**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

**FORM 10-K**

(Markone)

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

**For the fiscal year ended December 31, 2006 or**

**o**     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the transitionperiod from                           to                            **

**Commission file number I-91**

**Furniture Brands International, Inc.**

(Exact Name of registrant as specified in its charter)

| **Delaware**                                               | ** ** | **43-0337683**      |
|------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction of                            |       | (I.R.S. Employer    |
| incorporation or organization)                             |       | Identification No.) |
| **101 South Hanley Road, St.  Louis, Missouri**            | ** ** | **63105**           |
| (Address of principal executive offices)                   |       | (Zip Code)          |
| (Registrant’s telephone  number, including area code) |       | **(314) 863-1100**  |

SECURITIES REGISTEREDPURSUANT TO SECTION 12(B) OF THE ACT:
|                                      | ** ** | Name of each exchange on |
|--------------------------------------|------------|--------------------------|
| **Title of each class**              | ** ** | **which registered**     |
| Common Stock—$1.00 Stated Value |       | New York Stock Exchange  |
| with Preferred Stock Purchase Rights |       |                     |

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OFTHE ACT:

**None**

(Title of Class)

Indicate by check mark ifthe registrant is a well-known seasoned issuer as defined in Rule 405 ofthe Securities Act. Yes x   No o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. Yes o   No x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirementsfor the past 90 days. Yes x   No o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer (asdefined in Exchange Act Rule 12b-2).

| Large Accelerated Filer x |   | Accelerated Filer o |   | Non-Accelerated  Filer o |
|--------------------------------|--------|--------------------------|--------|-------------------------------|

Indicate by check mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act.). Yes o   No x

The aggregate market value of the voting stock held bynon-affiliates of the registrant as of June 30, 2006, was approximately$998,009,000.

Indicate the number of shares outstanding of each ofthe registrant’s classes of common stock, as of the latest practicable date.

48,336,252 shares as of January 31, 2007

**DOCUMENTS INCORPORATED BY REFERENCE**

Portions of DefinitiveProxy Statement for Annual Meeting of Stockholders on May 3, 2007                                                                                                                                                                                                                                                                                                                                                                                                                            Part III

 

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**PART I**

**Item 1.**                        Business

(a)           General Development ofBusiness

On April 12, 2006 the Company announced JeffYoung would replace Seamus Bateson as interim President of Maitland-SmithFurniture Industries, Inc., a subsidiary of the Company, effective April 21,2006.

On May 2, 2006, Thomasville Furniture Industries, Inc.,a subsidiary of the Company, announced the closing of a case goodsmanufacturing facility located in Thomasville, North Carolina.

On June 2, 2006, the Company announced theresignation of Donald E. Lasater from its Board of Directors effective May 27,2006.

On June 12, 2006, Broyhill Furniture Industries, Inc.,a subsidiary of the Company, announced the closing of a case goodsmanufacturing facility located in Lenoir, North Carolina.

On June 26, 2006, the Company announced theresignation of Harvey N. Dondero as President and Chief Executive Officer ofBroyhill Furniture Industries, Inc., a subsidiary of the Company. TheCompany also announced John T. Foy, President and Chief Operating Officer of FurnitureBrands International, Inc. would oversee day-to-day operations of Broyhillon an interim basis.

On August 21, 2006, the Company announced theappointment of Larry Milan as President of Maitland-Smith Furniture Industries, Inc.,a subsidiary of the Company.

On October 26, 2006, the Company announced theelection of Matthew E. Rubel to serve on its Board of Directors.

On December 4,2006, Broyhill Furniture Industries, Inc., a subsidiary of the Company,announced the closing of a case goods manufacturing facility located in Lenoir,North Carolina.

(c)           NarrativeDescription of Business

***BRANDS AND PRODUCTS***

Furniture Brands is one of the largest residentialfurniture companies in the United States. We market our products through fouroperating subsidiaries: Broyhill Furniture Industries, Inc.; LaneFurniture Industries, Inc.; Thomasville Furniture Industries, Inc.;and HDM Furniture Industries, Inc.

Through these four subsidiaries, we design,manufacture, source, market and distribute (i) case goods, consisting ofbedroom, dining room and living room furniture, (ii) stationary upholsteryproducts, consisting of sofas, loveseats, sectionals and chairs, (iii) occasionalfurniture, consisting of wood, metal and glass tables, accent pieces, homeentertainment centers and home office furniture, (iv) recliners, motionfurniture and sleep sofas, and (v) decorative accessories and accentpieces. Our brand names are featured in nearly every price and product categoryin the residential furniture industry.

Each Brand designs,manufactures, sources and markets home furnishings, targeting a specificsegment of the market in terms of style and price point; however, some overlapexists between the Brands in terms of style and price point. Broyhill hascollections of mid-priced furniture, including both wood furniture andupholstered products, in a wide range of styles. Lane focuses primarily onmid-priced upholstered furniture, reclining chairs, motion furniture, andstationary upholstered furniture and mid-priced wood furniture. Lane alsomarkets a premium-priced indoor/outdoor line of wicker, rattan, bamboo, exposedaluminum and teak furniture under the Laneventure brand. Thomasville has bothwood furniture and upholstered products in the mid- to upper-price ranges. The Thomasvillesubsidiary also includes Virginia Operations, a manufacturer and marketer ofpromotional-priced case goods and RTA 

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(ready-to-assemble)furniture; and HBF, a contract, office furniture and textile business in themid- to upper-price range. HDM consists of three primary operating subsidiariesunder one organizational structure: Henredon Furniture Industries, Inc.,Drexel Heritage Furniture Industries, Inc. and Maitland-Smith FurnitureIndustries, Inc. Henredon specializes in both wood furniture andupholstered products in the premium-price category, with licensing arrangementswith the Ralph Lauren Home Collection and Barbara Barry Realized by Henredon.Drexel Heritage has a “tri-branding” strategy, marketing both case goods andupholstered furniture under the three distinct brands of Heritage, Drexel anddh, in categories ranging from mid- to premium-price. Drexel Heritage also hasan upscale line of upholstery and case goods under the Lillian August brand.Maitland-Smith designs and manufactures premium hand crafted, antique-inspiredfurniture, accessories and lighting, utilizing a wide range of uniquematerials. Maitland-Smith markets under both the Maitland-Smith and LaBargebrand names. Also included in the HDM subsidiary is Hickory Chair a premium-pricedbrand of wood and upholstered furniture, offering traditional and modernstyles; and Pearson, which offers contemporary and traditional styles of finelytailored upholstered furniture in the premium-price category.

