     |       |                    |       |
| Preferred  stock, par value $0.01 per share, authorized 10,000,000 shares, none issued  or outstanding                                                                                     |       | —                   |       | —                  |       |
| Common  stock, par value $0.01 per share, authorized 100,000,000 shares; 41,382,816  shares issued and outstanding at March 31, 2006 and 41,369,922 shares at  December 31, 2005 |       | 414                      |       | 414                     |       |
| Additional  paid-in capital                                                                                                                                                                |       | 192,427                  |       | 191,229                 |       |
| Retained  earnings                                                                                                                                                                         |       | 17,201                   |       | 43,763                  |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                             |       | 8                        |       | (44                     | )          |
|                                                                                                                                                                                       |       |                     |       |                    |       |
| Total  Stockholders’ Equity                                                                                                                                                           |       | 210,050                  |       | 235,362                 |       |
|                                                                                                                                                                                       |       |                     |       |                    |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                           |       | $                        | 362,928    |                    | $          | 379,927 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

1

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**TuesdayMorning Corporation**

**ConsolidatedStatements of Income**

**(Inthousands, except per share data)**

 
| ** **                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                                          |       |                                             |       |   |   |
| Net sales                                     |       | $                                                | 187,759    |   | $ | 185,594 |   |
| Cost of  sales                                |       | 114,168                                          |       | 113,036 |   |
| Gross profit                                  |       | 73,591                                           |       | 72,558 |   |
| Selling,  general and administrative expenses |       | 63,163                                           |       | 62,122 |   |
| Operating  income                             |       | 10,428                                           |       | 10,436 |   |
| Other income  (expense):                      |       |                                             |       |   |   |
| Interest  income                              |       | 99                                               |       | 34 |   |
| Interest  expense                             |       | (186                                             | )          | (206 | ) |
| Other income  (expense)                       |       | 133                                              |       | 193 |   |
|                                          |       | 46                                               |       | 21 |   |
| Income  before income taxes                   |       | 10,474                                           |       | 10,457 |   |
| Income tax  expense                           |       | 3,934                                            |       | 3,791 |   |
|                                          |       |                                             |       |   |   |
| Net income                                    |       | $                                                | 6,540      |   | $ | 6,666 |   |
|                                          |       |                                             |       |   |   |
| **Earnings  Per Share**                       |       |                                             |       |   |   |
| Net income  per common share:                 |       |                                             |       |   |   |
| Basic                                         |       | $                                                | 0.16       |   | $ | 0.16 |   |
| Diluted                                       |       | $                                                | 0.16       |   | $ | 0.16 |   |
| Weighted  average number of common shares:    |       |                                             |       |   |   |
| Basic                                         |       | 41,376                                           |       | 41,129 |   |
| Diluted                                       |       | 41,674                                           |       | 41,740 |   |
|                                          |       |                                             |       |   |   |
| Dividend per  common share                    |       | $                                                | 0.80       |   | $ | — |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

2

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**TuesdayMorning Corporation**

**ConsolidatedStatements of Cash Flows**

**(Inthousands)**

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
|                                                                              |       |                                             |       |   |   |
| **Net cash  flows from operating activities:**                                    |       |                                             |       |   |   |
| Net income                                                                        |       | $                                                | 6,540      |   | $ | 6,666 |   |
| Adjustments  to reconcile net income to net cash used in operating activities:    |       |                                             |       |   |   |
| Depreciation  and amortization                                                    |       | 4,007                                            |       | 3,459 |   |
| Amortization  of financing fees                                                   |       | 43                                               |       | 43 |   |
| Stock-based  compensation                                                         |       | 809                                              |       | — |   |
| Other                                                                             |       | 52                                               |       | (28 | ) |
| Change in  operating assets and liabilities:                                      |       |                                             |       |   |   |
| Inventories                                                                       |       | (21,743                                          | )          | (23,455 | ) |
| Prepaid and  other assets                                                         |       | (799                                             | )          | (1,831 | ) |
| Accounts  payable                                                                 |       | 4,572                                            |       | 3,846 |   |
| Accrued  liabilities                                                              |       | (11,625                                          | )          | (7,072 | ) |
| Deferred  rent                                                                    |       | 55                                               |       | 4,084 |   |
| Income taxes  payable                                                             |       | (12,689                                          | )          | (12,531 | ) |
| Net cash  used in operating activities                                            |       | (30,778                                          | )          | (26,819 | ) |
| **Net cash  flows from investing activities:**                                    |       |                                             |       |   |   |
| Capital  expenditures                                                             |       | (2,385                                           | )          | (4,047 | ) |
| Net cash  used in investing activities                                            |       | (2,385                                           | )          | (4,047 | ) |
| **Net cash  flows from financing activities:**                                    |       |                                             |       |   |   |
| Payment of  dividends to common stockholders                                      |       | (33,102                                          | )          | — |   |
| Proceeds  from revolving credit facility                                          |       | 28,000                                           |       | — |   |
| Proceeds  from exercise of common stock options and stock purchase plan purchases |       | 48                                               |       | 94 |   |
| Net cash  (used in) provided by financing activities                              |       | (5,054                                           | )          | 94 |   |
| Net decrease  in cash and cash equivalents                                        |       | (38,217                                          | )          | (30,772 | ) |
| Cash and  cash equivalents, beginning of period                                   |       | 43,547                                           |       | 45,067 |   |
| Cash and  cash equivalents, end of period                                         |       | $                                                | 5,330      |   | $ | 14,295 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

