**UNITEDSTATES**

** SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****    QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FORTHE QUARTERLY PERIOD ENDED March 31, 2008**

 

**OR**

 

**o****    ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d)****OF THESECURITIES EXCHANGE ACT OF 1934**

 

**FORTHE TRANSITION PERIOD FROM           TO**

 

**Commissionfile number 0-19658**

 

**TUESDAYMORNING CORPORATION**

(Exact Name ofRegistrant as Specified in its Charter)

 

| **Delaware**                     | ** ** | **75-2398532**          |
|----------------------------------|------------|-------------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. Employer        |
| Incorporation or  Organization)  |       | 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 markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes      x   No      o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o No x

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

 
| **Class**                               | ** ** | **Outstanding at May 5, 2008** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------|------------|
| Common Stock, par value $0.01 per share |       | 41,809,920                                         |       |

 

 

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**Forward-LookingStatements**

 

 *This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of the federal securities lawsand the Private Securities Litigation Reform Act of 1995, which are basedon management’s current expectations, estimates and projections. Thesestatements may be found throughout this Form 10-Q particularly underthe heading “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” among others. Forward-looking statements typically areidentified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,”“believe,” “estimate,” “intend” and similar words, although someforward-looking statements are expressed differently. You should considerstatements that contain these words carefully because they describe ourexpectations, 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 our Annual Report on Form 10-K/Tfor the six month period ended June 30, 2007, and “Item 1A. Risk Factors”of this Quarterly Report on Form 10-Q for examples of risks, uncertaintiesand events that could cause our actual results to differ materially from theexpectations expressed in our forward-looking statements. These risks,uncertainties and events also include, but are not limited to, the following:*

 

·                  *uncertainties regarding our abilityto open stores in new and existing markets and operate these stores on aprofitable basis;*

 

·                  *conditions affecting consumerspending, such as high gasoline prices, household utility costs and the decrease in home values;*

 

·                  *general regional and nationaleconomic conditions;*

 

·                  *inclement weather, such as thepattern of hurricanes that affected the Southeast U.S. in August and September 2004and again in September 2005;*

 

·                  *changes in our merchandise mix;*

 

·                  *timing and type of sales events,promotional activities and other advertising;*

 

·                  *uncertainties arising out of worldevents;*

 

·                  *increased or new competition;*

 

·                  *our ability to continuously attractbuying opportunities for closeout merchandise and anticipate consumer demand ascloseout merchandise becomes available;*

 

·                  *loss of, or disruption in, ourcentralized distribution center;*

 

·                  *loss or departure of one or moremembers of our senior management;*

 

·                  *our dependence on external fundingsources;*

 

·                  *an increase in the cost or adisruption in the flow of our products;*

 

·                  *environmental regulations;*

 

·                  *seasonal and quarterly fluctuations;*

 

·                  *fluctuations in our comparable storeresults;*

 

·                  *our ability to operatein highly competitive markets and to compete effectively;*

 

·                  *our ability to attractand retain quality sales, distribution center and other associates in largenumbers, as well as, experienced buying and management personnel;*

 

·                  *our ability to operateinformation systems and implement new technologies effectively;*

 

·                  *our ability to generatestrong cash flows from our operations to support capital expansion, operationand debt repayment;*

 

·                  *our ability to maintaininternal control over financial reporting;*

 

·                  *our ability toanticipate and respond in a timely manner to changing consumer demands andpreferences; and*

 

·                  *our ability to generatestrong holiday season sales.*

 

*Theforward-looking statements made in this Form 10-Q relate only to events asof the date on which the statements were made. Except as may be required bylaw, we undertake no obligation to update our forward-looking statements toreflect events and circumstances after the date on which the statements weremade or to reflect the occurrence of unanticipated 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, 2008 and June 30, 2007                                  |
|                                                                                                           |
| Consolidated Statements of Operations for the Three  Months and Nine Months Ended March 31, 2008 and 2007 |
|                                                                                                           |
| Consolidated Statements of Cash Flows for the Nine  Months Ended March 31, 2008 and 2007                  |
|                                                                                                           |
| 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 6  — Exhibits                                                                                        |

 

----

 

**PART I — FINANCIAL INFORMATION**

 

**Item1. Financial Statements**

 