***DISTRIBUTION***

Our breadth of product and national scope ofdistribution enable us to service retailers ranging in size from small,independently-owned furniture stores to national and regional department storesand chains. The residential furniture retail industry has consolidated in recentyears, displacing many small local and regional furniture retailers with largerchains and specialty stores. This consolidation has made access to distributionchannels more difficult, and we believe our relative size and the strength ofour brand names offers us an important competitive advantage.

We have a three-tiered approach to our distributionefforts. Our primary avenue of distribution continues to be through a diversenetwork of independently owned, full-line furniture retailers. Although a numberof these retailers have been displaced in recent years, this network remains animportant part of our distribution base.

At the same time, as the second element of our retailapproach, we have developed dedicated distribution channels by expanding our galleryprograms. In this approach, one used primarily though not exclusively byBroyhill and Lane, retailers employ a consistent concept where products aredisplayed in complete and fully accessorized room settings instead of asindividual pieces. This presentation format encourages consumers to purchase anentire room of furniture instead of individual pieces from differentmanufacturers. Each of our Brands offers services to retailers to support theirmarketing efforts, including coordinated national advertising, merchandisingand display programs and dealer training.

Lastly, we have further developed our dedicateddistribution channels with an expanding network of single-brand retail stores,such as Thomasville Home Furnishings Stores and Drexel Heritage HomeInspiration Stores, and, to a lesser extent, Lane Home Furnishing Stores,Broyhill Home Collections Stores, and Henredon Stores. These stores areprimarily dealer-owned retail locations that exclusively feature a singlebrand. We believe distributing our products through dedicated, single-brandstores strengthens brand awareness, provides well-informed and focused salespersonnel and encourages the purchase of multiple items per visit. While mostof these stores are independently-owned, as of the end of 2006 we owned andoperated 21 of these single-brand stores and 6 designer showrooms (In the firsttwo months of 2007 we have acquired 18 additional stores). We believe thisownership brings us closer to the consumer, gives us greater line of sight intodeveloping tastes and trends in the marketplace, and helps us better understandthe challenges facing the independent retailers with whom we do the bulk of ourbusiness.

Our strategy of targeting these diverse distributionchannels is supported by dedicated sales forces covering each of thesedistribution channels. We also continue to explore opportunities to expand 

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international sales and todistribute through non-traditional channels such as wholesale clubs, catalogretailers, and the Internet.

Trade showrooms arelocated in Thomasville and High Point, North Carolina; Atlanta, Georgia;Chicago, Illinois; Las Vegas, Nevada; and Tupelo, Mississippi.

***MANUFACTURING AND SOURCING***

There has been a significant change in recent years inthe manner by which we bring products to market. Where we have traditionallybeen a domestic furniture manufacturer, we have shifted to a blended strategy,mixing domestic production with products sourced from offshore.

We operate 27 manufacturing facilities, located inNorth Carolina, Mississippi, Virginia, the Philippines and Indonesia. Broyhilloperates three case goods and upholstery production facilities totalingapproximately 1.1 million square feet, all located in North Carolina. VirginiaOperations (a subsidiary of Thomasville) operates two case goods facilitiestotaling approximately 1.0 million square feet, both located in Virginia. Laneoperates seven upholstery production and component facilities in Mississippiand North Carolina totaling approximately 3.2 million square feet. Thomasvilleoperates six case goods and upholstery production facilities located in NorthCarolina, totaling approximately 2.0 million square feet. HDM operates ninecase goods and upholstery production facilities encompassing approximately 3.0 millionsquare feet located in North Carolina, the Philippines and Indonesia.

An increasing percentage of our products are beingsourced from manufacturers located offshore, primarily in China, thePhilippines, Indonesia, and Vietnam. We design and engineer these products, andwe have them manufactured to our specifications by independent offshoremanufacturers. We have informal strategic alliances with several of the largerforeign manufacturers whereby we have the ability to purchase, on a coordinatedbasis, a significant portion of the foreign manufacturers’ capacity, subject toquality control and delivery standards. Two of these manufacturers represented21% and 19% of imported product during 2006 and three other manufacturersrepresented in excess of 5% each.

We have an agreement withOutlook International, Ltd. (doing business as Furniture Brands Import ServicesOrganization), an independently-owned company that provides sourcingassistance, product quality control and other import-related services for us inthe Far East.

**RAW MATERIALS ANDSUPPLIERS**

The raw materials used in manufacturing our productsinclude lumber, veneers, plywood, fiberboard, particleboard, steel, paper,hardware, adhesives, finishing materials, glass, mirrored glass, fabrics,leathers, metals, stone, synthetics and upholstered filling material (such assynthetic fibers, foam padding and polyurethane cushioning). The various typesof wood used in our products include cherry, oak, maple, pine, pecan, mahogany,alder, ash, poplar, and teak which are purchased both domestically and abroad.We purchase fabrics, leathers and other raw materials both domestically andabroad. We believe our supply sources for these materials are adequate.

We have no long-term supply contracts and we haveexperienced no significant problems in supplying our operations. Although wehave strategically selected our suppliers of raw materials, we believe thereare a number of other sources available, contributing to our ability to obtaincompetitive pricing. Prices fluctuate over time depending upon factors such assupply, demand and weather. Increases in prices may have a short-term impact onour profit margins.

We purchase the majorityof raw materials for promotional and RTA products domestically, although wepurchase paper and certain hardware abroad. We believe our proximity to andrelationship with suppliers is advantageous for the sourcing of such materials.In addition, by combining the purchase of 

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variousraw materials (such as foam, cartons, springs and fabric) and services, we havebeen able to realize cost savings.

***MARKETING AND ADVERTISING***

We use advertising toincrease consumer awareness of our brand names and motivate purchases of ourproducts. Our advertising is targeted to specific consumer segments throughnational and regional television as well as leading shelter and other popularmagazines such as Better Homes and Gardens, House Beautiful and ArchitecturalDigest. Each of our Brands uses focused advertising in major markets to createbuying urgency around specific sale events and to provide dealer locationinformation, enabling retailers to be listed jointly in advertisements formaximum advertising efficiency and shared costs. Each of our Brands seeks toincrease consumer buying and strengthen relationships with retailers throughcooperative advertising and selective promotional programs, and focuses itsmarketing efforts on prime potential customers utilizing information fromdatabases and from callers to each Brand’s toll-free telephone number. Each of ourBrands maintains consumer web sites to promote their products and driveconsumers to retail stores.

