**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

** **

**FORM 10-Q**

 

**(MarkOne)**

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

 

**FORTHE QUARTERLY PERIOD ENDED**

**December 31,2007**

 

**OR**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large  accelerated filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes oNo x

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

 
| **Class**                                | ** ** | **Outstanding  at January 31, 2008** |
|------------------------------------------|------------|-------------------------------------------|
| Common Stock, par value  $0.01 per share |       | 41,810,920                                |
|                                     |       |                                      |

 

 

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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 Factor”s 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 ability to open stores innew and existing markets and operate these stores on a profitable basis;*

·                  *conditions affecting consumer spending, such as highgasoline prices and household utility costs;*

·                  *general regional and national economic conditions;*

·                  *inclement weather, such as the pattern of hurricanesthat affected the Southeast U.S. in August and September 2004 andagain in September 2005;*

·                  *changes in our merchandise mix;*

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

·                  *uncertainties arising out of world events;*

·                  *increased or new competition;*

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

·                  *loss of, or disruption in, our centralizeddistribution center;*

·                  *loss or departure of one or more members of oursenior management;*

·                  *our dependence on external funding sources;*

·                  *an increase in the cost or a disruption in the flowof our products;*

·                  *environmental regulations;*

·                  *seasonal and quarterly fluctuations;*

·                  *fluctuations in our comparable store results;*

·                  *our ability to operate in highly competitive marketsand to compete effectively;*

·                  *our ability to attract and retain quality sales, distributioncenter and other associates in large numbers, as well as, experienced buyingand management personnel;*

·                  *our ability to operate information systems andimplement new technologies effectively;*

·                  *our ability to generate strong cash flows from ouroperations to support capital expansion, operation and debt repayment;*

·                  *our ability to maintain internal control overfinancial reporting;*

·                  *our ability to anticipate and respond in a timelymanner to changing consumer demands and preferences; and*

·                  *our ability to generate strong holiday season sales.*

 

2

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* *

*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.*

 

3

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| **PART I - FINANCIAL INFORMATION**                                                                       |
|---------------------------------------------------------------------------------------------------------------|
|                                                                                                          |
| Item 1 — Financial Statements                                                                            |
|                                                                                                          |
| Consolidated Balance Sheets as of  December 31, 2007 and June 30, 2007                              |
|                                                                                                          |
| Consolidated Statements of  Income for the Three Months and Six Months Ended December 31, 2007 and  2006 |
|                                                                                                          |
| Consolidated Statements of  Cash Flows for the Six Months Ended December 31, 2007 and 2006               |
|                                                                                                          |
| 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                                                                                        |

 

4

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**PART I — FINANCIAL INFORMATION**

 

**Item1. Financial Statements**

**TuesdayMorning Corporation**

**Consolidated Balance Sheets**

**December 31,2007 (unaudited) and June 30, 2007**

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

 
| ** **                                                                                                                                                                               | ** ** | **December 31,   2007** | ** ** | **June 30,   2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | ** **                        | ** ** | ** **                    | ** ** |
| **ASSETS**                                                                                                                                                                               |       |                              |       |                          |       |
| Current assets:                                                                                                                                                                          |       |                              |       |                          |       |
| Cash and cash  equivalents                                                                                                                                                               |       | $                                 | 11,993     |                          | $          | 10,303 |   |
| Inventories                                                                                                                                                                              |       | 259,299                           |       | 288,791                       |       |
| Prepaid expenses  and other current assets                                                                                                                                               |       | 6,668                             |       | 5,954                         |       |
| Deferred income  taxes                                                                                                                                                                   |       | 505                               |       | 1,211                         |       |
| Total current  assets                                                                                                                                                                    |       | 278,465                           |       | 306,259                       |       |
|                                                                                                                                                                                     |       |                              |       |                          |       |
| Property and  equipment, net                                                                                                                                                             |       | 80,792                            |       | 83,776                        |       |
| Deferred  financing costs                                                                                                                                                                |       | 603                               |       | 704                           |       |
| Other assets                                                                                                                                                                             |       | 3,601                             |       | 3,582                         |       |
|                                                                                                                                                                                     |       |                              |       |                          |       |
| Total Assets                                                                                                                                                                             |       | $                                 | 363,461    |                          | $          | 394,321 |   |
|                                                                                                                                                                                     |       |                              |       |                          |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                            |       |                              |       |                          |       |
| Current  liabilities:                                                                                                                                                                    |       |                              |       |                          |       |
| Revolving credit  facility                                                                                                                                                               |       | $                                 | —     |                          | $          | 26,500 |   |
| Accounts payable                                                                                                                                                                         |       | 59,601                            |       | 82,453                        |       |
| Accrued  liabilities                                                                                                                                                                     |       | 36,223                            |       | 31,223                        |       |
| Income taxes  payable                                                                                                                                                                    |       | 15,408                            |       | 712                           |       |
| Total current  liabilities                                                                                                                                                               |       | 111,232                           |       | 140,888                       |       |
|                                                                                                                                                                                     |       |                              |       |                          |       |
| Revolving credit  facility                                                                                                                                                               |       | 7,000                             |       | 30,000                        |       |
| Deferred rent                                                                                                                                                                            |       | 4,390                             |       | 4,534                         |       |
| Deferred income  taxes                                                                                                                                                                   |       | 1,922                             |       | 3,459                         |       |
|                                                                                                                                                                                     |       |                              |       |                          |       |
| Total  Liabilities                                                                                                                                                                       |       | 124,544                           |       | 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; 41,803,298 shares  issued and outstanding at December 31, 2007 and 41,440,000 shares at  June 30, 2007 |       | 418                               |       | 414                           |       |
| Additional  paid-in capital                                                                                                                                                              |       | 199,925                           |       | 198,183                       |       |
| Retained earnings                                                                                                                                                                        |       | 38,571                            |       | 16,881                        |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                           |       | 3                                 |       | (38                           | )          |
|                                                                                                                                                                                     |       |                              |       |                          |       |
| Total  Stockholders’ Equity                                                                                                                                                         |       | 238,917                           |       | 215,440                       |       |
|                                                                                                                                                                                     |       |                              |       |                          |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                                         |       | $                                 | 363,461    |                          | $          | 394,321 |   |