**TuesdayMorning Corporation**

**Consolidated Balance Sheets**

**March 31,2008 (unaudited) and June 30, 2007**

** (In thousands, except for per share data)**

 
| ** **                                                                                                                                                                            | ** ** | **March 31,  2008** | ** ** | **June 30,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | ** **               | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                                                                            |       |                     |       |                    |       |
| Current assets:                                                                                                                                                                       |       |                     |       |                    |       |
| Cash and cash  equivalents                                                                                                                                                            |       | $                        | 10,270     |                    | $          | 10,303 |   |
| Inventories                                                                                                                                                                           |       | 269,642                  |       | 288,791                 |       |
| Prepaid expenses  and other current assets                                                                                                                                            |       | 8,392                    |       | 5,954                   |       |
| Deferred income  taxes                                                                                                                                                                |       | —                   |       | 1,211                   |       |
| Total current  assets                                                                                                                                                                 |       | 288,304                  |       | 306,259                 |       |
|                                                                                                                                                                                  |       |                     |       |                    |       |
| Property and  equipment, net                                                                                                                                                          |       | 78,578                   |       | 83,776                  |       |
| Deferred  financing costs                                                                                                                                                             |       | 553                      |       | 704                     |       |
| Other assets                                                                                                                                                                          |       | 3,634                    |       | 3,582                   |       |
|                                                                                                                                                                                  |       |                     |       |                    |       |
| Total Assets                                                                                                                                                                          |       | $                        | 371,069    |                    | $          | 394,321 |   |
|                                                                                                                                                                                  |       |                     |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                         |       |                     |       |                    |       |
| Current  liabilities:                                                                                                                                                                 |       |                     |       |                    |       |
| Revolving credit  facility                                                                                                                                                            |       | $                        | 2,000      |                    | $          | 26,500 |   |
| Accounts payable                                                                                                                                                                      |       | 66,885                   |       | 82,453                  |       |
| Accrued  liabilities                                                                                                                                                                  |       | 30,679                   |       | 31,223                  |       |
| Deferred income  taxes                                                                                                                                                                |       | 666                      |       | —                  |       |
| Income taxes  payable                                                                                                                                                                 |       | —                   |       | 712                     |       |
| Total current  liabilities                                                                                                                                                            |       | 100,230                  |       | 140,888                 |       |
|                                                                                                                                                                                  |       |                     |       |                    |       |
| Revolving credit  facility                                                                                                                                                            |       | 30,000                   |       | 30,000                  |       |
| Deferred rent                                                                                                                                                                         |       | 4,211                    |       | 4,534                   |       |
| Deferred income  taxes                                                                                                                                                                |       | 1,790                    |       | 3,459                   |       |
|                                                                                                                                                                                  |       |                     |       |                    |       |
| Total  Liabilities                                                                                                                                                                    |       | 136,231                  |       | 178,881                 |       |
|                                                                                                                                                                                  |       |                     |       |                    |       |
| Commitments and  contingencies                                                                                                                                                        |       |                     |       |                    |       |
| Stockholders’  equity:                                                                                                                                                           |       |                     |       |                    |       |
| Preferred stock,  par value $.01 per share, authorized 10,000,000 shares, none issued or  outstanding                                                                                 |       | —                   |       | —                  |       |
| Common stock,  par value $.01 per share, authorized 100,000,000 shares; 41,810,920 shares  issued and outstanding at March 31, 2008 and 41,440,000 shares at  June 30, 2007 |       | 418                      |       | 414                     |       |
| Additional  paid-in capital                                                                                                                                                           |       | 200,562                  |       | 198,183                 |       |
| Retained  earnings                                                                                                                                                                    |       | 33,874                   |       | 16,881                  |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                        |       | (16                      | )          | (38                     | )          |
|                                                                                                                                                                                  |       |                     |       |                    |       |
| Total  Stockholders’ Equity                                                                                                                                                      |       | 234,838                  |       | 215,440                 |       |
|                                                                                                                                                                                  |       |                     |       |                    |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                      |       | $                        | 371,069    |                    | $          | 394,321 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

5

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**TuesdayMorning Corporation**

**Consolidated Statements of Operations(unaudited)**

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

** **
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** | **Nine Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net sales                                     |       | $                                                    | 178,446    |                                                | $          | 189,156 |   | $ | 688,789 |   | $ | 704,835 |   |
| Cost of sales                                 |       | 114,447                                              |       | 118,288                                             |       | 434,177 |   | 439,318 |   |
| Gross profit                                  |       | 63,999                                               |       | 70,868                                              |       | 254,612 |   | 265,517 |   |
| Selling, general  and administrative expenses |       | 71,357                                               |       | 69,289                                              |       | 224,565 |   | 220,959 |   |
| Operating income  (loss)                      |       | (7,358                                               | )          | 1,579                                               |       | 30,047 |   | 44,558 |   |
| Other income  (expense):                      |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                               |       | 2                                                    |       | 143                                                 |       | 155 |   | 200 |   |
| Interest expense                              |       | (455                                                 | )          | (234                                                | )          | (3,561 | ) | (1,779 | ) |
| Other income,  net                            |       | 209                                                  |       | 203                                                 |       | 782 |   | 826 |   |
|                                          |       | (244)                                                |       | 112                                                 |       | (2,624 | ) | (753 | ) |
| Income (loss)  before income taxes            |       | (7,602                                               | )          | 1,691                                               |       | 27,423 |   | 43,805 |   |
| Income tax  expense (benefit)                 |       | (2,905                                               | )          | 644                                                 |       | 10,429 |   | 15,768 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Net income  (loss)                            |       | $                                                    | (4,697     | )                                                   | $          | 1,047 |   | $ | 16,994 |   | $ | 28,037 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| **Earnings  Per Share**                       |       |                                                 |       |                                                |       |   |   |   |   |
| Net income  (loss) per common share:          |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                         |       | $                                                    | (0.11      | )                                                   | $          | 0.03 |   | $ | 0.41 |   | $ | 0.68 |   |
| Diluted                                       |       | $                                                    | (0.11      | )                                                   | $          | 0.03 |   | $ | 0.41 |   | $ | 0.67 |   |
| Weighted average  number of common shares:    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                         |       | 41,441                                               |       | 41,427                                              |       | 41,439 |   | 41,412 |   |
| Diluted                                       |       | 41,441                                               |       | 41,650                                              |       | 41,479 |   | 41,626 |   |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Dividends per  common share                   |       | $                                                    | —     |                                                | $          | — |   | $ | — |   | $ | 0.80 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

6

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**TuesdayMorning Corporation**