3

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**Tuesday Morning Corporation**

**Notes to ConsolidatedFinancial Statements**

 

1.               Basis of presentation - The consolidatedinterim financial statements included herein have been prepared by us pursuantto the rules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States have been condensed or omitted pursuant to such rules andregulations. These financial statements include all adjustments, consistingonly of those of a normal recurring nature, which, in the opinion ofmanagement, are necessary to present fairly the results of the interim periodspresented and should be read in conjunction with the consolidated financialstatements and notes thereto in our Form 10-K filing for the year ended December 31,2005. Because of the seasonal nature of our business, the results of operationsfor the quarter are not indicative of the results to be expected for the entireyear.

 

2.                 Stock-basedcompensation – On December 16, 2004, the Financial Accounting StandardsBoard (“FASB”) issued FASB Statement No. 123 (revised 2004), *Share-Based Payment*(Statement 123(R)), which is a revisionof FASB Statement No. 123, *Accounting for Stock-BasedCompensation*. Statement 123(R) supersedes APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and amends FASB Statement No. 95, *Statement of Cash Flows*.Generally, the approach in Statement 123(R) is similar to the approachdescribed in Statement 123. However, Statement 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values at the time ofgrant. Pro forma disclosure is no longer an alternative. 

 

Statement123(R) permits public companies to adopt its requirements using one of twomethods: (1) a “modified prospective” method in which compensation cost isrecognized beginning with the effective date (a) based on the requirementsof Statement 123(R) for all share-based payments granted after theeffective date and (b) based on the requirements of Statement 123 for allawards granted to employees prior to the effective date of Statement123(R) that remain unvested on the effective date; (2) a “modifiedretrospective” method which includes the requirements of the modifiedprospective method described above, but also permits entities to restate basedon the amounts previously recognized under Statement 123 for purposes of proforma disclosures either (a) all prior periods presented or (b) priorinterim periods of the year of adoption. We have adopted Statement 123(R) basedon the modified prospective method effective January 1, 2006. 

 

Stock-based compensationamounts recognized in the three months end March 31, 2006 upon theadoption of Statement 123(R) is as follows (in thousands):

 
| Total cost  of stock-based compensation during the period  |   | $    | 1,150 |   |
|------------------------------------------------------------|--------|------|-------|--------|
| Amounts  capitalized in ending inventory                   |   | (341 | )     |
| Amounts  charged against income for the period before tax  |   | $    | 809   |   |
| Amount of  related income tax benefit recognized in income |   | $    | (230  | )      |

 

Consistent with ourinventory accounting policies, the payroll costs of buying, distribution andcertain other general and administrative expenses, and with the adoption ofStatement 123(R), the related stock-based compensation of these functions, arecapitalized as a part of inventory and expensed as cost of sales when therelated inventory is sold.  The adoptionof Statement 123(R) also caused a $0.01 decrease in basic and diluted earningsper share for the three months ended March 31, 2006. Basedon non-vested stock options outstanding at March 31, 2006, we expect toincur approximately $3.0 million, net of tax, in stock-based compensation forthe year ended December 31, 2006.

 

Statement123(R) includes several modifications to the way that incomes taxes areprovided for in the financial statements. The expense for stock option grantsis only deductible for tax purposes at the time the taxable event takes place,which will cause variability in our effective tax rates recorded throughouteach year. The expected variability in our effective tax rate is caused byStatement 123(R)’s forbiddance of companies from predicting when these taxableevents will take place. Statement 123(R) also requires the benefits of taxdeductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow as required undercurrent literature. This requirement will reduce net operating cash flows andincrease net financing cash flows in annual periods after adoption.

 

In the prior year, we accounted for our stock-basedcompensation plans utilizing the intrinsic value method in accordance with theprovisions of Accounting Principles Board Opinion No. 25 (APB 25).  Generally, no compensation expense wasrecognized for fixed stock option plans because the exercise prices of employeestock options equaled or exceeded the market prices of the underlying stock on thedates of grant. Had we applied the fair value based method and recognitionprovisions of Statement of Financial Accounting Standards (SFAS) No. 123, “*Accounting for Stock-Based Compensation*,” (as amended byStatement of 

 

4

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Financial Accounting Standards No. 148, “*Accounting for Stock-Based Compensation Transition and Disclosure*”)the pro forma effects of stock-based compensation on net income and net incomeper common share for the three months ended March 31, 2005 were as follows(in thousands except share and per share amounts):

 
| Net income  as reported                                                                                              |   | $      | 6,666  |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Less:  Stock-based employee compensation expense determined under the fair value  method, net of related tax effects |   | 1,000  |   |
| Pro-forma  net income                                                                                                |   | $      | 5,666  |   |
|                                                                                                                 |   |   |   |
| Net income  per common share                                                                                         |   |   |   |
| Basic as  reported                                                                                                   |   | $      | 0.16   |   |
| Basic  pro-forma                                                                                                     |   | 0.14   |   |
| Diluted as  reported                                                                                                 |   | 0.16   |   |
| Diluted  pro-forma                                                                                                   |   | 0.14   |   |