 

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

 

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**TuesdayMorning Corporation**

**Consolidated Statements of Income(unaudited)**

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

** **
| ** **                                    | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                    | ** ** | **2007**                                                | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                                                    |       |                                                  |       |   |   |   |   |
| Net sales                                     |       | $                                                       | 308,687    |                                                  | $          | 321,266 |   | $ | 510,344 |   | $ | 515,679 |   |
| Cost of sales                                 |       | 193,783                                                 |       | 199,683                                               |       | 319,731 |   | 321,030 |   |
| Gross profit                                  |       | 114,904                                                 |       | 121,583                                               |       | 190,613 |   | 194,649 |   |
| Selling, general  and administrative expenses |       | 80,664                                                  |       | 84,327                                                |       | 153,208 |   | 151,670 |   |
| Operating income                              |       | 34,240                                                  |       | 37,256                                                |       | 37,405 |   | 42,979 |   |
| Other income  (expense):                      |       |                                                    |       |                                                  |       |   |   |   |   |
| Interest income                               |       | 152                                                     |       | 52                                                    |       | 153 |   | 57 |   |
| Interest expense                              |       | (1,420                                                  | )          | (753                                                  | )          | (3,106 | ) | (1,545 | ) |
| Other income,  net                            |       | 195                                                     |       | 449                                                   |       | 572 |   | 623 |   |
|                                          |       | (1,073)                                                 |       | (252                                                  | )          | (2,381 | ) | (865 | ) |
| Income before  income taxes                   |       | 33,167                                                  |       | 37,004                                                |       | 35,024 |   | 42,114 |   |
| Income tax  expense                           |       | 12,633                                                  |       | 13,177                                                |       | 13,334 |   | 15,124 |   |
|                                          |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income                                    |       | $                                                       | 20,534     |                                                  | $          | 23,827 |   | $ | 21,690 |   | $ | 26,990 |   |
|                                          |       |                                                    |       |                                                  |       |   |   |   |   |
| **Earnings  Per Share**                       |       |                                                    |       |                                                  |       |   |   |   |   |
| Net income per  common share:                 |       |                                                    |       |                                                  |       |   |   |   |   |
| Basic                                         |       | $                                                       | 0.50       |                                                  | $          | 0.58 |   | $ | 0.52 |   | $ | 0.65 |   |
| Diluted                                       |       | $                                                       | 0.50       |                                                  | $          | 0.57 |   | $ | 0.52 |   | $ | 0.65 |   |
| Weighted average  number of common shares:    |       |                                                    |       |                                                  |       |   |   |   |   |
| Basic                                         |       | 41,441                                                  |       | 41,416                                                |       | 41,437 |   | 41,392 |   |
| Diluted                                       |       | 41,451                                                  |       | 41,648                                                |       | 41,456 |   | 41,647 |   |
|                                          |       |                                                    |       |                                                  |       |   |   |   |   |
| Dividends per  common share                   |       | $                                                       | —     |                                                  | $          | — |   | $ | — |   | $ | — |   |

 

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

 

6

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**TuesdayMorning Corporation**