**USES OF CASH**

Our preferred use of freecash is reinvestment in the business. In recent years, as free cash hasexceeded the needs of funding the business, we have instituted a dividendpayment and we have been repurchasing our Common Stock. Going forward we expectto continue to pay dividends and to consider the repurchase of our Common Stockas free cash is available.

**MANAGEMENT ANDEMPLOYEES**

As of December 31, 2006, we employedapproximately 13,800 full-time employees. None of our employees are representedby a union.

During 2005 and 2006, we made a number of changes toour senior management team, attracting talent from outside the furnitureindustry to further strengthen our organization, to introduce new ideas, newcultures and new attitudes, and to help us both reflect and understand ourconsumer base. We are also establishing a more comprehensive managementdevelopment program within the Company to help develop our future leaders.

Through regularinteraction, sharing of best practices, and cooperative efforts to reduce costsand drive value, our senior leadership team across all of our Brands operatesas a single unit. Our goal is to gain the full leverage of our size, while atthe same time retaining the entrepreneurial spirit vital to the success of ourBrands.

**ENVIRONMENTALMATTERS**

We are subject to a widerange of federal, state and local laws and regulations relating to protectionof the environment, worker health and safety and the emission, discharge,storage, treatment and disposal of hazardous materials. These laws include theClean Air Act of 1970, as amended, the Resource Conservation and Recovery Act,the Federal Water Pollution Control Act and the Comprehensive Environmental,Response, Compensation and Liability Act (“Superfund”). Certain of ouroperations use glues and coating materials that contain chemicals that areconsidered hazardous under various environmental laws. Accordingly, we closelymonitor environmental performance at all of our facilities. We believe we arein substantial compliance with all environmental laws. While we may be requiredto make capital investments from time to time at some of our facilities toensure compliance, we believe we will continue to meet all applicablerequirements in a timely fashion and that the cost required to meet theserequirements will not materially affect our financial condition or our resultsof operations.

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***COMPETITION***

The residential furnitureindustry is highly competitive. Our products compete against domesticmanufacturers, importers and foreign manufacturers entering the United Statesmarket; as well as increased direct importing by some larger retailers. Ourcompetitors include: Ashley Furniture Industries, Inc.; La-Z-BoyIncorporated; Ethan Allen Interiors Inc. and many other home furnishingsretailers and manufacturers. The elements of competition include price, style,quality, service and marketing.

**BACKLOG**

The combined backlog ofour operating companies as of December 31, 2006 was approximately $248 millioncompared to approximately $285 million as of December 31, 2005. Backlogconsists of orders believed to be firm for which a customer purchase order hasbeen received. Since orders may be rescheduled or canceled, backlog does notnecessarily reflect future sales levels.

**TRADEMARKS ANDTRADE NAMES**

We utilize trademarks and trade names extensively topromote brand loyalty among consumers. We view such trademarks and tradenamesas valuable assets and we aggressively protect our trademarks and trade namesby taking appropriate legal action against anyone who infringes upon or misusesthem.

Our principle trademarksand tradenames are: Broyhill, Lane, Laneventure, Thomasville, Henredon, DrexelHeritage, Maitland-Smith, Hickory Chair, Pearson, HBF, Founders Furniture,Vignettes, and Creative Interiors.

**WORKING CAPITAL**

For information regardingworking capital items, see the discussion of “Financial Discussion andLiquidity—Liquidity” in Item 7, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, on Page 14.

**Item 1A.**                RiskFactors

Our operating results aresubject to quarterly and annual fluctuations as a result of a number offactors. Such factors are set forth below.

*An economicdownturn could result in a decrease in our sales and earnings.*

The residential furnitureindustry is subject to cyclical variations in the general economy and touncertainty regarding future economic prospects. Economic downturns could affectconsumer spending habits by decreasing the overall demand for home furnishings.Such events would also impact retailers, our primary customers, resulting in adecrease in our sales and earnings.

***Loss of market share due tocompetition would result in a decrease in our future sales and earnings.***

The residential furnitureindustry is highly competitive and fragmented. We compete with many othermanufacturers and retailers some of which offer widely-advertised, well-known,branded products, and large retail furniture dealers who offer their ownstore-branded products. The highly competitive nature of the industry means weare constantly subject to the risk of losing market share. As a result, we maynot be able to maintain or to raise the prices of our products in response tosuch inflationary pressures as increasing costs. Also due to the large numberof competitors and their wide range of product offerings, we may not be able todifferentiate our products (through styling, finish and other construction techniques)

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fromthose of our competitors. Large retail furniture dealers have the ability toobtain offshore sourcing on their own.

*Failure to forecastdemand or respond to changes in consumer tastes and fashion trends in a timelymanner could result in a decrease in our future sales and earnings.*

Residential furniture is ahighly styled product subject to fashion trends and geographic consumer tastes.Consumer tastes and fashion trends can change rapidly. If we are unable toanticipate or respond to changes in consumer tastes and fashion trends in atimely manner or to otherwise forecast demand accurately, we may lose sales andface excess inventory (both raw materials and finished goods). Disposal ofexcess inventory may result in a decrease in sales and earnings.

*Failure to achieveour projected mix of product sales could result in a decrease in our futuresales and earnings.*

Some of our products aresold for a higher profit than other of our products. An increase in the salesof our lower profit products at the expense of the sales of our higher profitproducts could result in a decrease in our earnings.

*Business failuresof large dealers and customers could result in a decrease in our future salesand earnings.*

Although we have nocustomers who individually represent 10% or more of our total annual sales, thepossibility of business failures of large customers could result in a decreasein our future sales and earnings. Also, we are either lessee on or guarantor ofmany leases of Company-brand stores operated by independent furniture dealers.Defaults by any of these dealers would result in our becoming responsible forpayments under these leases thereby reducing our future earnings.

*Distributionrealignments and cost savings programs can result in a decrease in ournear-term sales and earnings.*

At times it is necessarywe discontinue certain relationships with customers (retailers) who do not meetour growth and profitability standards. Until realignment is established, therecan be a decrease in near-term sales and earnings. We continually reviewrelationships with our customers (retailers) and future realignments arepossible based upon such ongoing reviews.

*Manufacturingrealignments could result in a decrease in our near-term earnings.*

We continually review ourdomestic manufacturing operations and offshore (import) sourcing capabilities.Effects of periodic manufacturing realignments and cost savings programs couldresult in a decrease in our near-term earnings until the expected costreductions are achieved. Such programs can include the consolidation andintegration of facilities, functions, systems and procedures. Certain productsmay also be shifted from domestic manufacturing to offshore sourcing. Suchactions may not be accomplished as quickly as anticipated and the expected costreductions may not be achieved in full.