 

We have established the Tuesday Morning Corporation 1997 Long-TermEquity Incentive Plan, as amended, (the “1997 Plan”) and the Tuesday MorningCorporation 2004 Long-Term Equity Incentive Plan, as amended (the “2004 Plan”)which allows our Board of Directors to grant stock options to directors,officers and key employees of, and certain other key individuals who perform servicesfor us and our subsidiaries. The 1997 Plan and the 2004 Plan authorizes grantsof options to purchase up to 4,800,000 and 2,000,000 shares, respectively, ofauthorized, but unissued common stock. Stock options are granted with anexercise price, terms and vesting determined by the Compensation Committee ofthe Board of Directors, with certain limitations.

 

Options granted underthe 1997 Plan and the 2004 Plan vest daily over periods of four to five yearsand expire in ten years. The exercise prices of the options range between $0.20and $35.23, which represents fair value on the grant date of the shares ofcommon stock into which such options are exercisable. At March 31, 2006,there were 3,410 and 1,895,000 shares available for grant under the 1997 Planand the 2004 Plan, respectively. 

 

Consistent with prioryears, the fair value of each stock option granted during the three monthsended March 31, 2006 was estimated at the date of grant using aBlack-Scholes option pricing model based on the assumptions of expectedvolatility of 35%, expected dividend yield of 2.5%, expected term of 4.5 yearsand a risk-free interest rate of 4.2%. The expected volatility is based on ourconsideration of the implied volatility of our minimally traded options on ourshares and the historical volatility of our stock based on our historical stockprices. The expected term of an option is based on our historical review ofemployee exercise behavior based on the employee class (executive or non-executive)and based on our consideration of the remaining contractual term if limitedexercise activity existed for a certain employee class. The risk-free interestrate is the constant maturity interest rate for U.S. Treasury instruments withterms consistent with the expected lives of the awards.

 

A summary of stockoption activity as of March 31, 2006 and changes during the three monthsended March 31, 2006 is presented below (in thousands except share and pershare amounts):

 
| ** **                                   | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------|------------|
| Options  Outstanding at January 1, 2006 |       | 2,016,293                  |       | $                                           | 20.07      |                                                            | —     |                                | —     |   |
| Granted                                      |       | 25,000                     |       | 21.43                                       |       | —                                                          |       | —                              |       |
| Exercised                                    |       | (12,894                    | )          | 2.64                                        |       | —                                                          |       | —                              |       |
| Cancelled                                    |       | (13,412                    | )          | 31.60                                       |       | —                                                          |       | —                              |       |
| Options  Outstanding at March 31, 2006  |       | 2,014,987                  |       | $                                           | 20.13      |                                                            | 6.6        |                                | $          | 5,973 |   |
| Exercisable  at March 31, 2006          |       | 1,306,712                  |       | $                                           | 16.83      |                                                            | 5.9        |                                | $          | 8,178 |   |

 

The weighted averagegrant-date fair value of share options granted during the three months ended March 31,2006 was $6.05. The total intrinsic value of share options exercised during thethree months ended March 31, 2006 was $245 thousand.

 

As of March 31,2006, we had $11.2 million of total unrecognized stock-based compensationexpense related to stock options that is expected to be recognized over aweighted average period of 2.86 years.

 

5

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3.               Leaseaccounting adjustment - Based on certain views expressed in a letter of February 7,2005 from the Office of the Chief Accountant of the Securities and ExchangeCommission to the American Institute of Certified Public Accountants, wereviewed our accounting policies and practices associated with operatingleases. Consistent with industry practices, we historically reportedstraight-line rental expense beginning on the lease commencement date. This hadthe effect of excluding the rent holiday associated with the pre-opening orbuild-out period of our stores from the calculation of the period over which weexpensed rent. Following our review, we modified our accounting policies suchthat we begin recording rent expense on the date we take possession of or havethe right to use the premises.

 

As a result of thisadjustment, we recorded a non-cash, $3.9 million ($2.4 million, netof income tax) cumulative charge to earnings during the first quarter of fiscal2005. The adjustment did not impact historical or future net cash flows nor thetiming of the payments under related leases. Prior years’ financial statementswere not restated as the impact of this issue was immaterial to previouslyreported results for any individual previous period.

 

4*.**              *Comprehensiveincome - Comprehensive income isdefined as net income plus the change in equity during a period fromtransactions and other events, excluding those resulting from investments byand distributions to stockholders. Total comprehensive income for the threemonth period ended March 31, 2006 and 2005 was $6.6 million.

 

5.               Legal proceedings – During 2001 and 2002, wewere named as a defendant in three complaints filed in the Superior Court ofCalifornia in and for the County of Los Angeles. The plaintiffs are seeking tocertify a statewide class made up of some of our current and formeremployees, which they claim are owed compensation for overtime wages, penaltiesand interest. The plaintiffs are also seeking attorney’s fees and costs. In October 2003,we entered into a settlement agreement with a sub-class of theseplaintiffs consisting of manager-in-training and management trainees which waspaid in November 2005 with no material impact to our financial statements.The remaining complaint relating to our salaried managers is still open and isawaiting a trial date. We are attempting to consolidate a similar lawsuit filedin Orange County, California in 2004 with this remaining manager complaint, butno agreement has been reached with the court. This case is still in discovery.We do not expect either of these complaints to have a material impact to ourfinancial statements.