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

**(Inthousands)**

** **
| ** **                                                                                 | ** ** | **Six Months Ended   December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
|                                                                                       |       |                                                    |       |   |   |
| **Net  cash flows from operating activities:**                                             |       |                                                    |       |   |   |
| Net income                                                                                 |       | $                                                       | 21,690     |   | $ | 26,990 |   |
| Adjustments to  reconcile net income to net cash used in operating activities:             |       |                                                    |       |   |   |
| Depreciation and  amortization                                                             |       | 8,854                                                   |       | 8,636 |   |
| Amortization of  financing fees                                                            |       | 101                                                     |       | 85 |   |
| Deferred income  taxes                                                                     |       | (851                                                    | )          | 290 |   |
| Loss on disposal  of assets                                                                |       | 236                                                     |       | 120 |   |
| Stock-based  compensation                                                                  |       | 2,030                                                   |       | 2,411 |   |
| Other non-cash  items                                                                      |       | 33                                                      |       | (17 | ) |
| Change in  operating assets and liabilities:                                               |       |                                                    |       |   |   |
| Inventories                                                                                |       | 29,234                                                  |       | (1,118 | ) |
| Prepaid and  other assets                                                                  |       | (733                                                    | )          | 1,589 |   |
| Accounts payable                                                                           |       | (16,555                                                 | )          | 16,212 |   |
| Accrued  liabilities                                                                       |       | 5,000                                                   |       | 6,490 |   |
| Deferred rent                                                                              |       | (144                                                    | )          | 65 |   |
| Income taxes  payable                                                                      |       | 14,696                                                  |       | 10,807 |   |
| Net cash  provided by operating activities                                                 |       | 63,591                                                  |       | 72,560 |   |
|                                                                                       |       |                                                    |       |   |   |
| **Net  cash flows from investing activities:**                                             |       |                                                    |       |   |   |
| Capital  expenditures                                                                      |       | (6,100                                                  | )          | (8,285 | ) |
| Net cash used in  investing activities                                                     |       | (6,100                                                  | )          | (8,285 | ) |
|                                                                                       |       |                                                    |       |   |   |
| **Net  cash flows from financing activities:**                                             |       |                                                    |       |   |   |
| Repayments under  revolving credit facility                                                |       | (168,000                                                | )          | (128,500 | ) |
| Proceeds under  revolving credit facility                                                  |       | 118,500                                                 |       | 107,500 |   |
| Change in cash  overdraft                                                                  |       | (6,297                                                  | )          | — |   |
| Excess tax  benefit related to exercise of stock options                                   |       | —                                                  |       | 63 |   |
| Proceeds from  exercise of common stock options and used for stock purchase plan purchases |       | (4                                                      | )          | 529 |   |
| Net cash used in  financing activities                                                     |       | (55,801                                                 | )          | (20,408 | ) |
| Net increase in  cash and cash equivalents                                                 |       | 1,690                                                   |       | 43,867 |   |
| Cash and cash  equivalents, beginning of period                                            |       | 10,303                                                  |       | 5,766 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                                       | 11,993     |   | $ | 49,633 |   |

 

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

 

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**Tuesday Morning Corporation**

**Notes to Consolidated FinancialStatements (unaudited)**

 

1.     Basisof presentation — The unaudited consolidated interim financial statementsincluded herein have been prepared by us pursuant to the rules andregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations.These financial statements include all adjustments, consisting only of those ofa normal recurring nature, which, in the opinion of management, are necessaryto present fairly the results of the interim periods presented and should beread in conjunction with the consolidated financial statements and notesthereto in our Form 10-K/T filing for the six month period ended June 30,2007. Because of the seasonal nature of our business, the results of operationsfor the quarter are not indicative of the results to be expected for the entireyear.

 

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,refer to the consolidated financial statements and notes thereto included inour Form 10-K/T for the six month period ended June 30, 2007.  We operate our business as a single operatingsegment.

 

2.     Stock-basedcompensation — We account for our stock-based compensation plan in accordancewith Statement of Financial Accounting Standards (“SFAS”) 123 (revised 2004) “Share-BasedPayment” (“SFAS 123R”).  Under SFAS 123R,all stock-based compensation cost is measured at the grant date, based on theestimated fair value of the award, and is recognized as an expense in theincome statement 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 to directors, officers and key employees of, and certain otherkey individuals who perform services for us and our subsidiaries. The 1997 Planand the 2004 Plan authorizes grants of options to purchase up to 4,800,000 and2,000,000 shares, respectively, of authorized, but unissued common stock.  Stock options are awarded at a fair marketvalue equal to the average of the high and low trading prices of the Company’scommon 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$7.43 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 terminated asof December 29, 2007.  There were1,369,953 shares available for grant under the 2004 Plan at December 31,2007.

 

Stock compensation expenserecognized in the three months and six months ended December 31, 2007 wasas follows:

 
| ** **                                                | ** ** | **Three Months Ended   December 31, 2007** | ** ** | **Six Months Ended   December 31, 2007** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
|                                                      |       |                                                                |       |                                                              |       |
| Total cost of  stock-based compensation during the period |       | $                                                                   | 565        |                                                              | $          | 1,771 |   |
| Amounts  capitalized in ending inventory                  |       | (224                                                                | )          | (452                                                              | )          |
| Amounts  recognized in expense previously capitalized     |       | 347                                                                 |       | 711                                                               |       |
|                                                      |       |                                                                |       |                                                              |       |
| Amounts charged  against income for the period before tax |       | $                                                                   | 688        |                                                              | $          | 2,030 |   |

 

3.     Comprehensiveincome - Comprehensive income is defined as net income plus the change inequity during a period from transactions and other events, excluding thoseresulting from investments by and distributions to stockholders. Totalcomprehensive income for the three month period ended December 31, 2007and 2006 was $20.5 million and $23.8 million, respectively, and for the sixmonth period ended December 31, 2007 and 2006 was $21.7 million and $27.0million, respectively.