** Consolidated Statements of Cash Flows(unaudited)**

** (In thousands)**

** **
| ** **                                                                                 | ** ** | **Nine Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
|                                                                                       |       |                                            |       |   |   |
| **Net  cash flows from operating activities:**                                             |       |                                            |       |   |   |
| Net income                                                                                 |       | $                                               | 16,994     |   | $ | 28,037 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:         |       |                                            |       |   |   |
| Depreciation and  amortization                                                             |       | 13,172                                          |       | 12,999 |   |
| Amortization of  financing fees                                                            |       | 150                                             |       | 128 |   |
| Deferred income  taxes                                                                     |       | 183                                             |       | 290 |   |
| Loss on disposal  of assets                                                                |       | 478                                             |       | 409 |   |
| Stock-based  compensation                                                                  |       | 2,663                                           |       | 3,444 |   |
| Other non-cash  items                                                                      |       | 23                                              |       | (157 | ) |
| Change in  operating assets and liabilities:                                               |       |                                            |       |   |   |
| Inventories                                                                                |       | 18,892                                          |       | (39,559 | ) |
| Prepaid and  other assets                                                                  |       | (2,490                                          | )          | 1,452 |   |
| Accounts payable                                                                           |       | (12,383                                         | )          | 17,380 |   |
| Accrued  liabilities                                                                       |       | (544                                            | )          | 3,236 |   |
| Deferred rent                                                                              |       | (323                                            | )          | 76 |   |
| Income taxes  payable                                                                      |       | (712                                            | )          | (4,196 | ) |
| Net cash  provided by operating activities                                                 |       | 36,103                                          |       | 23,539 |   |
|                                                                                       |       |                                            |       |   |   |
| **Net  cash flows from investing activities:**                                             |       |                                            |       |   |   |
| Capital  expenditures                                                                      |       | (8,530                                          | )          | (11,689 | ) |
| Proceeds from  sale of assets                                                              |       | 78                                              |       | — |   |
| Net cash used in  investing activities                                                     |       | (8,452                                          | )          | (11,689 | ) |
|                                                                                       |       |                                            |       |   |   |
| **Net  cash flows from financing activities:**                                             |       |                                            |       |   |   |
| Repayments under  revolving credit facility                                                |       | (219,000                                        | )          | (128,500 | ) |
| Proceeds under  revolving credit facility                                                  |       | 194,500                                         |       | 153,000 |   |
| Payment of dividends                                                                       |       | —                                          |       | (33,144 | ) |
| Change in cash  overdraft                                                                  |       | (3,185                                          | )          | — |   |
| Excess tax  benefit related to exercise of stock options                                   |       | —                                          |       | 63 |   |
| Proceeds from  exercise of common stock options and used for stock purchase plan purchases |       | 1                                               |       | 528 |   |
| Net cash used in  financing activities                                                     |       | (27,684                                         | )          | (8,053 | ) |
| Net increase  (decrease) in cash and cash equivalents                                      |       | (33                                             | )          | 3,797 |   |
| Cash and cash  equivalents, beginning of period                                            |       | 10,303                                          |       | 5,766 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                               | 10,270     |   | $ | 9,563 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

7

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**Tuesday Morning Corporation**

**Notes to Consolidated FinancialStatements (unaudited)**

 

1.     Basis of presentation — Theunaudited consolidated interim financial statements included herein have beenprepared by us pursuant to the rules and regulations of the Securities andExchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations. These financial statementsinclude all adjustments, consisting only of those of a normal recurring nature,which, in the opinion of management, are necessary to present fairly theresults of the interim periods presented and should be read in conjunction withthe consolidated financial statements and notes thereto in our Form 10-K/Tfiling for the six month period ended June 30, 2007. Because of theseasonal nature of our business, the results of operations for the quarter arenot indicative of the results to be expected for the entire year.

 

The balance sheet at June 30,2007 has been derived from the audited consolidated financial statements atthat date but does not include all of the information and notes required byU.S. generally accepted accounting principles for complete financialstatements.  For further information, referto the consolidated financial statements and notes thereto included in our Form 10-K/Tfor the six month period ended June 30, 2007.  We operate our business as a single operatingsegment.

 

2.    Stock-based compensation — Weaccount for our stock-based compensation plan in accordance with Statement ofFinancial Accounting Standards (“SFAS”) 123 (revised 2004) “Share-Based Payment”(“SFAS 123R”).  Under SFAS 123R, allstock-based compensation cost is measured at the grant date, based on theestimated fair value of the award, and is recognized as an expense in thestatement of operations over the requisite service period.

 

We have established theTuesday Morning Corporation 1997 Long-Term Equity Incentive Plan, as amended(the “1997 Plan”), and the Tuesday Morning Corporation 2004 Long-Term EquityIncentive Plan, as amended (the “2004 Plan”), which allows for the granting ofstock options and restricted stock to directors, officers and key employees of,and certain other key individuals who perform services for us and oursubsidiaries. The 1997 Plan and the 2004 Plan authorizes grants of options topurchase up to 4,800,000 and 2,000,000 shares, respectively, of authorized, butunissued common stock.  Stock options areawarded at a fair market value equal to the average of the high and low tradingprices of the Company’s common stock on the date of grant.

 

Options granted under the1997 Plan and the 2004 Plan typically vest daily over periods of four to fiveyears and expire in ten years. The exercise prices of the options range between$4.92 and $35.23, which represents market value on the grant date.  At December 31, 2007, all sharesavailable under the 1997 Plan had been granted and the 1997 Plan expired as of December 29,2007.  There were 1,493,331 sharesavailable for grant under the 2004 Plan at March 31, 2008.

 

Stock compensationexpense recognized in the three months and nine months ended March 31,2008 was as follows:

 
| ** **                                                | ** ** | **Three Months Ended  March 31, 2008** | ** ** | **Nine Months Ended  March 31, 2008** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                                      |       |                                                       |       |                                                      |       |
| Total cost of  stock-based compensation during the period |       | $                                                          | 635        |                                                      | $          | 2,406 |   |
| Amounts  capitalized in ending inventory                  |       | (214                                                       | )          | (666                                                      | )          |
| Amounts  recognized in expense previously capitalized     |       | 212                                                        |       | 923                                                       |       |
|                                                      |       |                                                       |       |                                                      |       |
| Amounts charged  against income for the period before tax |       | $                                                          | 633        |                                                      | $          | 2,663 |   |

 

3.      Comprehensive income or loss- Comprehensive income or loss is defined as net income or loss plus the changein equity during a period from transactions and other events, excluding thoseresulting from investments by and distributions to stockholders. Total comprehensiveloss for the three month period ended March 31, 2008 was $4.7 millionwhile comprehensive income was $1.0 million for the three month period ending March 31,2007.  Comprehensive income for the ninemonth periods ended March 31, 2008 and 2007 was $17.0 million and $28.0million, respectively.

 

4.      Legalproceedings — During 2001 and 2002, we were named as a defendant in threecomplaints filed in the Superior Court of California in and for the County ofLos Angeles.  These three complaints weresubsequently consolidated into one action. The plaintiffs are seeking to certify a statewide class made up of someof our current 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 ofmanagers-in-training and management trainees which was paid in November 2005with no material impact to our financial statements. There is no trial date setfor the remaining complaint. A similar lawsuit, which also alleges claimsconcerning meal and rest periods, was filed in Orange County, California in2004, by managers, managers-in-training and assistant managers, and an amendedcomplaint was

 

8

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filed in January 2007. This case isstill in the discovery phase. We do not expect either of these complaints tohave a material impact to our financial statements.