*Increased relianceon offshore sourcing of our products subject us to changes in local governmentregulations and currency fluctuations which could result in a decrease in ourearnings.*

During recent years, wehave been increasing our offshore capabilities to provide flexibility inproduct programs and pricing to meet competitive pressures. The mix of productlines has been moving from domestically manufactured to offshore sourced. Risksinclude changes in local government regulations and policies, including thoserelated to tariffs and trade barriers, investments, taxation, exchange controlsand repatriation of earnings. Changes in the relative values of currenciescould increase our costs and decrease our earnings. For example, in 2004 theU.S. Department of Commerce imposed tariffs on wooden bedroom furniture cominginto the United States from China. In this case, none of the rates imposed were

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ofsignificant magnitude to alter our import strategy in any meaningful way;however, these tariffs are currently under review and could be increased.

*Our operationsdepend increasingly on production facilities located outside the United Stateswhich are subject to increased risks of disrupted production which could causedelays in shipments, loss of customers and decreases in sales and earnings.*

We have placed moreproduction in emerging markets to capitalize on market opportunities and tominimize our costs. Our international production operations could be disruptedby a natural disaster, labor strike, war, political unrest, terrorist activityor public health concerns, particularly in emerging countries that are notwell-equipped to handle such occurrences. Our production abroad may also be moresusceptible to changes in laws and policies in host countries and economic andpolitical upheaval than our domestic production. Any such disruption couldcause delays in shipments of products, the loss of customers and decreases insales and earnings.

*Fluctuations in theprice, availability and quality of raw materials could cause delay which couldresult in a decrease in our sales and increase costs which would result in adecrease in our earnings.*

Fluctuations in the price,availability and quality of the raw materials we use in manufacturingresidential furniture could have a negative effect on our cost of sales andability to meet the demands of our customers (retailers). Inability to meet thedemands of our customers could result in the loss of future sales. We usevarious types of wood, fabrics, leathers, glass, upholstered filling material,steel, and other raw materials in manufacturing furniture. The costs tomanufacture furniture depend in part on the market prices of the raw materialsused to produce the furniture. We may not be able to pass along to ourcustomers all or a portion of the costs of higher raw materials due tocompetitive and marketing pressures.

*We are subject tolitigation and environmental regulations that could adversely impact our salesand earnings.*

We are, and may in thefuture be, a party to legal proceedings and claims, including those involvingproduct liability and environmental matters, some of which claim significantdamages. We face the business risk of exposure to product liability claims inthe event that the use of any of our products results in personal injury orproperty damage. In the event any of our products prove to be defective, we maybe required to recall or redesign such products. We maintain insurance against productliability claims, but there can be no assurance such coverage will continue tobe available on terms acceptable to us or such coverage will be adequate forliabilities actually incurred. We also are, and may in the future be, a partyto legal proceedings and claims arising out of certain dealer terminations aswe continue to re-examine and realign our retail distribution strategy. Giventhe inherent uncertainty of litigation, we can offer no assurance futurelitigation will not have a material adverse impact. We are also subject tovarious laws and regulations relating to environmental protection and thedischarge of materials into the environment and we could incur substantialcosts as a result of the noncompliance with or liability for cleanup or othercosts or damages under environmental laws.

*Future acquisitionsand investments could result in dilution to our earnings per share and adecrease in the valuation of our Common Stock.*

As part of our businessstrategy, we may make acquisitions and investments in businesses that offercomplementary products. Risks commonly encountered in acquisitions include thepossibility that we pay more than the acquired company or assets are worth, thedifficulty of assimilating the operations and personnel of the acquiredbusiness, the potential disruption of our ongoing business and the distractionof our management from ongoing business. Consideration paid for futureacquisitions could be in the form of cash or stock or a combination thereof.Dilution to existing stockholders and to earnings per share may result inconnection with any such future acquisition.

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*Impairment oflong-lived assets would result in a decrease in our earnings.*

Accounting rules requirethat long-lived assets be evaluated for impairment at least annually. We havesubstantial long-lived assets, consisting of goodwill and trademarks, whichbased upon the outcome of such evaluations, could result in the write-down ofall or a portion of these assets and a corresponding reduction in our earningsand net worth.

*Certainanti-takeover provisions and preferred stock issuances could result in adecrease in a potential acquirer’s valuation of our Common Stock.*

Certain provisions of ourCertificate of Incorporation could make it more difficult for a third party toacquire control of us, even if such change in control would be beneficial toour stockholders. Also, our Certificate of Incorporation allows us to issuepreferred stock without stockholder approval. Such issuances could also make itmore difficult for a third party to acquire us.

*Our growth strategyincludes the development of new stores each year. If we and our dealers are notable to open new stores or effectively manage the growth of these stores, ourability to grow and our profitability could be adversely affected.*

Our growth in part dependson our ability and the ability of our dealers to open and operate new storessuccessfully. We and our dealers opened a net total of 4 stores in fiscal 2006.In fiscal 2007, we and our dealers plan to open a similar number of singlebrand stores and we anticipate further store openings in subsequent years. Inaddition, we have in the past and will likely continue to purchase or otherwiseassume operation of Company-brand stores from independent dealers. Our abilityand the ability of our dealers to identify and open new stores in desirablelocations and operate such stores profitably is a factor in our ability to growsuccessfully. Increased demands on our operational, managerial andadministrative resources could cause us to operate our business lesseffectively, which in turn could cause deterioration in our profitability.

*Loss of fundingsources would adversely impact our business.*

Access to funding through the financial markets isimportant to our business operations and if we are unable to maintain suchaccess we could experience an adverse effect on our business and financialresults. Failure to meet our financial covenants could adversely affect ouraccess to the financial markets or increase our financing costs.

Though we are currently in compliance with thefinancial covenants in our revolving credit facility and note purchaseagreement, the present outlook for business conditions indicates we will likelynot be in compliance as of March 31, 2007. As such we are currently innegotiations with both lending groups to amend the agreements to include lessrestrictive covenants. These negotiations could result in economic concessionsto the lending groups including increased costs, reduction in the size of therevolving credit facility or other modifications to the terms and conditions ofthe agreements. If these negotiations are unsuccessful and we are in defaultunder the credit agreements, the lending groups have certain rights includingthe termination of commitments and acceleration of principal and interestpayments. The successful completion of these negotiations or the refinancing ofthe credit agreements would be necessary to meet our future liquidityrequirements.