 

In June 2004, we were named as a defendant in acomplaint filed in the U.S. District Court, Central District of California. Theplaintiff, Thomas Kinkade Company (f/k/a/ Media Arts Group Inc.), allegedcopyright infringement and false advertisements on merchandise we sold in thesecond quarter of 2004. The case went to trial in March 2006. The juryfound in favor of us on the trademark infringement claim. The jury was unableto reach a verdict on the remaining claims. The parties have agreed to mediatewith the presiding judge regarding the remaining claims. The mediation willoccur in May 2006.

 

We intend to vigorously defend all pending actions.We do not believe these or any other legal proceedings pending or threatenedagainst us would have a material adverse effect on our financial condition orresults of operations.

 

6.               Earnings per common share

 
| ** **                                                                                          | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                                                                          | ** ** | **(in thousands, except per share  amounts)** | ** ** |
| **Basic  earnings per share:**                                                                      |       |                                                              |       |   |   |
| Net income                                                                                          |       | $                                                                 | 6,540      |   | $ | 6,666 |   |
| Weighted  average number of common shares outstanding                                               |       | 41,376                                                            |       | 41,129 |   |
| Net income  per common share                                                                        |       | $                                                                 | 0.16       |   | $ | 0.16 |   |
|                                                                                                |       |                                                              |       |   |   |
| **Diluted  earnings per share:**                                                                    |       |                                                              |       |   |   |
| Net income                                                                                          |       | $                                                                 | 6,540      |   | $ | 6,666 |   |
|                                                                                                |       |                                                              |       |   |   |
| Dilutive  effect of employee stock options                                                          |       | 298                                                               |       | 611 |   |
| Weighted  average number of common shares outstanding                                               |       | 41,376                                                            |       | 41,129 |   |
| Weighted  average number of common shares and diluted effect of outstanding employee  stock options |       | 41,674                                                            |       | 41,740 |   |
| Net income  per common share                                                                        |       | $                                                                 | 0.16       |   | $ | 0.16 |   |

 

6

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7.               Revolving credit facility – Our $210 millionrevolving credit facility expires in December 2009. We incur commitmentfees of up to 0.25% on the unused portion of the revolving credit facility. Anyborrowings under the revolving credit facility incur interest at LIBOR or theprime rate, depending on the type of borrowing, plus an applicable margin.These rates are increased or reduced as our average total leverage ratiochanges.

 

At March 31, 2006, we had $28.0 millionoutstanding under the revolving credit facility and had availability of $175.3million.

 

7

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

 

**Overview**

 

•       We sellupscale, name brand home furnishings, gifts and related items significantlybelow retail prices charged by department and specialty stores throughout 734stores in 46 states. We have a unique event-based selling strategy that createsa sense of urgency and excitement for our customer base.

 

•       Our storebase has grown at approximately 10% per year for the last five years, andduring the first quarter of 2006 we expanded our store base by 7 new stores andhad 5 store closures.

 

•       During thefirst quarter of 2006, we paid our second annual cash dividend of $0.80 pershare totaling $33.1 million.

 

**Stock-based Compensation**

 

On December 16, 2004, the FinancialAccounting Standards Board (“FASB”) issued FASB Statement No. 123 (revised2004), *Share-Based Payment*(Statement 123(R)),which is a revision of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*. Statement 123(R) supersedes APBOpinion No. 25, *Accounting for StockIssued to Employees*, and amends FASB Statement No. 95, *Statement of Cash Flows*. Generally, the approach inStatement 123(R) issimilar to the approach described in Statement 123. However, Statement 123(R)requires all share-based payments to employees, including grants of employeestock options, to be recognized in the income statement based on their fairvalues at the time of grant. Pro forma disclosure is no longer an alternative. 

 

Statement 123(R) permits public companies toadopt its requirements using one of two methods: (1) a “modified prospective”method in which compensation cost is recognized beginning with the effectivedate (a) based on the requirements of Statement 123(R) for allshare-based payments granted after the effective date and (b) based on therequirements of Statement 123 for all awards granted to employees prior to theeffective date of Statement 123(R) that remain unvested on the effectivedate; (2) a “modified retrospective” method which includes therequirements of the modified prospective method described above, but also permitsentities to restate based on the amounts previously recognized under Statement123 for purposes of pro forma disclosures either (a) all prior periodspresented or (b) prior interim periods of the year of adoption. We haveadopted Statement 123(R) based on the modified prospective method effective January 1,2006. 