 

4.     Legal proceedings — During 2001 and 2002,we were 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.  The plaintiffsare seeking to certify a statewide class made up of some of our current andformer employees, which they claim are owed compensation for overtime wages,penalties and interest. The plaintiffs are also seeking attorney’s fees andcosts. In October 2003, we entered into a settlement agreement with asub-class of these plaintiffs consisting of managers-in-training and managementtrainees which was paid in November 2005 with no material impact to ourfinancial statements. There is no trial date set for the remaining complaint. Asimilar lawsuit, which also alleges claims concerning meal and rest periods,was filed in Orange County, California in 2004, by managers,managers-in-training and assistant managers, and an amended complaint 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 tovigorously defend all pending actions. We do not believe these or any otherlegal proceedings pending or threatened against us would have a materialadverse effect on our financial condition or results of operations.

 

5.     Earningsper common share

 
| ** **                                                                                                               | ** ** | **Three Months Ended   December 31** | ** ** | **Six Months Ended   December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(in thousands, except per share data)**                                                       | ** ** | **2007**                                                 | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                                     |       |                                                     |       |                                                   |       |   |   |   |   |
| **Basic  earnings per share:**                                                                                           |       |                                                     |       |                                                   |       |   |   |   |   |
| Net income                                                                                                               |       | $                                                        | 20,534     |                                                   | $          | 23,827 |   | $ | 21,690 |   | $ | 26,990 |   |
| Weighted average  number of common shares outstanding                                                                    |       | 41,441                                                   |       | 41,416                                                 |       | 41,437 |   | 41,392 |   |
| Net income per  common share                                                                                             |       | $                                                        | 0.50       |                                                   | $          | 0.58 |   | $ | 0.52 |   | $ | 0.65 |   |
|                                                                                                                     |       |                                                     |       |                                                   |       |   |   |   |   |
| **Diluted  earnings per share:**                                                                                         |       |                                                     |       |                                                   |       |   |   |   |   |
| Net income                                                                                                               |       | $                                                        | 20,534     |                                                   | $          | 23,827 |   | $ | 21,690 |   | $ | 26,990 |   |
|                                                                                                                     |       |                                                     |       |                                                   |       |   |   |   |   |
| Dilutive effect  of employee stock options                                                                               |       | —                                                   |       | 444                                                    |       | 9 |   | 480 |   |
| Dilutive effect  of restricted stock                                                                                     |       | 10                                                       |       | —                                                 |       | 10 |   | — |   |
| Weighted average  number of common shares outstanding                                                                    |       | 41,441                                                   |       | 41,204                                                 |       | 41,437 |   | 41,167 |   |
| Weighted average  number of common shares and diluted effect of outstanding employee stock  options and restricted stock |       | 41,451                                                   |       | 41,648                                                 |       | 41,456 |   | 41,647 |   |
|                                                                                                                     |       |                                                     |       |                                                   |       |   |   |   |   |
| Net income per  common share                                                                                             |       | $                                                        | 0.50       |                                                   | $          | 0.57 |   | $ | 0.52 |   | $ | 0.65 |   |

 

6.     Revolvingcredit facility – At December 31, 2007, we had $7 million outstandingunder the revolving credit facility, $8.9 million of outstanding letters ofcredit and availability of $184.1 million under the revolving creditfacility.  We incur commitment fees of upto 0.25% on the unused portion of the revolving credit facility. Any borrowingunder the revolving credit facility incurs interest at LIBOR or the prime rate,depending on the type of borrowing, plus an applicable margin. These rates areincreased or reduced as our average total leverage ratio changes.   The weighted average interest rate at December 31,2007 was 6.25%. 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 provides 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 million to $200 million; a change in the total leverageratio 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 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 December 31, 2007, we were incompliance with all covenants.

 

7.     IncomeTaxes - Tuesday Morning Corporation (the “Company”) or one of its subsidiariesfiles income tax returns in the U.S. federal jurisdiction, and various statejurisdictions.  With a few exceptions,Tuesday Morning Corporation is generally no longer subject to U.S. state andlocal income tax examinations by tax authorities for years before 1999.  The Internal Revenue Service (“IRS”) hasconcluded an examination of the Company for years ending before 2005.

 

9

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8.     Cashand Cash Equivalents – Credit card receivables of $8.1 million and $7.4 millionat December 31, 2007 and 2006, respectively, from MasterCard, Visa,Discover and American Express, and all highly liquid investments with anoriginal maturity date of three months or less are considered to be cashequivalents.