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*INTERNET ACCESS*

Forms 10-K, 10-Q,8-K and all amendments to those reports are available without chargethrough our Internet web site as soon as reasonably practicable afterelectronically filed with, or furnished to, the Securities & ExchangeCommission. Our website can be accessed at www.furniturebrands.com. Informationon our website does not constitute part of this Form 10-K.

**Item 1B.**               UnresolvedStaff Comments

None.

**Item 2.**                        Properties

We ownor lease the following principal plants, offices and distribution centers:
| Division/Location      | ** ** | **Type of Facility**                           |   | **Floor Space (sq. ft)** | ** ** | **Owned or Leased** |
|------------------------|------------|------------------------------------------------|--------|--------------------------|------------|---------------------|
| **Furniture  Brands:** |       |                                           |   |                     |       |                |
| St. Louis, MO          |       | Headquarters                                   |   | 32,978                   |       | Leased              |
| **Broyhill:**          |       |                                           |   |                     |       |                |
| Lenoir, NC             |       | Offices                                        |   | 136,000                  |       | Owned               |
| Lenoir, NC             |       | Case goods plant/distribution center           |   | 628,000                  |       | Owned               |
| Lenoir, NC             |       | Upholstery plant/distribution center           |   | 262,878                  |       | Owned               |
| Taylorsville, NC       |       | Upholstery plant/distribution center           |   | 212,754                  |       | Owned               |
| Rutherfordton, NC      |       | Distribution center                            |   | 1,009,253                |       | Owned               |
| Lenoir, NC             |       | Distribution center                            |   | 251,210                  |       | Leased              |
| Lenoir, NC             |       | Distribution center                            |   | 205,964                  |       | Leased              |
| Rialto, CA             |       | Distribution center                            |   | 403,176                  |       | Leased              |
| **Lane**               |       |                                           |   |                     |       |                |
| Tupelo, MS             |       | Offices/upholstery plant/distribution center   |   | 715,951                  |       | Owned               |
| Saltillo, MS           |       | Upholstery plant/distribution center           |   | 830,200                  |       | Owned               |
| Verona, MS             |       | Upholstery plant/distribution center           |   | 423,392                  |       | Owned               |
| Pontotoc, MS           |       | Upholstery plant/distribution center           |   | 358,652                  |       | Owned               |
| Wren, MS               |       | Distribution center                            |   | 494,813                  |       | Leased              |
| High Point, NC         |       | Component plant                                |   | 187,162                  |       | Owned               |
| Conover, NC            |       | Upholstery plant                               |   | 351,015                  |       | Owned               |
| Conover, NC            |       | Upholstery plant/distribution center           |   | 347,500                  |       | Owned               |
| **Thomasville:**       |       |                                           |   |                     |       |                |
| Thomasville, NC        |       | Offices/showroom                               |   | 256,000                  |       | Owned               |
| Thomasville, NC        |       | Case goods plant                               |   | 325,000                  |       | Owned               |
| Lenoir, NC             |       | Case goods plant/distribution center           |   | 828,000                  |       | Owned               |
| Troutman, NC           |       | Upholstery plant                               |   | 238,200                  |       | Owned               |
| Conover, NC            |       | Upholstery plant                               |   | 181,900                  |       | Owned               |
| Hickory, NC            |       | Upholstery plant/distribution center           |   | 209,800                  |       | Leased              |
| Thomasville, NC        |       | Distribution center                            |   | 731,000                  |       | Owned               |
| Hickory, NC            |       | Case goods plant/upholstery plant/distribution |   |                     |       |                |
|                   |       | center                                         |   | 214,991                  |       | Owned               |
| Rialto, CA             |       | Distribution center                            |   | 300,000                  |       | Leased              |
| Appomattox, VA         |       | Case goods plant/distribution center           |   | 829,800                  |       | Owned               |
| Carysbrook, VA         |       | Case goods plant                               |   | 189,000                  |       | Owned               |

 

10

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| Division/Location   | ** ** | **Type of Facility**                                   |   | **Floor Space (sq. ft)** |   | **Owned or Leased** |
|---------------------|------------|--------------------------------------------------------|--------|--------------------------|--------|---------------------|
| **HDM:**            |       |                                                   |   |                     |   |                |
| High Point, NC      |       | Offices/showroom                                       |   | 100,000                  |   | Owned               |
| High Point, NC      |       | Upholstery plant                                       |   | 280,650                  |   | Owned               |
| Morganton, NC       |       | Distribution center                                    |   | 513,800                  |   | Owned               |
| Longview, NC        |       | Upholstery plant                                       |   | 260,060                  |   | Leased              |
| Morganton, NC       |       | Case goods plant                                       |   | 874,506                  |   | Owned               |
| Mt. Airy, NC        |       | Upholstery plant                                       |   | 102,500                  |   | Owned               |
| Hickory, NC         |       | Case goods plant/upholstery plant/distribution  center |   | 519,011                  |   | Owned               |
| High Point, NC      |       | Upholstery plant/distribution center                   |   | 178,500                  |   | Owned               |
| Marion, NC          |       | Distribution center                                    |   | 400,000                  |   | Leased              |
| High Point, NC      |       | Offices/distribution center                            |   | 220,000                  |   | Leased              |
| Cebu, Philippines   |       | Case goods plant                                       |   | 418,367                  |   | Owned               |
| Semarang, Indonesia |       | Plant/distribution center                              |   | 176,413                  |   | Leased              |
|                     |            |                                                        |        |                          |        |                     |  |  |

 

The Tupelo, Mississippi facility is encumbered by amortgage and first lien securing revenue bonds.

We believe our properties are generally wellmaintained, suitable for our present operations and adequate for currentproduction requirements. Productive capacity and extent of utilization of ourfacilities are difficult to quantify with certainty because in any one facilitymaximum capacity and utilization varies periodically depending upon the productbeing manufactured, the degree of automation and the utilization of the laborforce in the facility. In this context, we estimate the overall productioncapacity, in conjunction with our import capabilities, is sufficient to meetanticipated or unanticipated demand.

In 2001 we beganimplementing a plan to reduce our domestic manufacturing capacity. As of December 31,2006, this plan included the closing, consolidation or reconfiguration of 34manufacturing facilities. Restructuring activity included the closing or therealignment of three manufacturing facilities in 2006, the closing of eightmanufacturing facilities in 2005 and the closing of three manufacturingfacilities in 2004.