 

We intend to vigorouslydefend all pending actions. We do not believe these or any other legalproceedings pending or threatened against us would have a material adverseeffect on our financial condition or results of operations.

 

5.      Earnings per common share

 
| ** **                                                                                                               | ** ** | **Three Months Ended  March 31** | ** ** | **Nine Months Ended  March 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| **(in thousands, except per share data)**                                                       | ** ** | **2008**                                        | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                                                                     |       |                                            |       |                                           |       |   |   |   |   |
| **Basic  earnings per share:**                                                                                           |       |                                            |       |                                           |       |   |   |   |   |
| Net income  (loss)                                                                                                       |       | $                                               | (4,697     | )                                              | $          | 1,047 |   | $ | 16,994 |   | $ | 28,037 |   |
| Weighted average  number of common shares outstanding                                                                    |       | 41,441                                          |       | 41,427                                         |       | 41,439 |   | 41,427 |   |
| Net income  (loss) per common share                                                                                      |       | $                                               | (0.11      | )                                              | $          | 0.03 |   | $ | 0.41 |   | $ | 0.68 |   |
|                                                                                                                     |       |                                            |       |                                           |       |   |   |   |   |
| **Diluted  earnings per share:**                                                                                         |       |                                            |       |                                           |       |   |   |   |   |
| Net income  (loss)                                                                                                       |       | $                                               | (4,697     | )                                              | $          | 1,047 |   | $ | 16,994 |   | $ | 28,037 |   |
|                                                                                                                     |       |                                            |       |                                           |       |   |   |   |   |
| Dilutive effect  of employee stock options                                                                               |       | —                                          |       | 223                                            |       | 1 |   | 214 |   |
| Dilutive effect  of restricted stock                                                                                     |       | —                                          |       | —                                         |       | 39 |   | — |   |
| Weighted average  number of common shares outstanding                                                                    |       | 41,441                                          |       | 41,427                                         |       | 41,439 |   | 41,412 |   |
| Weighted average  number of common shares and diluted effect of outstanding employee stock  options and restricted stock |       | 41,441                                          |       | 41,650                                         |       | 41,479 |   | 41,626 |   |
|                                                                                                                     |       |                                            |       |                                           |       |   |   |   |   |
| Net income  (loss) per common share                                                                                      |       | $                                               | (0.11      | )                                              | $          | 0.03 |   | $ | 0.41 |   | $ | 0.67 |   |

 

6.      Revolving credit facility — AtMarch 31, 2008, we had $32.0 million outstanding under the revolvingcredit facility, $8.1 million of outstanding letters of credit and availabilityof $159.9 million under the revolving credit facility.  We incur commitment fees of up to 0.25% onthe unused portion of the revolving credit facility. Any borrowing under therevolving credit facility incurs interest at LIBOR or the prime rate, dependingon the type of borrowing, plus an applicable margin. These rates are increasedor reduced as our average total leverage ratio changes.   The weighted average interest rate at March 31,2008 was 5.19%. Our indebtedness under the credit facility is secured by a lienon our inventory and cash accounts, as well as a pledge of our ownershipinterests in all of our subsidiaries.  OnApril 18, 2007, we entered into an amendment to the existing revolvingcredit facility.  The amendment to therevolving credit facility provided for, among other things: the extension ofthe maturity date from December 22, 2009 to December 22, 2010;changes in applicable commitment fees and interest rates in connection withaverage leverage ratios; a reduction of the lenders’ revolving creditcommitment from $210.0 million to $200.0 million; a change in the totalleverage ratio from the ratio “3:00 to 1:0” to the ratio “2:50 to 1:0”; and a “cleandown” provision requirement that for 15 consecutive days during the period fromDecember 1 through January 31, the sum of the aggregate principalamount of the outstanding loans may not exceed $30.0 million.  The revolving credit facility containscertain restrictive covenants, which among other things, require us to complywith certain financial ratios covering maximum leverage, minimum fixed chargecoverage and minimum interest coverage. Other restrictions affect our abilityto incur liens or make certain other restricted payments, sell assets or mergeor consolidate with any other person. As of March 31, 2008, we were incompliance with all covenants.

 

7.      Income Taxes - TuesdayMorning Corporation (the “Company”) or one of its subsidiaries files income taxreturns in the U.S. federal jurisdiction, and various state jurisdictions.  With a few exceptions, Tuesday MorningCorporation is generally no longer subject to U.S. state and local income tax examinationsby tax authorities for years before 1999. The Internal Revenue Service (“IRS”) has concluded an examination of theCompany for years ending before 2005.

 

8.     Cash and Cash Equivalents –Credit card receivables of $6.5 million and $6.4 million at March 31, 2008and 2007, respectively, from MasterCard, Visa, Discover and American Express,and all highly liquid investments with an original maturity date of threemonths or less are considered to be cash equivalents.

 

9.     Recent Accounting Pronouncements- In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasures.” SFAS No. 157 defines fair value, establishes a framework formeasuring fair value, and requires additional disclosures about fair valuemeasurements. SFAS No. 157 applies to fair measurements that are alreadyrequired or permitted by other accounting standards, except for measurements ofshare-based payments and measurements that are similar to, but not intended tobe fair value and 

 

9

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does not changeexisting guidance as to whether or not an instrument is carried at fair value.The provisions of SFAS No. 157 are effective for the recurring fair valuemeasures for financial statements issued for fiscal years beginning after November 15,2007.  The provisions of SFAS No. 157are effective for the non recurring fair value measures for financialstatements issued for fiscal years beginning after November 15, 2008.  We are currently evaluating the impact, ifany, that the adoption of SFAS No. 157 will have on our consolidatedfinancial statements.

 

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

 

The following discussionshould be read in conjunction with our unaudited Consolidated Financial Statementsand the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q.