 

9.     RecentAccounting Pronouncements - In September 2006, the FASB issued SFAS No. 157,“Fair Value Measures.” SFAS No. 157 defines fair value, establishes aframework for measuring fair value, and requires additional disclosures aboutfair value measurements. SFAS No. 157 applies to fair measurements thatare already required or permitted by other accounting standards, except formeasurements of share-based payments and measurements that are similar to, butnot intended to be fair value and does not change existing guidance as towhether or not an instrument is carried at fair value. The provisions of SFAS No. 157are effective for the specified fair value measures for financial statementsissued for fiscal years beginning after November 15, 2007. We arecurrently evaluating the impact, if any, that the adoption of SFAS No. 157will have on our consolidated financial 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 831 discountretail stores in 47 states as of December 31, 2007.  We sell closeout home furnishings,housewares, gifts and related items, which we purchase at below wholesaleprices.  Our stores operate duringperiodic “sales events” that occur in each month except January andJuly.  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 financial

 

10

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resources than we do. Ourcompetitors’ greater financial resources allow them to initiate and sustainaggressive price competition, initiate broader marketing campaigns that reach alarger customer base, fund ongoing promotional events and communicate morefrequently 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 to continuouslyattract buying opportunities for closeout merchandise and to anticipateconsumer demand as closeout merchandise becomes available represents anuncertainty in our business. By their nature, specific closeout merchandiseitems are generally only available from manufacturers or vendors on anon-recurring basis. As a result, we do not have long-term contracts with ourvendors for supply, pricing or access to products, but make individual purchasedecisions, which are often for large quantities. Although we have many sourcesof merchandise and do not foresee any shortage of closeout merchandise in thenear future, we cannot assure that manufacturers or vendors will continue tomake desirable closeout merchandise available to us in quantities or on terms acceptableto us or that our buyers will continue to identify and take advantage ofappropriate buying opportunities. Since this uncertainty is a by-product of ourbusiness, 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 secondquarter of fiscal 2008 were $308.7 million, a decrease of 3.9% compared to thesame period last year.  Comparable storesales for the quarter ended December 31, 2007 decreased by 7.6% comprisedof a 7.2% decrease in customer transactions and a 0.4% decrease in averageticket.  Net income for the quarter was $20.5 million and diluted earningsper share were $0.50.

 

For the six months ended December 31,2007, net sales were $510.3 million compared to $515.7 million for the sameperiod last year.  Comparable store salesfor the six month period ended December 31, 2007 decreased 5.3% comparedto the same period last year.  Thisdecrease was comprised of a 4.7% decrease in customer transactions and a 0.6%decrease in average ticket.  Net income for the year-to-date period was$21.7 million and diluted earnings per share were $0.52.

 

We opened 18 new storesduring the second quarter of fiscal 2008. In addition, we relocated five existing stores and expanded two existingstores.

 

**Update to Critical Accounting Policies**

 

To supplement the critical accounting policies included on Form 10-KTfor the six month period ended June 30, 2007, we have made an update to ourinventory markdown policy and added a policy for stock-based compensation asfollows:

 

*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 andDecember 31 due primarily to seasonal merchandise. Permanent markdowns arecharged to cost of sales immediately based on the total quantities on-hand inthe stores. We review all inventory during each quarter on a continual basis toensure all necessary price actions are taken to adequately value our inventoryat the lower 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 markdowns coulddiffer materially from management’s initial estimates based on future customerdemand or economic conditions.  Theeffect of a .5% markdown in the value of our inventory at December 31, 2007would result in a decline in gross profit and diluted earnings per share forthe three months ended December 31, 2007 of $1.3 million and $0.03,respectively.

 

*Stock-based compensation* —The CompensationCommittee and, through express consent of the Compensation Committee, the CEOare authorized to grant stock options and restricted stock awards from time totime to eligible employees and directors. We typically grant approved optionswith exercise prices equal to the market price of our common stock on the dateof the option grant. The majority of the options granted vest daily overperiods of four to five years and expire in ten years.  On January 1,2006, we adopted the provisions of SFAS No. 123(R), "Share BasedPayment," which requires that companies measure and recognize compensationexpense at an amount equal to the fair value of share-based payments grantedunder compensation arrangements. We calculate the fair value of stock optionsusing the Black-Scholes option pricing model. Determining the fair value ofshare-based awards at the grant date requires judgment in developingassumptions, which involve a number of variables. These variables include, butare not limited to, the expected stock price volatility over the term of theawards, the expected dividend yield and expected stock option exercisebehavior. In addition, we also use judgment in estimating the number ofshare-based awards that are expected to be forfeited.

 

**Resultsof Operations**

 

The following table setsforth certain financial information from our consolidated statements of incomeexpressed as a percentage of net sales.  Our business is highly seasonal,with a significant portion of our net sales and most of our operating incomegenerated in the quarter ending December 31, which includes the holidayseason. There can be no assurance that the trends in sales growth or operatingresults will continue in the future.

 
| ** **                                       | ** ** | **Three Months Ended   December 31** | ** ** | **Six Months Ended   December 31** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                       | ** ** | **2007**                                                 | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                        |       | 100.0                                                    | %          | 100.0                                                  | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                    |       | 62.8                                                     |       | 62.2                                                   |       | 62.6 |   | 62.3 |   |
| Gross profit                                     |       | 37.2                                                     |       | 37.8                                                   |       | 37.4 |   | 37.7 |   |
| Selling, general  and administrative expense     |       | 26.1                                                     |       | 26.2                                                   |       | 30.1 |   | 29.4 |   |
| Operating income                                 |       | 11.1                                                     |       | 11.6                                                   |       | 7.3 |   | 8.3 |   |
| Net interest  expense and other income (expense) |       | (0.4                                                     | )          | (0.1                                                   | )          | (0.4 | ) | (0.2 | ) |
| Income before  income taxes                      |       | 10.7                                                     |       | 11.5                                                   |       | 6.9 |   | 8.1 |   |
| Income tax  expense                              |       | 4.0                                                      |       | 4.1                                                    |       | 2.6 |   | 2.9 |   |
|                                             |       |                                                     |       |                                                   |       |   |   |   |   |
| Net income                                       |       | 6.7                                                      | %          | 7.4                                                    | %          | 4.3 | % | 5.2 | % |