**Item 3.**                        LegalProceedings

We are or may become a defendant in a number ofpending or threatened legal proceedings in the ordinary course of business. Inour opinion, our ultimate liability, if any, from all such proceedings is notreasonably likely to have a material adverse effect upon our consolidatedfinancial position or results of operations or those of our subsidiaries.

We are also subject toregulation regarding environmental matters, and are a party to certain actionsrelated thereto. For information regarding environmental matters, see “Item 1. Business—EnvironmentalMatters.”

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

Not applicable.

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**PART II**

**Item 5.**                        Marketfor the Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

(a)           Market Information

Shares of our Common Stock are traded on the New YorkStock Exchange. The reported high and low sale prices for our Common Stock onthe New York Stock Exchange are included in Note 16 to the consolidatedfinancial statements of the Company.

Holders

As of January 31, 2007, there were approximately1,400 holders of record of Common Stock.

Dividends

We paid dividends at the rate of $0.16 per share perquarter during 2006. Additional information concerning dividends may be foundin the following sections of this Form 10-K, which are incorporatedinto this Item 5. by reference: “Consolidated Statement of Cash Flows”, “ConsolidatedStatement of Shareholders’ Equity and Comprehensive Income,” and Note 16, “QuarterlyFinancial Information (Unaudited)” in Item 8. Financial Statements andSupplementary Data.

Equity Compensation Plan Information

The following table sets forth aggregate informationregarding the Company’s equity compensation plans as of December 31, 2006:
|                                                             | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **Number of securities**            | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | ** **                                 | ** ** | ** **                        | ** ** | **remaining available for**         | ** ** |
| ** **                                                  | ** ** | **Number of securities to** | ** ** | **Weighted-average**              | ** ** | **future issuance under**           | ** ** |
| ** **                                                  | ** ** | **be issued upon exercise** | ** ** | **exercise price of**   | ** ** | **equity compensation plans**       | ** ** |
| ** **                                                  | ** ** | **of outstanding options,**      | ** ** | **outstanding options,**     | ** ** | **(excluding securities reflected** | ** ** |
| **Plan Category**                                      | ** ** | ** **                                 | ** ** | **warrants and rights** | ** ** | **warrants and rights**             | ** ** | **in column (a))** | ** ** |
| ** **                                                  | ** ** | **(a)**                                    | ** ** | **(b)**                           | ** ** | **(c)**                                       | ** ** |
| Equity  compensation plans approved by security holders (1) |       |                                       | 3,945,381  |                              |       |                                          | $          | 24.28 |   |   |   | 761,576 |   |   |
| Equity  compensation plans not approved by security holders |       |                                       | —     |                              |       |                                          | —     |   |   |   | — |   |   |
| Total                                                       |       |                                       | 3,945,381  |                              |       |                                          | $          | 24.28 |   |   |   | 761,576 |   |   |
|                                                             |            |                                            |            |                                   |            |                                               |            |  |  |  |  |  |  |  |  |  |

----

(1)          Includes the Company’s1992 Stock Option Plan and 1999 Long-Term Incentive Plan. Included in column (a) are84,081 shares of restricted Common Stock that have been awarded and that vestover a period from 1 to 17 years. These shares of restricted Common Stock weredisregarded for purposes of computing the weighted-average exercise price incolumn (b).

Annually, the Board of Directors determines the amountof fees to be paid to non-employee Directors, including an award of restrictedshares of Company Common Stock, as described under “Compensation of Board ofDirectors” in the 2007 Proxy Statement, hereby incorporated by reference. Theseshares are purchased in open-market transactions.

Annually, Lane Furniture Industries, Inc., asubsidiary of the Company, awards a limited number of shares of Company CommonStock to a few of its truck drivers as safety awards. 560 shares of the Company’sCommon Stock were issued as safety awards in 2006. These shares are purchasedin open-market transactions.

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Informationregarding the 1992 Stock Option Plan and 1999 Long-Term Incentive Plan setforth in Note 7 of Notes to Consolidated Financial Statements is herebyincorporated by reference.

(c)           Repurchase of EquitySecurities

On July 28, 2005 the Board of Directorsauthorized the repurchase of $100 million of our common stock over the next 12month period. During 2006, 1,734,951 shares were purchased at a cost of $40.1million. The balance of the authorization expired on July 28, 2006.

On January 26, 2006the Board of Directors authorized the repurchase of $50 million of Common Stockover the next 12 month period. As of January 26, 2007 this authorizationexpired with no shares having been purchased.

**Item 6.**                        SelectedFinancial Data

**FIVE-YEARCONSOLIDATED FINANCIAL REVIEW**
|                                                             | ** ** | **Year Ended December 31,**                                     | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**                                                                       | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                  | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Summary of operations:                                      |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net sales                                                   |       | $                                                                              | 2,418,175  |   | $ | 2,386,774 |   | $ | 2,447,430 |   | $ | 2,434,130 |   | $ | 2,458,836 |   |
| Gross profit                                                |       | 530,035                                                                        |       | 539,951 |   | 579,816 |   | 565,336 |   | 587,352 |   |
| Interest expense                                            |       | 17,669                                                                         |       | 11,877 |   | 15,314 |   | 19,384 |   | 21,732 |   |
| Earnings before income tax expense                          |       | 80,922                                                                         |       | 91,994 |   | 142,640 |   | 149,224 |   | 184,424 |   |
| Income tax expense                                          |       | 25,867                                                                         |       | 30,558 |   | 51,073 |   | 54,651 |   | 65,593 |   |
| Net earnings                                                |       | $                                                                              | 55,055     |   | $ | 61,436 |   | $ | 91,567 |   | $ | 94,573 |   | $ | 118,831 |   |
| Per share of  Common Stock—diluted:                    |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Net earnings                                                |       | $                                                                              | 1.13       |   | $ | 1.18 |   | $ | 1.66 |   | $ | 1.68 |   | $ | 2.11 |   |
| Dividends                                                   |       | $                                                                              | 0.64       |   | $ | 0.60 |   | $ | 0.525 |   | $ | 0.125 |   | — |   |
| Weighted average common shares—diluted (in  thousands) |       | 48,753                                                                         |       | 52,104 |   | 55,220 |   | 56,256 |   | 56,387 |   |
| Other  information:                                         |       |                                                                           |       |   |   |   |   |   |   |   |   |
| Working capital                                             |       | $                                                                              | 752,618    |   | $ | 718,183 |   | $ | 711,115 |   | $ | 703,233 |   | $ | 652,095 |   |
| Property, plant and equipment, net                          |       | 221,398                                                                        |       | 250,817 |   | 284,973 |   | 310,563 |   | 333,371 |   |
| Capital expenditures                                        |       | 24,713                                                                         |       | 28,541 |   | 30,593 |   | 41,451 |   | 50,214 |   |
| Total assets                                                |       | 1,558,203                                                                      |       | 1,582,224 |   | 1,587,759 |   | 1,578,259 |   | 1,567,402 |   |
| Long-term debt                                              |       | 300,800                                                                        |       | 301,600 |   | 302,400 |   | 303,200 |   | 374,800 |   |
| Shareholders’  equity                                  |       | $                                                                              | 910,715    |   | $ | 903,952 |   | $ | 957,483 |   | $ | 966,902 |   | $ | 869,515 |   |