 

Stock-based compensation amounts recognized in thethree months end March 31, 2006 upon the adoption of Statement 123(R) isas follows (in thousands):

 
| Total cost  of stock-based compensation during the period  |   | $    | 1,150 |   |
|------------------------------------------------------------|--------|------|-------|--------|
| Amounts  capitalized in ending inventory                   |   | (341 | )     |
| Amounts  charged against income for the period before tax  |   | $    | 809   |   |
| Amount of  related income tax benefit recognized in income |   | $    | (230  | )      |

 

Consistent with our inventory accountingpolicies, the payroll costs of buying, distribution and certain other generaland administrative expenses, and with the adoption of Statement 123(R), therelated stock-based compensation of these functions, are capitalized as a part ofinventory and expensed as cost of sales when the related inventory is sold.  The adoption of Statement 123(R) also caused a $0.01 decrease in basicand diluted earnings per share for the three months ended March 31, 2006. Basedon non-vested stock options outstanding at March 31, 2006, we expect toincur approximately $3.0 million, net of tax, in stock-based compensation forthe year ended December 31, 2006.

 

Statement 123(R) includes several modificationsto the way that incomes taxes are provided for in the financial statements. Theexpense for stock option grants is only deductible for tax purposes at the timethe taxable event takes place, which will cause variability in our effectivetax rates recorded throughout each year. The expected variability in oureffective tax rate is caused by Statement 123(R)’s forbiddance of companiesfrom predicting when these taxable events will take place. Statement123(R) also requires the benefits of tax deductions in excess ofrecognized compensation cost to be reported as a financing cash flow, ratherthan as an operating cash flow as required under current literature. Thisrequirement will reduce net operating cash flows and increase net financingcash flows in annual periods after adoption.

 

In the prior year, we accounted for our stock-basedcompensation plans utilizing the intrinsic value method in accordance with theprovisions of Accounting Principles Board Opinion No. 25 (APB 25).  Generally, no compensation expense wasrecognized for fixed stock option plans because the exercise prices of employeestock options equaled or exceeded the market prices of the underlying stock onthe dates of grant. Had we applied the fair value based method and recognitionprovisions of Statement of Financial Accounting Standards (SFAS) No. 123, “*Accounting for Stock-Based Compensation*,” (as amended byStatement of 

 

8

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Financial Accounting Standards No. 148, “*Accounting for Stock-Based Compensation Transition and Disclosure*”)the pro forma effects of stock-based compensation on net income and net incomeper common share for the three months ended March 31, 2005 were as follows(in thousands except share and per share amounts):

 
| Net income  as reported                                                                                              |   | $      | 6,666  |   |
|----------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Less:  Stock-based employee compensation expense determined under the fair value  method, net of related tax effects |   | 1,000  |   |
| Pro-forma  net income                                                                                                |   | $      | 5,666  |   |
|                                                                                                                 |   |   |   |
| Net income  per common share                                                                                         |   |   |   |
| Basic as  reported                                                                                                   |   | $      | 0.16   |   |
| Basic  pro-forma                                                                                                     |   | 0.14   |   |
| Diluted as  reported                                                                                                 |   | 0.16   |   |
| Diluted  pro-forma                                                                                                   |   | 0.14   |   |

 

Consistent with prior years, the fair value of eachstock option granted during the three months ended March 31, 2006 wasestimated at the date of grant using a Black-Scholes option pricing model basedon the assumptions of expected volatility of 35%, expected dividend yield of2.5%, expected term of 4.5 years and a risk-free interest rate of 4.2%. Theexpected volatility is based on our consideration of the implied volatility ofour minimally traded options on our shares and the historical volatility of ourstock based on our historical stock prices. The expected term of an option isbased on our historical review of employee exercise behavior based on theemployee class (executive or non-executive) and based on our considerationof the remaining contractual term if limited exercise activity existed for acertain employee class. The risk-free interest rate is the constant maturityinterest rate for U.S. Treasury instruments with terms consistent with theexpected lives of the awards.

 

As of March 31, 2006, we had $11.2 million oftotal unrecognized stock-based compensation expense related to stock optionsthat is expected to be recognized over a weighted average period of 2.86 years.

 

**Lease Accounting Adjustment**

 

Based on certain views expressed in a letter of February 7,2005 from the Office of the Chief Accountant of the Securities and ExchangeCommission to the American Institute of Certified Public Accountants, wereviewed our accounting policies and practices associated with operatingleases. Consistent with industry practices, we historically reportedstraight-line rental expense beginning on the lease commencement date. This hadthe effect of excluding the rent holiday associated with the pre-opening orbuild-out period of our stores from the calculation of the period over which weexpensed rent. Following our review, we modified our accounting policies suchthat we begin recording rent expense on the date we take possession of or havethe right to use the premises.

 

Asa result of this adjustment, we recorded a non-cash, $3.9 million($2.4 million, net of income tax) cumulative charge to earnings during thefirst quarter of 2005. The adjustment did not impact historical or future netcash flows nor the timing of the payments under related leases. Prior years’financial statements were not restated as the impact of this issue wasimmaterial to previously reported results for any individual previous periods.