 

 

11

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**ThreeMonths Ended December 31, 2007**

**Comparedto the Three Months Ended December 31, 2006**

 

During the second fiscalquarter of 2008, net sales decreased to $308.7 million from $321.3 million, adecrease of $12.6 million or 3.9% compared to the quarter ended December 31,2006. The decrease in second quarter sales is primarily due to the 7.6%decrease in comparable store sales.  The decrease in comparable sales forthe second quarter of fiscal 2008 was comprised of a 7.2% decrease in thenumber of transactions and a 0.4% decrease in the average transaction amount. Average store sales for the second fiscal quarter of 2008 decreased 8.2% whencompared to the same prior year quarter.  Comparable store sales and salesper store decreased primarily due to lower traffic levels thananticipated.  Management believes traffic levels are lower due to a numberof factors, including an increase in supply of home furnishing products, thecompetitive promotional environment of the home furnishings retail sector, theeconomic pressures impacting the discretionary income of consumers and a weaknessin the housing market.

 

Gross profit decreased$6.7 million, or 5.5%, to $114.9 million for the three months ended December 31,2007 as compared to the same quarter last year of $121.6 million, primarily asa result of lower sales volume. Our gross profit percentage decreased from37.8% to 37.2% in the second fiscal quarter of fiscal 2008. This decrease of0.6% in gross profit percentage is primarily due to an increase in cost ofproduct and markdowns.  The increase incost of product of 0.3% resulted from a shift in product mix as we have, tosome extent, moved from higher margin merchandise to more commodity typemerchandise in response to customer demand which is generally lower marginmerchandise.  Markdowns were higher by0.3% due to addressing aged and slower moving inventory.

 

Selling, general andadministrative expenses decreased $3.7 million, or 4.3%, to $80.7 million inthe three months ended December 31, 2007 from $84.3 million in the samequarter last year.  The decrease was attributable to a $3.6 milliondecrease in advertising costs, a $.4 million decrease in stock compensationexpense and a $.4 million decrease in other corporate expenses including legalexpense and long-distance telephone expense. These were partially offset by an increase in store occupancy costs,store personnel costs and store depreciation expense primarily due to theexpansion in our store base.  As a percentage of net sales, these selling,general and administrative expenses slightly decreased 0.1% to 26.1% in the secondfiscal quarter of 2008 from 26.2% in the same quarter last year due to thedecrease in advertising costs, stock compensation expense and other corporateexpenses, including legal expense and long distance telephone expenses.  Selling, general and administrative expensesper average store is $98.2 thousand this quarter compared to$107.4 thousand in the same quarter last year, a decrease of 8.6%.

 

The income tax provisionfor the three month periods ended December 31, 2007 and 2006 was $12.6million and $13.2 million, respectively, reflecting an effective tax rate of38.1% and 35.6%, respectively.  Theeffective tax rate is higher in the second quarter of fiscal 2008 as comparedto the same quarter last year primarily due to a net adjustment of tax reservesrelated to net favorable settlements with certain state taxing authorities lastyear that did not occur this year.

 

 

**SixMonths Ended December 31, 2007**

**Comparedto the Six Months Ended December 31, 2006**

 

During the six monthsended December 31, 2007, net sales decreased to $510.3 million from $515.7million, a decrease of $5.3 million or 1.0% compared to the six month periodended December 31, 2006. The decrease in sales for the first six months offiscal 2008 is primarily due to the 5.3% decrease in comparable store sales.The decrease in comparable sales for the first six months of fiscal 2008 wascomprised of a 4.7% decrease in the number of transactions and a 0.6% decreasein the average transaction amount.  Total average store sales for thefirst six months of fiscal 2008 decreased 5.8% when compared to the same prioryear period.  Comparable store sales and sales per store decreasedprimarily due to lower traffic levels than anticipated.  Management believes traffic levels are lowerdue to a number of factors, including an increase in supply of home furnishingproducts, the competitive promotional environment of the home furnishingsretail sector, the economic pressures impacting the discretionary income ofconsumers and a weakness in the housing market.

 

Gross profit decreased$4.0 million, or 2.1%, to $190.6 million for the six months ended December 31,2007 as compared to the same six month period last year of $194.6 million,primarily as a result of our decreased net sales.  In the six month periodended December 31, 2007, our gross profit percentage decreased to 37.4%from 37.7% in the same period last year.  This 0.3% decrease in the grossprofit percentage is comprised of a 0.2% decrease in product margin due to ashift in merchandise mix as we have, to some extent, moved from higher marginmerchandise to more commodity type merchandise in response to customer demandwhich is generally greater for lower margin merchandise.