 

**Introduction**

 

We operated 821 discountretail stores in 47 states as of March 31, 2008.  We sell closeout home furnishings,housewares, gifts and related items, which we purchase at below wholesaleprices.  We are generally closed for thefirst two weeks of January and July, which traditionally have been weakermonths for retailers.  We purchase firstquality, brand name merchandise at closeout prices and sell it at prices 50% to80% below those generally charged by department stores and specialty andcatalog retailers. We do not sell seconds, irregulars, refurbished or factoryrejects.

 

**BusinessOverview**

 

The retail homefurnishings industry has been negatively impacted by increased supply andcompetition within an already highly competitive promotional environment, atrend we believe is likely to continue in the near term and potentially longer.As a closeout retailer of home furnishings, we currently compete against adiverse group of retailers, including department and discount stores, specialtyand e-commerce retailers and mass merchants, which sell, among other products,home furnishing products similar and often identical to those we sell. We alsocompete in particular markets with a substantial number of retailers thatspecialize in one or more types of home furnishing and houseware products thatwe sell. Many of these competitors have substantially greater financialresources than we do. Our competitors’ greater financial resources allow themto initiate and sustain aggressive price competition, initiate broadermarketing campaigns that reach a larger customer base, fund ongoing promotionalevents and communicate more frequently with existing and potential customers.

 

In response to this trendin the retail home furnishings industry, we have been focused internally onimplementing various strategic initiatives that we believe will offset theimpact of this trend including, but not limited to, striving to provide amerchandise assortment that evolves and adapts to the changing needs andpreferences of the Company’s customer base, continuing to review the individualcontributions of the existing store base and making decisions about the futureof individual store locations, including whether to close or relocate them,seeking to improve overall supply chain efficiency, including reviewingoperational practices such as freight costs, vendor payment terms anddistribution processes and increasing inventory turns, and striving to improvethe Company’s marketing plan by maximizing traffic, increasing comparable storesales and expanding the current customer base, while also maintaining costefficiency.

 

Our ability tocontinuously attract buying opportunities for closeout merchandise and toanticipate consumer demand as closeout merchandise becomes available representsan uncertainty in our business. By their nature, specific closeout merchandiseitems are generally only available from manufacturers or vendors on a non-recurringbasis. As a result, we do not have long-term contracts with our vendors forsupply, pricing or access to products, but make individual purchase decisions,which are often for large quantities. Although we have many sources ofmerchandise and do not foresee any shortage of closeout merchandise in the nearfuture, we cannot assure that manufacturers or vendors will continue to makedesirable closeout merchandise available to us in quantities or on termsacceptable to us or that our buyers will continue to identify and takeadvantage of appropriate buying opportunities. Since this uncertainty is aby-product of our business, we expect it to be an ongoing concern.

 

The stability of ourearnings is also heavily influenced by macroeconomic factors. As the economyimproves or worsens our business is often similarly impacted. Macroeconomicfactors, such as the current conditions in the debt and housing markets, haveimpacted and will continue to impact our business by decreasing the disposableincome of our potential consumers. The decline in consumer confidence levelshas also had a negative impact on consumers’ ability and willingness to spenddiscretionary income. At this time, we view the direction of the economy to beuncertain, which does not allow us a high degree of visibility or certainty inpredicting our earnings.

 

Net sales for the thirdquarter of fiscal 2008 were $178.4 million, a decrease of 5.7% compared to thesame period last year.  Comparable storesales for the quarter ended March 31, 2008 decreased by 8.2%, comprised ofa 6.6% decrease in customer transactions and a 1.6% decrease in averageticket.  Net loss for the quarter was $4.7 million and diluted loss pershare was $0.11.

 

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For the nine months endedMarch 31, 2008, net sales were $688.8 million compared to $704.8 millionfor the same period last year. Comparable store sales for the nine month period ended March 31,2008 decreased 6.1% compared to the same period last year.  This decrease was comprised of a 5.2% decreasein customer transactions and a 0.9% decrease in average ticket.  Netincome for the year-to-date period was $17.0 million and diluted earnings pershare were $0.41.

 

We opened three newstores during the third quarter of fiscal 2008. In addition, we relocated eight existing stores and expanded sevenexisting stores.

 

**Update to Critical AccountingPolicies**

 

To supplement thecritical accounting policies included on Form 10-K/T for the six monthperiod ended June 30, 2007, we have made an update to our inventorymarkdown policy and added a policy for stock-based compensation as follows:

 

*Markdowns*—**We have usedmarkdowns to promote the effective and timely sale of merchandise that allowsus to consistently provide fresher merchandise to our customers. We are alsoutilizing markdowns coupled with promotional events to drive traffic andstimulate sales during non-sales event periods. Markdowns may be temporary orpermanent. Temporary markdowns are for a designated period of time withmarkdowns recorded based on quantities sold during the period. Permanentmarkdowns may vary throughout the quarter or year in timing with highermarkdowns traditionally recorded in the quarters ended June 30 and December 31due primarily to seasonal merchandise. Permanent markdowns are charged to costof sales immediately based on the total quantities on-hand in the stores. Wereview all inventory during each quarter on a continual basis to ensure allnecessary price actions are taken to adequately value our inventory at thelower of cost or market. These actions which involve actual or plannedpermanent markdowns are considered by management to be the appropriate pricesto stimulate demand for the merchandise. Actual required permanent markdownscould differ materially from management’s initial estimates based on futurecustomer demand or economic conditions. The effect of a .5% decrease in the value of our inventory at March 31,2008 would result in a decline in gross profit and diluted earnings per sharefor the three months ended March 31, 2008 of $1.3 million and $0.03,respectively.

 

*Stock-based compensation* —The Compensation Committee and, throughexpress consent of the Compensation Committee, the CEO are authorized to grantstock options and restricted stock awards from time to time to eligibleemployees and directors. We typically grant approved options with exerciseprices equal to the market price of our common stock on the date of the optiongrant. The majority of the options granted vest daily over periods of four tofive years and expire in ten years.  On January 1, 2006, we adoptedthe provisions of SFAS No. 123(R), “Share Based Payment,” which requiresthat companies measure and recognize compensation expense at an amount equal tothe fair value of share-based payments granted under compensation arrangements.We calculate the fair value of stock options using the Black-Scholes optionpricing model. Determining the fair value of share-based awards at the grantdate requires judgment in developing assumptions, which involve a number ofvariables. These variables include, but are not limited to, the expected stockprice volatility over the term of the awards, the expected dividend yield andexpected stock option exercise behavior. In addition, we also use judgment inestimating the number of share-based awards that are expected to be forfeited.