 

**Results of Operations**

 

Thefollowing table sets forth certain financial information from our consolidatedstatements of income expressed as a percentage of net sales. Our business ishighly seasonal, with a significant portion of our net sales and most of ouroperating income generated in the fourth quarter, which includes the holidayseason. There can be no assurance that the trends in sales growth or operatingresults will continue in the future.

 
| ** **                                       | ** ** | **Three Months Ended****March 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                           | ** ** | **2005** | ** ** |
| Net sales                                        |       | 100.0                                              | %          | 100.0 | % |
| Cost of  sales                                   |       | 60.8                                               |       | 60.9 |   |
| Gross profit                                     |       | 39.2                                               |       | 39.1 |   |
| Selling,  general and administrative expense     |       | 33.6                                               |       | 33.5 |   |
| Operating  income                                |       | 5.6                                                |       | 5.6 |   |
| Net interest  expense and other income (expense) |       | 0.0                                                |       | 0.0 |   |
| Income  before income taxes                      |       | 5.6                                                |       | 5.6 |   |
| Income tax  expense                              |       | 2.1                                                |       | 2.0 |   |
| Net income                                       |       | 3.5                                                | %          | 3.6 | % |

 

9

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**Three Months Ended March 31, 2006**

**Compared to the Three Months Ended March 31, 2005**

 

Duringthe first quarter of 2006, net sales increased to $187.8 million from $185.6million, an increase of $2.2 million or 1.2% compared to the same quarter of2005. The increase in first quarter sales is primarily due to the $10.2 millionincrease in sales from non-comparable new stores, offset by a 4.5% decrease incomparable store sales. The decrease in comparable sales for the first quarterof 2006 was comprised of a 5.0% decrease in the number of transactionspartially offset by a 0.5% increase in the average transaction amount. Averagestore sales for the first quarter of 2006 decreased 7.6% when compared to thesame prior year quarter. Comparable store sales and sales per store decreasedprimarily due to lower traffic levels than anticipated. Management believestraffic levels are lower due to a number of factors, including a decelerationin the sales trends of home-related merchandise and reduced disposable incomeof our consumers given the pressure of rising gasoline and energy costs ontheir household budget.

 

Grossprofit increased $1.0 million, or 1.4%, to $73.6 million for the three monthsended March 31, 2006 as compared to last year’s first quarter of $72.6million, primarily as a result of our increased net sales. Our gross profitpercentage increased to 39.2% from 39.1% in the prior year’s first quarter. This0.1% increase is comprised of a 0.3% increase in gross profit percentage due tothe sale of higher margin merchandise in the first quarter of 2006, partiallyoffset by a 0.2 % decrease in our gross profit percentage due to the increasein damaged merchandise and in our shrink provision.

 

Selling,general and administrative expenses are comprised of store labor, storeoccupancy costs, advertising, miscellaneous store operating expenses andcorporate office costs. Increases in dollar amounts of these expenses areattributable to increases in the number of stores and increases in variableexpenses due to sales growth. Variable expenses include payroll and relatedbenefits, advertising expense and other expenses such as credit card fees.

 

Selling,general and administrative expenses increased $1.1 million, or 1.7%, to $63.2million from $62.1 million in the first quarter of 2005. The increase wasattributable to a $3.7 million increase in store occupancy costs, storepersonnel costs and store fixed asset depreciation expense primarily due to theexpansion in our store base and the $809 thousand stock-based compensationrecorded upon the adoption of Statement 123(R), primarily offset by the $3.9million non-cash lease accounting adjustment in the same prior year quarter. Asa percentage of net sales, these expenses increased 0.1% to 33.6% in the firstquarter of 2006 from 33.5% in the first quarter of 2005. The increasedpercentage is primarily due to the reduced expense leveraging given ournegative comparable store sales for the first quarter of 2006 and includes a1.8% increase related to store occupancy costs, store personnel costs and storefixed asset depreciation expense and a 0.4% increase due to the recording ofstock-based compensation upon the adoption of Statement 123(R), primarilyoffset by the 2.1% decrease related to the lease accounting adjustment recordedin the prior year.

 

Theincome tax provision for the three month periods ended March 31, 2006 and2005 was $3.9 million and $3.8 million, respectively, reflecting an effectivetax rate of 37.6% and 36.3%, respectively. The effective tax rate is higher inthe first quarter of 2006 as compared to the first quarter of 2005 due to afavorable settlement of tax matters in the prior year quarter.

 

### **Liquidity and Capital Resources**

### ** **

Wehave financed our operations with funds generated from operating activities andborrowings under our revolving credit facility. Our cash flows will continue tobe utilized for the expansion of our business and future cash dividends to ourstockholders. We have no off-balance sheet arrangements or transactions withunconsolidated, limited purpose or variable interest entities, nor do we havematerial transactions or commitments involving related persons or entities.

 

Net cash used in operating activities for thethree months ended March 31, 2006 and 2005 was $30.8 million and $26.8million, respectively, representing a $4.0 million increase. This increase is primarilydue to the $2.6 million decrease in operating income after excluding thenon-cash items related to the $3.9 million lease accounting adjustment in theprior year period, the $809 thousand stock-based compensation expense in thecurrent year period, and depreciation and amortization expense of both periods.

 

Capitalexpenditures principally associated with new store openings and warehouse andoffice equipment were $2.4 million and $4.0 million for the three months ended March 31,2006 and 2005, respectively. The decrease in capital expenditures is due to ourdecreased store openings in the first quarter of 2006 when compared to thefirst quarter of 2005. We expect to spend approximately $16.0 million foradditional capital expenditures for the remainder of 2006, which will includethe opening of new stores, enhancements of selected stores, and purchases ofequipment for our distribution center and corporate office.