 

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Selling, general andadministrative expenses during the six months ended December 31, 2007increased $1.5 million, or 1.0%, to $153.2 million from $151.7 million duringthe six months ended December 31, 2006.  The increase wasattributable to a $5.9 million increase in store occupancy costs, storepersonnel costs and store depreciation expense primarily due to the expansionin our store base offset by a decrease of $.5 million in stock compensationexpense and $.8 million decrease in corporate expenses.  As a percentageof net sales, these expenses increased 0.6% to 30.0% in the first six months offiscal 2008 from 29.4% in the same period last year.  The increasedpercentage is primarily due to the reduced expense leveraging given ournegative comparable store sales and includes a 1.4% increase related to storeoccupancy costs, store personnel costs and store depreciation expense offsetprimarily by a 0.5% decrease in advertising expense and 0.1% in storepreopening expense.  Selling, general andadministrative expenses per average store is $187.7 thousand for the sixmonths ended December 31, 2007 compared to $196.6 thousand in thesame period last year, a decrease of 4.6%.

 

The income tax provisionfor the six month periods ended December 31, 2007 and 2006 was $13.3million and $15.1 million, respectively, reflecting an effective tax rate of38.1% and 35.9%, respectively.  The effective tax rate is higher in thesix months ended December 31, 2007 as compared to the six months ended December 31,2006 primarily due to a net adjustment of tax reserves related to net favorablesettlements with certain state taxing authorities last year that did not occurthis 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 future cash dividends to ourstockholders.  Our borrowings havehistorically peaked in the quarter ended September 30 as we buildinventory 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 six months ended December 31, 2007 was $63.6million primarily due to net income, adjusted for non-cash items (primarilydepreciation and amortization of $8.9 million and stock compensation of $2.0million) of $32.1 million, an increase in inventory of $29.2 million, adecrease in accounts payable of $16.6 million and an increase in income taxespayable of $14.7 million.   The increasein inventory and the decrease in accounts payable is a result of the timing ofinventory receipts and the related payments to vendors.  There has been no material change in ourpayment policy to vendors.  The increasein income taxes payable is the result of higher pretax earnings in the sixmonth period ended December 31, 2007 compared to the six month period endedJune 30, 2007.

 

Net cash used ininvesting activities of $6.1 million for the six months ended December 31, 2007is primarily a result of capital expenditures that relate to opening new storesand store relocations in addition to the purchase of warehouse equipment andcorporate hardware and software.  Weexpect to spend approximately $9.9 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 in financing activities for the six months ended December31, 2007 is primarily due to repayments under the revolving credit facility of$168,000 net of borrowings of $118,500.

 

At December 31,2007, we had $7 million outstanding under the revolving credit facility, $8.9million of outstanding letters of credit and availability of $184.1 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 weightedaverage interest rate at December 31, 2007 was 6.25%. Our indebtednessunder the credit facility is secured by a lien on our inventory and cashaccounts, as well as a pledge of our ownership interests in all of oursubsidiaries.  On April 18, 2007, weentered into an amendment to the existing revolving credit facility.  The amendment to the revolving credit facilityprovides for, among other things: the extension of the maturity date from December 22,2009 to December 22, 2010; changes in applicable commitment fees andinterest rates in connection with average leverage ratios; a reduction of thelenders’ revolving credit commitment from $210 million to $200 million; achange in the total leverage ratio from the ratio “3:0 to 1:0” to the ratio “2:50to 1:0”; and a “clean down” provision requirement that for 15 consecutive daysduring the period from December 1 through January 31, the sum of theaggregate principal amount of the outstanding loans may not exceed $30million.  The revolving credit facilitycontains certain restrictive covenants, which among other things, require us tocomply with certain financial ratios covering maximum leverage, minimum fixedcharge coverage and minimum interest coverage. Other restrictions affect ourability to incur liens or make certain other restricted payments, sell assetsor merge or consolidate with any other person. As of December 31, 2007, wewere 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.

 

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**StoreOpenings/Closings**

 
| ** **                          | ** ** | **Six Months   Ended   December 31,   2007** | ** ** | **Six Months   Ended   December 31,   2006** | ** ** | **Six Months   Ended   June 30,   2007** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
|                                |       |                                                                  |       |                                                                  |       |                                                              |       |
| Stores open at  beginning of period |       | 810                                                                   |       | 762                                                                   |       | 795                                                               |       |
| Stores opened  during the period    |       | 24                                                                    |       | 36                                                                    |       | 27                                                                |       |
| Stores closed  during the period    |       | (3                                                                    | )          | (3                                                                    | )          | (12                                                               | )          |
| Stores open at  end of period       |       | 831                                                                   |       | 795                                                                   |       | 810                                                               |       |

 

**Item3. Quantitative and Qualitative Disclosures 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 December 31,2007, we have determined that there was no material market risk exposure to ourconsolidated financial position, results of operations or cash flows as of suchdate. Our market 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.There have been no significant changes in the foreign currency exchange rate orinterest 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 our principalfinancial officer), our principal executive officer and our principal financialofficer have concluded that our disclosure controls and procedures (as definedin Rule 13a-15(e) or Rule 15d-15(e) under the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”)) were effective as of December 31,2007 to ensure that information required to be disclosed by us in thisQuarterly Report on Form 10-Q was (1) recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and (2) accumulated and communicated toour management, including our principal executive and principal financialofficers, to allow timely decisions regarding required disclosure.