 

**Resultsof Operations**

 

The following table setsforth certain financial information from our consolidated statements ofoperations expressed as a percentage of net sales.  Our business is highlyseasonal, with a significant portion of our net sales and most of our operatingincome generated in the quarter ending December 31, which includes theholiday season. There can be no assurance that the trends in sales growth oroperating results will continue in the future.

 
| ** **                                       | ** ** | **Three Months Ended  March 31** | ** ** | **Nine Months Ended  March 31** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                        | ** ** | **2007**                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                        |       | 100.0                                           | %          | 100.0                                          | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                    |       | 64.1                                            |       | 62.5                                           |       | 63.0 |   | 62.3 |   |
| Gross profit                                     |       | 35.9                                            |       | 37.5                                           |       | 37.0 |   | 37.7 |   |
| Selling, general  and administrative expense     |       | 40.0                                            |       | 36.7                                           |       | 32.6 |   | 31.4 |   |
| Operating income  (loss)                         |       | (4.1                                            | )          | 0.8                                            |       | 4.4 |   | 6.3 |   |
| Net interest  expense and other income (expense) |       | (0.1                                            | )          | 0.1                                            |       | (0.4 | ) | (0.1 | ) |
| Income (loss) before  income taxes               |       | (4.2                                            | )          | 0.9                                            |       | 4.0 |   | 6.2 |   |
| Income tax  expense (benefit)                    |       | (1.6                                            | )          | 0.3                                            |       | 1.5 |   | 2.2 |   |
|                                             |       |                                            |       |                                           |       |   |   |   |   |
| Net income  (loss)                               |       | (2.6                                            | )%         | 0.6                                            | %          | 2.5 | % | 4.0 | % |

 

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**ThreeMonths Ended March 31, 2008**

**Comparedto the Three Months Ended March 31, 2007**

 

During the third fiscalquarter of 2008, net sales decreased to $178.4 million from $189.2 million, adecrease of $10.8 million or 5.7% compared to the quarter ended March 31,2007. The decrease in third quarter sales is primarily due to the 8.2% decreasein comparable store sales.  The decrease in comparable sales for the thirdquarter of fiscal 2008 was comprised of a 6.6% decrease in the number oftransactions and a 1.6% decrease in the average transaction amount. Comparable store sales and sales per store decreased primarily due to lowertraffic levels than last year.  Management believes that the generaleconomic conditions have resulted in lower discretionary spending by consumersand the home furnishings sector has been particularly impacted by the decreasein home values and the slowdown in housing starts.

 

Gross profit decreased$6.9 million, or 9.7%, to $64.0 million for the three months ended March 31,2008 as compared to the same quarter last year of $70.9 million, primarily as aresult of lower sales volume. Our gross profit percentage decreased from 37.5%to 35.9% in the third fiscal quarter of fiscal 2008. This decrease of 1.6% ingross profit percentage is primarily due to an increase in markdowns anddistribution expenses as a percentage of sales.   Markdowns were higher as a percentage ofsales by 0.9% due to the lower sales volume. Freight and distribution expenses were higher due to the increase infreight costs as a result of higher fuel surcharges.    We addressed aged and slow moving inventoryby taking the necessary markdowns.  Theincreased markdowns as well as lower third quarter purchases served to assistin lowering our inventory from $281.0 million at March 31, 2007 to $269.6million at March 31, 2008.

 

Selling, general andadministrative expenses increased $2.1 million, or 3.0%, to $71.4 million inthe three months ended March 31, 2008 from $69.3 million in the samequarter last year.  The increase was attributable to a $0.8 million increasein advertising costs and an increase in store occupancy costs and storecompensation of $1.7 million.  As apercentage of net sales, these selling, general and administrative expensesincreased to 40.0% in the third fiscal quarter of 2008 from 36.6% in the samequarter last year due to the increase in the number of stores at this year overlast year.  Selling, general, andadministrative expenses per average store declined by 0.9% for the quarter.

 

The income tax provision(benefit) for the three month periods ended March 31, 2008 and 2007 was($2.9) million and $0.6 million, respectively, reflecting an effective tax rateof 38.2% and 38.1%, respectively.

 

**NineMonths Ended March 31, 2008**

**Comparedto the Nine Months Ended March 31, 2007**

 

During the nine monthsended March 31, 2008, net sales decreased to $688.8 million from $704.8million, a decrease of $16.0 million or 2.3% compared to the nine month periodended March 31, 2007. The decrease in sales for the first nine months offiscal 2008 is primarily due to the 6.1% decrease in comparable store sales.The decrease in comparable sales for the first nine months of fiscal 2008 wascomprised of a 5.2% decrease in the number of transactions and a 0.9% decreasein the average transaction amount.  Total average store sales for thefirst nine months of fiscal 2008 decreased 6.7% when compared to the same prioryear period.  Comparable store sales and sales per store decreasedprimarily due to lower traffic levels than anticipated.  Management believes that the general economicconditions have resulted in lower discretionary spending by consumers and thehome furnishings sector has been particularly impacted by the decrease in homevalues and the slowdown in housing starts.

 

Gross profit decreased$10.9 million, or 4.1%, to $254.6 million for the nine months ended March 31,2008 as compared to the same nine month period last year of $265.5 million,primarily as a result of our decreased net sales.  In the nine monthperiod ended March 31, 2008, our gross profit percentage decreased to37.0% from 37.7% in the same period last year.  This 0.7% decrease in thegross profit percentage is comprised of an increase in markdowns as apercentage of sales, as well as a slight increase in freight and distribution expenses.  Markdowns were used to address aged and slowmoving inventory.   Freight anddistribution expenses were slightly higher due to the increase in freight costsas a result of higher fuel surcharges. The cost of product was up slightly as a result of a shift in categorymix.  We have shifted slightly fromdecorative merchandise toward commodity products, which carry lower margins.