 

Wehave a $210 million revolving credit facility that expires in December 2009.Any borrowing under the revolving credit facility will incur interest atLIBOR or the prime rate, depending on the type of borrowing, plus an applicablemargin. We incur commitment fees of up to 0.25% on the unused portion of therevolving credit facility. This rate is reduced or increased as our averagetotal leverage ratio changes. Our indebtedness under the credit facility issecured by a lien on our inventory and cash accounts, as well as a pledge ofour ownership interests in all of our subsidiaries.

 

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AtMarch 31, 2006, we had $28.0 million in debt outstanding under therevolving credit facility and had availability of $175.3 million. As of March 31,2006, we had outstanding letters of credit of $6.7 million, primarily forself-insurance.

 

Therevolving credit facility contains certain restrictive covenants, which amongother things, require us to comply with certain financial ratios coveringmaximum leverage, minimum fixed charge coverage and minimum interest coverage.Other restrictions affect our ability to incur liens or make certain otherrestricted payments, sell assets or merge or consolidate with any other person.As of March 31, 2006, we were in compliance with all covenants.

 

We anticipate that our future net cash flowsfrom operations and unused borrowings under our revolving credit facility willbe sufficient to fund our working capital needs and planned capitalexpenditures for the next 12 months.

 

**Store Openings/Closings**

 
| ** **                          | ** ** | **Three Months  Ended  March 31  2006** | ** ** | **Three Months  Ended  March 31  2005** | ** ** | **Twelve Months   Ended  December 31,  2005** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                        | ** ** | ** **                                        | ** ** | ** **                                                   | ** ** |
| Stores Open  at beginning of period |       | 732                                               |       | 662                                               |       | 662                                                          |       |
| Stores  Opened during the period    |       | 7                                                 |       | 18                                                |       | 81                                                           |       |
| Stores  Closed during the period    |       | (5                                                | )          | (7                                                | )          | (11                                                          | )          |
| Stores Open  at end of period       |       | 734                                               |       | 673                                               |       | 732                                                          |       |

 

**Item3.**           Quantitative and Qualitative Disclosuresabout Market Risk

** **

Weare exposed to various market risks, including changes in foreign currencyexchange rates and interest rates. Market risk is the potential loss arisingfrom adverse changes in market prices and rates, such as foreign currencyexchange and interest rates. Based on our market risk sensitive instrumentsoutstanding as of March 31, 2006, we have determined that there was nomaterial market risk exposure to our consolidated financial position, resultsof operations or cash flows as of such date. Our market risk is discussed inmore detail in our Annual Report on Form 10-K for the year ended December 31,2005. We do not enter into derivatives or other financial instruments fortrading or speculative purposes. There have been no significant changes in theforeign currency exchange rate or interest rate market risks since December 31,2005.

 

**Item 4. Controlsand Procedures**

** **

**Disclosure Controls and Procedures**

 

Based on our management’sevaluation (with participation of our principal executive officer and ourprincipal financial officer), our principal executive officer and our principalfinancial officer have concluded that our disclosure controls and procedures(as defined in Rule 13a-15(e) or Rule 15d-15(e) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) were effectiveas of March 31, 2006 to ensure that information required to be disclosedby us in this Quarterly Report on Form 10-Q was (1) recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and (2) accumulatedand communicated to our management, including our principal executive andprincipal financial officers, to allow timely decisions regarding requireddisclosure.

 

A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Becauseof inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues, if any, within a companyhave been detected. Accordingly, our disclosure controls and procedures aredesigned to provide reasonable, not absolute, assurance that the objectives ofour disclosure control system are met and, as set forth above, our chiefexecutive officer and chief financial officer have concluded, based on theirevaluation as of the end of the period covered by this report, that ourdisclosure controls and procedures were effective to provide reasonableassurance that the objectives of our disclosure control system were met.

 

**Changesin Internal Control Over Financial Reporting**

 

Therewere no changes in our internal control over financial reporting that occurredduring the quarter ended March 31, 2006 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

 

11

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**PART II- OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

During2001 and 2002, we were named as a defendant in three complaints filed in theSuperior Court of California in and for the County of Los Angeles. Theplaintiffs are seeking to certify a statewide class made up of some of ourcurrent and former employees, which they claim are owed compensation forovertime wages, penalties and interest. The plaintiffs are also seekingattorney’s fees and costs. In October 2003, we entered into a settlementagreement with a sub-class of these plaintiffs consisting ofmanager-in-training and management trainees which was paid in November 2005with no material impact to our financial statements. The remaining complaintrelating to our salaried managers is still open and is awaiting a trial date.We are attempting to consolidate a similar lawsuit filed in Orange County,California in 2004 with this remaining manager complaint, but no agreement hasbeen reached with the court. This case is still in discovery. We do not expecteither of these complaints to have a material impact to our financialstatements.