 

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 December 31, 2007 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 adverse effecton 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.

 

**Item 4.****Submission of Mattersto a Vote of Security Holders**

 

At the Annual Meeting ofStockholders held on November 7, 2007, the following proposals weresubmitted to stockholders with the following results:

 

1.                                Electionof six directors to serve until their terms expire at the next annual meetingof stockholders, or the earlier of their death, resignation or removal

 
| ** **                     | ** ** | **Number of Shares** | ** ** |
|--------------------------------|------------|--------------------------------|------------|
| ** **                     | ** ** | **For**                        | ** ** | **Withheld** | ** ** | **Broker Non-Votes** | ** ** |
|                           |       |                           |       |   |   |   |   |
| Benjamin D.  Chereskin         |       | 38,227,621                     |       | 1,379,488 |   | — |   |
| Kathleen Mason                 |       | 30,899,283                     |       | 8,707,826 |   | — |   |
| William J.  Hunckler, III |       | 39,292,286                     |       | 314,823 |   | — |   |
| Robin P. Selati                |       | 35,703,492                     |       | 3,903,617 |   | — |   |
| Henry F. Frigon                |       | 20,057,425                     |       | 19,549,684 |   | — |   |
| Bruce A.  Quinnell             |       | 35,714,537                     |       | 3,892,572 |   | — |   |

 

2.                                Amendmentto our 1997 Long-Term Equity Incentive Plan to extend the term of the plan

 
| ** ** | ** ** | **Number of Shares** | ** ** |
|------------|------------|--------------------------------|------------|
|       |       |                           |       |
| For        |       | 16,495,113                     |       |
|       |       |                           |       |
| Against    |       | 18,828,596                     |       |
|       |       |                           |       |
| Abstain    |       | 155,228                        |       |

 

3.                                Amendmentto our 2004 Long-Term Equity Incentive Plan to increase the aggregate number ofshares with respect to which restricted stock awards may be granted under theplan

 
| ** ** | ** ** | **Number of Shares** | ** ** |
|------------|------------|--------------------------------|------------|
|       |       |                           |       |
| For        |       | 23,849,353                     |       |
|       |       |                           |       |
| Against    |       | 11,478,782                     |       |
|       |       |                           |       |
| Abstain    |       | 150,837                        |       |

 

15

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4.                                Ratificationof the selection of Ernst & Young LLP as our independent registeredpublic accounting firm for the fiscal year ending June 30, 2008

 
| ** ** | ** ** | **Number of Shares** | ** ** |
|------------|------------|--------------------------------|------------|
|       |       |                           |       |
| For        |       | 39,030,587                     |       |
|       |       |                           |       |
| Against    |       | 506,747                        |       |
|       |       |                           |       |
| Abstain    |       | 69,775                         |       |

 

No other matters werevoted upon at the meeting.

 

16

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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 (File No. 000-19658) 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 (File  No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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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*              Thecertifications attached hereto as Exhibit 32.1 and Exhibit 32.2 arefurnished with this Quarterly Report on Form 10-

Q andshall not be deemed “filed” by the Company for purposes of Section 18 ofthe 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:      | February 5, 2008            | By: | /s/ Michael Marchetti |
|       |                             | Michael Marchetti,  Executive Vice President, Chief   Operating Officer, Acting Chief Financial Officer, Acting   Treasurer and Acting Secretary   (Acting Principal Financial Officer and duly   authorized to sign this report on behalf of the registrant) |
|            |                                  |  |  |  |  |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                          |
| 3.1                  |       | Certificate of  Incorporation of Tuesday Morning Corporation (the “Company”) (incorporated by  reference to Exhibit 3.1 to the Company’s Registration Statement on  Form S-4 (File No. 333-46017) as filed with the Securities and  Exchange Commission (the “Commission”) on February 10, 1998) |
| 3.1.2                |       | Certificate of  Amendment to the Certificate of Incorporation of the Company dated  March 25, 1999 (incorporated by reference to Exhibit 3.3 to the  Company’s Registration Statement on Form S-1/A (File No. 333-74365)  as filed with the Commission on March 29, 1999)                                       |
| 3.1.3                |       | Certificate of  Amendment to the Certificate of Incorporation of the Company dated  May 7, 1999 (incorporated by reference to Exhibit 3.1.3 to the  Company’s Form 10-Q (File No. 000-19658) as filed with the  Commission on May 2, 2005)                                                                      |
| 3.2                  |       | Amended and Restated  By-laws of the Company dated December 14, 2006 (incorporated by  reference to Exhibit 3.1 to the Company’s Form 8-K (File  No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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 (File No. 000-19658) 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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*      Thecertifications attached hereto as Exhibit 32.1 and Exhibit 32.2 arefurnished with this Quarterly Report on Form 10-Q and shall not be deemed “filed”by the Company for purposes of Section 18 of the Securities Exchange Actof 1934, as amended.

 

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