 

Selling, general andadministrative expenses during the nine months ended March 31, 2008increased $3.6 million, or 1.6%, to $224.6 million from $221.0 million duringthe nine months ended March 31, 2007.  The increase was attributableto a $7.5 million increase in store occupancy costs, store personnel costs andstore depreciation expense primarily due to the expansion in our store baseoffset by a decrease of $0.8 million in stock compensation expense and $2.0million decrease in advertising expenses.  As a percentage of net sales,these expenses increased 1.3% to 32.6% in the first nine months of fiscal 2008from 31.3% in the same period last year.  The increased percentage isprimarily due to the reduced expense leveraging given our negative comparablestore sales and includes a 1.6% increase related to store occupancy costs,store personnel costs and store depreciation expense offset primarily by a 0.2%decrease in advertising expense. Selling, general and administrative expenses per average store is$274.7 thousand for the nine months ended March 31, 2008 compared to$284.4 thousand in the same period last year, a decrease of 3.4%.

 

The income tax provisionfor the nine month periods ended March 31, 2008 and 2007 was $10.4 millionand $15.8 million, 

 

12

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respectively, reflectingan effective tax rate of 38.0% and 36.0%, respectively.  The effective taxrate is higher in the nine months ended March 31, 2008 as compared to thenine months ended March 31, 2007 primarily due to a net adjustment of taxreserves related to net favorable settlements with certain state taxingauthorities last year that did not occur this year.

 

**Liquidityand Capital Resources**

 

We have financed ouroperations with funds generated from operating activities and borrowings underour revolving credit facility. Our cash flows will continue to be utilized forthe expansion of our business and the use of any excess cash will be determinedby the Board of Directors.  On February 1,2008, our Board of Directors voted to terminate the declaration of our cashdividend. Our borrowings have historically peaked in the quarter ended September 30as we build inventory levels prior to the holiday selling season.  Given the seasonality of our business, theamount of borrowings under our revolving credit facility may fluctuatematerially depending on various factors, including the time of year, our needsand the opportunity to acquire merchandise inventory.  We have no off-balance sheet arrangements ortransactions with unconsolidated, limited purpose or variable interestentities, nor do we have material transactions or commitments involving relatedpersons or entities.

 

Net cash flows providedby operating activities for the nine months ended March 31, 2008 was $36.1million, primarily due to net income, adjusted for non cash items, primarilydepreciation and amortization of $13.3 million and stock compensation of $2.7million.  The net change in assets andliabilities was $2.4 million, which was comprised of a decrease in inventory of$18.9 million, offset by a decrease in accounts payable of $12.4 million andchanges in other assets and liabilities of $4.1 million.  The decrease in inventory was the result ofusing markdowns to address aged and slow moving products coupled with lowerpurchases.  The decrease in accountspayable is a combination of the timing of receipts for the first two quartersas well as lower receipts for the third quarter and their related payments tovendors.  There has been no materialchange in our payment policy to vendors.

 

Net cash used ininvesting activities of $8.5 million for the nine months ended March 31,2008 is primarily a result of capital expenditures that relate to opening newstores and store relocations in addition to the purchase of warehouse equipmentand corporate hardware and software.  Weexpect to spend approximately $6.5 million for additional capital expendituresduring the remainder of fiscal 2008, which will include the opening of newstores, the expansion, relocation and enhancement of selected existing storesand purchases of equipment for our distribution center and corporate office.

 

Net cash used infinancing activities for the nine months ended March 31, 2008 is primarilydue to repayments under the revolving credit facility of $219.0 million net ofborrowings of $194.5 million.

 

At March 31, 2008,we had $32.0 million outstanding under the revolving credit facility, $8.1million of outstanding letters of credit and availability of $159.9 millionunder the revolving credit facility.  Weincur commitment fees of up to 0.25% on the unused portion of the revolvingcredit facility. Any borrowing under the revolving credit facility incursinterest at LIBOR or the prime rate, depending on the type of borrowing, plusan applicable margin. These rates are increased or reduced as our average totalleverage ratio changes.   The weighted averageinterest rate at March 31, 2008 was 5.19%. Our indebtedness under thecredit facility is secured by a lien on our inventory and cash accounts, aswell as a pledge of our ownership interests in all of our subsidiaries.  On April 18, 2007, we entered into anamendment to the existing revolving credit facility.  The amendment to the revolving creditfacility provides for, among other things: the extension of the maturity datefrom December 22, 2009 to December 22, 2010; changes in applicablecommitment fees and interest rates in connection with average leverage ratios;a reduction of the lenders’ revolving credit commitment from $210.0 million to$200.0 million; a change in the total leverage ratio from the ratio “3:0 to 1:0”to the ratio “2:50 to 1:0”; and a “clean down” provision requirement that for15 consecutive days during the period from December 1 through January 31,the sum of the aggregate principal amount of the outstanding loans may notexceed $30.0 million.  The revolvingcredit facility contains certain restrictive covenants, which among otherthings, require us to comply with certain financial ratios covering maximumleverage, minimum fixed charge coverage and minimum interest coverage. Otherrestrictions affect our ability to incur liens or make certain other restrictedpayments, sell assets or merge or consolidate with any other person. As of March 31,2008, we were in compliance with all covenants.

 

We anticipate that ourfuture net cash flows from operations and unused borrowings under our revolvingcredit facility will be sufficient to fund our working capital needs andplanned capital expenditures for the next 12 months.