 

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**Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OF**

**OPERATIONS ANDFINANCIAL CONDITION**

**Overview**

Furniture Brands is one of the largest residentialfurniture companies in the United States. We market our products through fouroperating subsidiaries: Broyhill Furniture Industries, Inc.; LaneFurniture Industries, Inc.; Thomasville Furniture Industries, Inc.and HDM Furniture Industries, Inc.

Through these four subsidiaries, we design,manufacture, source, market and distribute (i) case goods, consisting ofbedroom, dining room and living room furniture, (ii) stationary upholsteryproducts, consisting of sofas, loveseats, sectionals and chairs, (iii) occasionalfurniture, consisting of wood, metal and glass tables, accent pieces, homeentertainment centers and home office furniture, (iv) recliners, motionfurniture and sleep sofas, and (v) decorative accessories and accentpieces.

Our brand names include Broyhill, Lane, Thomasville,Drexel Heritage, Henredon, Maitland-Smith, Laneventure, HBF, CreativeInteriors, Founders, Vignettes, Hickory Chair and Pearson. These brand namescover nearly every price and product category in the residential furnitureindustry.

Our breadth of product and national scope ofdistribution enable us to service retailers ranging in size from small,independently-owned furniture stores to national and regional department storesand chains. The residential furniture retail industry has consolidated inrecent years, displacing many small local and regional furniture retailers withlarger chains and specialty stores. This consolidation has made access todistribution channels more difficult, and we believe our relative size and thestrength of our brand names offers us an important competitive advantage.

We have a three-tiered approach to our distributionefforts. Our primary avenue of distribution continues to be through a diversenetwork of independently owned, full-line furniture retailers. The secondelement of our retail approach is dedicated distribution channels in the formof gallery programs. In this approach retailers employ a concept where productsare displayed in complete and fully accessorized room settings. Thispresentation format encourages consumers to purchase an entire room offurniture instead of individual pieces from different manufacturers. Lastly, wehave further developed our dedicated distribution channels with an expandingnetwork of single-brand retail stores. These stores are primarily dealer-ownedretail locations that exclusively feature a single brand, such as Thomasville,Drexel Heritage, Lane, Broyhill or Henredon. We believe distributing ourproducts through dedicated, single-brand stores strengthens brand awareness, provideswell-informed and focused sales personnel and encourages the purchase ofmultiple items per visit.

There has been a significant change in recent years inthe manner by which we bring products to market. Where we have traditionallybeen a domestic furniture manufacturer, we have shifted to a blended strategy,mixing domestic production with products sourced from offshore.

We have closed or announced the closing of 34 domesticcase goods and upholstery manufacturing facilities since the start of 2001, thoughwe still own and operate 25 such facilities, located in North Carolina,Mississippi, and Virginia.

An increasing percentageof our products are being sourced from manufacturers located offshore,primarily in China, the Philippines, Indonesia, and Vietnam. We design andengineer these products, and we have them manufactured to our specifications byindependent offshore manufacturers. We also own and operate 2 offshoremanufacturing facilities located in the Philippines and Indonesia.

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**Results of Operations**

As anaid to understanding our results of operations on a comparative basis, thefollowing table has been prepared to set forth certain statement of operationsand other data for 2006, 2005, and 2004:
|                                               | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | ** **                                 | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                                    | ** ** | ** **                                 | ** ** | **Net** | ** ** | ** ** | ** ** | **Net** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                                    | ** ** | **Dollars**                                | ** ** | **Sales** | ** ** | **Dollars** | ** ** | **Sales** | ** ** | **Dollars** | ** ** | **Sales** | ** ** |
| ** **                                    | ** ** | **(Dollars in millions)**        | ** ** |
| Net sales                                     |       | $                                          | 2,418.2    |   | 100.0 | % | $ | 2,386.8 |   | 100.0 | % | $ | 2,447.4 |   | 100.0 | % |
| Cost of sales                                 |       | 1,888.2                                    |       | 78.1 |   | 1,846.8 |   | 77.4 |   | 1,867.6 |   | 76.3 |   |
| Gross Profit                                  |       | 530.0                                      |       | 21.9 |   | 540.0 |   | 22.6 |   | 579.8 |   | 23.7 |   |
| Selling, general  and administrative expenses |       | 446.3                                      |       | 18.4 |   | 440.7 |   | 18.4 |   | 424.1 |   | 17.4 |   |
| Earnings from  operations                     |       | 83.7                                       |       | 3.5 |   | 99.3 |   | 4.2 |   | 155.7 |   | 6.3 |   |
| Interest expense                              |       | 17.7                                       |       | 0.7 |   | 11.9 |   | 0.5 |   | 15.3 |   | 0.6 |   |
| Other income, net                             |       | 14.9                                       |       | 0.6 |   | 4.6 |   | 0.2 |   | 2.3 |   | 0.1 |   |
| Earnings before  income tax expense           |       | 80.9                                       |       | 3.4 |   | 92.0 |   | 3.9 |   | 142.7 |   | 5.8 |   |
| Income tax  expense                           |       | 25.8                                       |       | 1.1 |   | 30.6 |   | 1.3 |   | 51.1 |   | 2.1 |   |
| Net earnings                                  |       | $                                          | 55.1       |   | 2.3 | % | $ | 61.4 |   | 2.6 | % | $ | 91.6 |   | 3.7 | % |
| Earnings per common  share—diluted       |       | $                                          | 1.13       |   | — |   | $ | 1.18 |   | — |   | $ | 1.66 |   | — |   |

 

**Year Ended December 31, 2006Compared to Year Ended December 31, 2005**

Net sales for 2006 were $2,418.2 million compared to$2,386.8 million in 2005, an increase of $31.4 million or 1.3%.Thomasville and Lane experienced strong sales growth early in the year;however, slower traffic at retail and competitive pressures resulted in a weaksecond half of the year for all brands. Broyhill case goods were negativelyimpacted in each quarter due to the transition from domestic production to animported product. The increase in Company-owned stores from 14 to 21 provided amodest addition to net sales.