 

InJune 2004, we were named as a defendant in a complaint filed in the U.S.District Court, Central District of California. The plaintiff, Thomas KinkadeCompany (f/k/a/ Media Arts Group Inc.), alleged copyright infringement andfalse advertisements on merchandise we sold in the second quarter of 2004. Thecase went to trial in March 2006. The jury found in favor of us on thetrademark infringement claim. The jury was unable to reach a verdict on theremaining claims. The parties have agreed to mediate with the presiding judgeregarding the remaining claims. The mediation will occur in May 2006.

 

We intend to vigorously defend all pendingactions. We do not believe these or any other legal proceedings pending orthreatened against us would have a material adverse effect on our financialcondition or results of operations.

 

**Item 1A. Risk Factors**

 

There have been no material changes from our risk factors previouslydisclosed in “Item 1A. Risk Factors” of our Form 10K for the year ended December 31,2005.

 

**Item 5. Other Information**

 

Therehave been no material changes to the procedures by which security holders may recommendnominees to our Board of Directors since April 21, 2003.

 

12

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**Item 6.  Exhibits**

 
| **Exhibit  Number** | ** ** | **Title of Exhibit**                                                                                                                                                                                                                                                                                                                |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                 |       | Certificate of Incorporation of Tuesday Morning Corporation (the “Company”)  (incorporated by reference to Exhibit 3.1 to the Company’s Registration  Statement on Form S-4 (File No. 333-46017) as filed with the  Securities and Exchange Commission (the “Commission”) on February 10,  1998) |
| 3.1.2               |       | Certificate of Amendment to the Certificate of Incorporation of the  Company dated March 25, 1999 (incorporated by reference to Exhibit 3.3  to the Company’s Registration Statement on Form S-1/A (File No. 333-74365)  as filed with the Commission on March 29, 1999)                                        |
| 3.1.3               |       | Certificate of Amendment to the Certificate of Incorporation of the  Company dated May 7, 1999 (incorporated by reference to Exhibit 3.1.3  to the Company’s Form 10-Q (File No. 000-19658) as filed with the  Commission on May 2, 2005)                                                                       |
| 3.2                 |       | Amended and Restated By-laws of the Company (incorporated by  reference to Exhibit 3.7 to the Company’s Registration Statement on Form S-4  (File No. 333-46017) as filed with the Commission on February 10,  1998)                                                                                                 |
| 31.1                |       | Certification by the Chief Executive Officer of the Company pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                   |
| 31.2                |       | Certification by the Chief Financial Officer of the Company pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                   |
| 32.1                |       | Certification of the Chief Executive Officer of the Company pursuant  to 18 U.S.C §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 *                                                                                                                                                                       |
| 32.2                |       | Certification of the Chief Financial Officer of the Company pursuant  to 18 U.S.C §1350, adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 *                                                                                                                                                                       |

 

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*                 Thecertifications attached hereto as Exhibit 32.1 and Exhibit 32.2 arefurnished with this Quarterly Report on Form 10-Q and shall notbe deemed “filed” by the Company for purposes of Section 18 of theSecurities Exchange Act of 1934, as amended.

 

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SIGNATURE

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| ** ** |             | **TUESDAY MORNING CORPORATION** |
|------------|------------------|---------------------------------|
|       |             |                            | (Registrant) |
|       |             |                            |   |
|       |             |                            |   |
| DATE:      | May 2, 2006 |                            | By: | /s/ Loren K. Jensen |   |
|       |             |                            |   | Loren K. Jensen, Executive Vice President,  Chief Financial Officer and Secretary  (Principal Financial Officer and duly  authorized to sign this report on behalf of the  registrant) |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1                  |       | Certificate of Incorporation of Tuesday  Morning Corporation (the “Company”) (incorporated by reference to Exhibit 3.1  to the Company’s Registration Statement on Form S-4 (File No. 333-46017)  as filed with the Securities and Exchange Commission (the “Commission”) on February 10,  1998) |
| 3.1.2                |       | Certificate of Amendment to the Certificate  of Incorporation of the Company dated March 25, 1999 (incorporated by  reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-1/A  (File No. 333-74365) as filed with the Commission on March 29,  1999)                                       |
| 3.1.3                |       | Certificate of Amendment to the Certificate of Incorporation of the  Company dated May 7, 1999 (incorporated by reference to Exhibit 3.1.3  to the Company’s Form 10-Q (File No. 000-19658) as filed with the  Commission on May 2, 2005)                                                                       |
| 3.2                  |       | Amended and Restated By-laws of the Company  (incorporated by reference to Exhibit 3.7 to the Company’s Registration  Statement on Form S-4 (File No. 333-46017) as filed with the  Commission on February 10, 1998)                                                                                                 |
| 31.1                 |       | Certification by the Chief Executive  Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                                                                  |
| 31.2                 |       | Certification by the Chief Financial  Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002                                                                                                                                                                                                                  |
| 32.1                 |       | Certification of the Chief Executive  Officer of the Company pursuant to 18 U.S.C. § 1350, adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                 |
| 32.2                 |       | Certification of the Chief Financial  Officer of the Company pursuant to 18 U.S.C. § 1350, adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                 |

 

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*                 Thecertifications attached hereto as Exhibit 32.1 and Exhibit 32.2 arefurnished with this Quarterly Report on Form 10-Q and shall not be deemed “filed”by the Company for purposes of Section 18 of the Securities Exchange Actof 1934, as amended.

 

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