 

**StoreOpenings/Closings**

 
| ** **                          | ** ** | **Nine Months  Ended  March 31,  2008** | ** ** | **Nine Months  Ended  March 31,  2007** | ** ** | **Six Months  Ended  June 30,  2007** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
|                                |       |                                              |       |                                              |       |                                            |       |
| Stores open at  beginning of period |       | 810                                               |       | 762                                               |       | 795                                             |       |
| Stores opened  during the period    |       | 27                                                |       | 48                                                |       | 27                                              |       |
| Stores closed  during the period    |       | (16                                               | )          | (15                                               | )          | (12                                             | )          |
| Stores open at  end of period       |       | 821                                               |       | 795                                               |       | 810                                             |       |

 

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**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

We are exposed to variousmarket risks, including changes in foreign currency exchange rates and interestrates. Market risk is the potential loss arising from adverse changes in marketprices and rates, such as foreign currency exchange and interest rates. Basedon our market risk sensitive instruments outstanding as of March 31, 2008,we have determined that there was no material market risk exposure to our consolidatedfinancial position, results of operations or cash flows as of such date. Ourmarket risk is discussed in more detail in our Annual Report on Form 10-K/Tfor the six month period ended June 30, 2007. We do not enter intoderivatives or other financial instruments for trading or speculative purposes.We have not been significantly impacted by changes in the foreign currencyexchange rate or interest rate market risks since June 30, 2007.

 

**Item4.  Controls and Procedures**

 

**DisclosureControls 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”)) wereeffective as of March 31, 2008 to ensure that information required to bedisclosed by 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.

 

**Changes in Internal Control Over Financial Reporting**

 

There were no changes inour internal control over financial reporting that occurred during the quarterended March 31, 2008 that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**Item1. 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.  These three complaints were subsequentlyconsolidated into one action.  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 ofmanagers-in-training and management trainees which was paid in November 2005with no material impact to our financial statements. There is no trial date setfor the remaining complaint. A similar lawsuit, which also alleges claimsconcerning meal and rest periods, was filed in Orange County, California in2004, by managers, managers-in-training and assistant managers, and an amendedcomplaint was filed in January 2007. This case is still in the discoveryphase. We do not expect either of these complaints to have a material impact toour financial statements.

 

We intend to vigorouslydefend all pending actions. We do not believe these or any other legalproceedings pending or threatened against us would have a material adverseeffect on our financial condition or results of operations.

 

**Item1A. Risk Factors**

 

There have been nomaterial changes from our risk factors previously disclosed in “Item 1A. RiskFactors” of our Form 10-K/T for the six month period ended June 30,2007.

 

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**Item6. 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 as filed with the Commission on May 2, 2005)                                                                                                 |
| 3.2                 |       | Amended and Restated  By-laws of the Company dated December 14, 2006 (incorporated by  reference to Exhibit 3.1 to the Company’s Form 8-K as filed with  the Commission on December 20, 2006)                                                                                                                        |
| 10.1                |       | Second Amendment to the  Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan, as amended,  dated November 7, 2007 (incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K as filed with the Commission on  November 8, 2007)                                                              |
| 10.2                |       | Form of Restricted  Stock Award Agreement for Directors under the Tuesday Morning Corporation  2004 Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission  on November 6, 2007)                                                         |
| 10.3                |       | Form of Restricted  Stock Award Agreement for Directors under the Tuesday Morning Corporation  1997 Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.2 to the Company’s Form 8-K as filed with the Commission  on December 19, 2007)                                                        |
| 10.4                |       | Form of Restricted  Stock Award Agreement for Employees under the Tuesday Morning Corporation  1997 Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.3 to the Company’s Form 8-K as filed with the Commission  on December 19, 2007)                                                        |
| 10.5                |       | Form of Restricted  Stock Award Agreement for Employees under the Tuesday Morning Corporation  2004 Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.4 to the Company’s Form 8-K as filed with the Commission  on December 19, 2007)                                                        |
| 10.6                |       | Form of  Confidentiality Agreement for Directors (incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission  on December 19, 2007)                                                                                                                                           |
| 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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| * |   | The certifications  attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished 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 Act of 1934, as amended. |
|---|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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SIGNATURE

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|       | **TUESDAY  MORNING CORPORATION** |
|------------|----------------------------------|
| ** ** | (Registrant)                     |
| ** ** |                             |
|       |                             |
| DATE:      | May 5, 2008                 |   | By: | /s/ Stephanie Bowman |
|       |                             | Stephanie Bowman,  Executive Vice President, Chief  Financial Officer, Treasurer and Secretary |
|            |                                  |  |  |  |

 

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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 as filed with the Commission on May 2, 2005)                                                                                                 |
| 3.2              |       | Amended and Restated  By-laws of the Company dated December 14, 2006 (incorporated by  reference to Exhibit 3.1 to the Company’s Form 8-K as filed with  the Commission on December 20, 2006)                                                                                                                        |
| 10.1             |       | Second Amendment to the  Tuesday Morning Corporation 2004 Long-Term Equity Incentive Plan, as amended,  dated November 7, 2007 (incorporated by reference to Exhibit 10.1  to the Company’s Form 8-K as filed with the Commission on  November 8, 2007)                                                              |
| 10.2             |       | Form of Restricted  Stock Award Agreement for Directors under the Tuesday Morning Corporation  2004 Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission  on November 6, 2007)                                                         |
| 10.3             |       | Form of Restricted  Stock Award Agreement for Directors under the Tuesday Morning Corporation  1997 Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.2 to the Company’s Form 8-K as filed with the Commission  on December 19, 2007)                                                        |
| 10.4             |       | Form of Restricted  Stock Award Agreement for Employees under the Tuesday Morning Corporation  1997 Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.3 to the Company’s Form 8-K as filed with the Commission  on December 19, 2007)                                                        |
| 10.5             |       | Form of Restricted  Stock Award Agreement for Employees under the Tuesday Morning Corporation  2004 Long-Term Equity Incentive Plan (incorporated by reference to  Exhibit 10.4 to the Company’s Form 8-K as filed with the Commission  on December 19, 2007)                                                        |
| 10.6             |       | Form of  Confidentiality Agreement for Directors (incorporated by reference to  Exhibit 10.1 to the Company’s Form 8-K as filed with the Commission  on December 19, 2007)                                                                                                                                           |
| 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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| * |   | The certifications  attached hereto as Exhibit 32.1 and Exhibit 32.2 are furnished 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 Act of  1934, as amended. |
|---|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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