Gross profit for 2006 was $530.0 million compared to$540.0 million in 2005. Gross margin decreased from 22.6% in 2005 to 21.9% in2006. The majority of the decline in gross margin is attributable to increaseddiscounting in an attempt to stimulate sales in the second half of the year. Increasesin gross margin attributable to the additional retail stores (which operate atsignificantly higher gross margins) and reduced restructuring charges wereoffset by increases in raw material prices.

Selling, general and administrative expenses increasedto $446.3 million in 2006 from $440.7 million in 2005; however, as a percentageof net sales remained flat at 18.4%. The increase in selling, general andadministrative expenses was due to the expensing of stock options ($5.7million), increased expenses for Company-owned stores ($8.0 million), additionalbad debt expenses ($4.4 million) and additional retirement costs ($3.0million), partially offset by a decline in restructuring charges ($11.9million) and reduced advertising expenses ($3.8 million).

Interest expense for 2006 totaled $17.7 million comparedto $11.9 million in 2005. The increase in interest expense resulted from therefinancing of the credit facility, issuance of term notes with higher interestrates and the termination of hedge accounting on the interest rate swaps.

Other income, net for 2006 totaled $14.9 millioncompared to $4.6 million for 2005. For 2006, other income consisted of intereston short-term investments and notes receivable of $2.6 million, a gain realizedfrom the termination of hedge accounting on interest rate swaps of $8.9 millionand other miscellaneous income and expenses of $3.4 million. This compares withinterest income of $2.6 million and other miscellaneous income and expenseitems totaling $2.0 million in 2005.

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Income tax expense for 2006 totaled $25.8 million,producing an effective tax rate of 32.0% compared with an effective tax rate of33.2% for 2005. The decrease in the effective tax rate for 2006 was primarilythe result of a higher proportion of income subject to tax in lower rateforeign tax jurisdictions. As in the past, the rate has been reduced by theFederal Domestic Manufacturing deductions enacted under the American JobCreations Act and federal and state income tax credits.

Earnings per common shareon a diluted basis were $1.13 in 2006 and $1.18 in 2005. Weighted averageshares outstanding used in the calculation of earnings per common share on adiluted basis were 48,753,006 in 2006 and 52,103,975 in 2005. The reduction inaverage shares outstanding was due to the repurchase of 1,734,951 shares in2006 and the full year impact of the repurchase of 4,125,588 shares in 2005.

**Year Ended December 31, 2005Compared to Year Ended December 31, 2004**

Net sales for 2005 were $2,386.8 million compared to$2,447.4 million in 2004, a decrease of $60.6 million or 2.5%. Thedecrease reflects weakness at our mid-priced brands, resulting from the declinein domestic case goods shipments in anticipation of imported products and aloss of sales to certain major customers. The decrease was partially offset byrevenue increases at the high-end due to improved service positions and productdifferentiation. Increased revenues were also achieved from additionalCompany-owned stores, 14 stores at the end of 2005 versus 9 stores at the endof 2004.

Gross profit for 2005 was $540.0 million compared to$579.8 million in 2004. Gross margin decreased from 23.7% for 2004 to 22.6% for2005. The decrease in gross margin was due to raw material price increases(foam increased 42% in the fourth quarter of 2005) which were only partiallyoffset with wholesale price increases and surcharges, manufacturinginefficiencies resulting from plant closures, additional restructuring chargesand pricing pressures at Brands doing business with large discount chains.

Selling, general and administrative expenses increasedto $440.7 million in 2005 from $424.1 million in 2004. As a percentage of netsales, these expenses increased from 17.4% in 2004 to 18.4% in 2005. Theincrease was due to increased expenses associated with additional Company-ownedretail stores ($14.6 million), increased restructuring charges ($10.7million) and increased pension expense ($4.4 million due primarily tochanges in actuarial assumptions), partially offset by reduced advertisingcosts ($5.9 million) and bad debt expense ($7.4 million).

Interest expense for 2005 totaled $11.9 millioncompared to $15.3 million in 2004. The decrease in interest expense reflects alower effective interest rate due to the full year impact of the interest rateswaps entered into in May 2004.

Other income, net for 2005 totaled $4.6 millioncompared to $2.3 million for 2004. For 2005, other income consisted of intereston short-term investments and notes receivable of $2.6 million compared with$1.1 million in 2004, and other miscellaneous income and expense items totaling$2.0 million (including proceeds received from an anti-trust lawsuitsettlement) in 2005 compared with $1.2 million in 2004. The increased interestincome reflects increased levels of invested funds and higher interest rates.

Income tax expense for 2005 totaled $30.6 million,producing an effective tax rate of 33.2% compared with an effective tax rate of35.8% for 2004. The decrease in the effective tax rate for 2005 was the resultof the Federal Domestic Manufacturing deductions enacted under the American JobCreations Act and federal and state income tax credits.

Earnings per common shareon a diluted basis were $1.18 in 2005 and $1.66 in 2004. Weighted averageshares outstanding used in the calculation of earnings per common share on adiluted basis were 52,103,975 in 2005 and 55,219,572 in 2004. The reduction inaverage shares outstanding was due to the repurchase of 4,125,588 shares duringthe year.

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**Financial Conditionand Liquidity**

**Liquidity**

Cash and cash equivalents at December 31, 2006totaled $26.6 million compared to $114.3 million at December 31, 2005. Netcash used in operating activities totaled $26.9 million in 2006 compared withnet cash provided by operating activities of $189.0 million in 2005 and $107.3million in 2004. This decrease in cash flow from operations is attributable tothe decline in net earnings over the three year period and an increase inworking capital. Net cash used in investing activities totaled $14.8 million in2006 compared with $18.7 million in 2005 and $22.5 million in 2004. Thedecrease in cash used in investing activities is the result of decliningpurchases of property, plant and equipment due to the reduction in domesticmanufacturing facilities. Net cash used in financing activities totaled $46.1million compared with $107.2 million in 2005 and $105.3 million in 2004.The primary use of cash for financing activities is for dividends and CommonStock repurchases.

Working capital was $752.6 million at December 31,2006 compared to $718.2 million at December 31, 2005. The current ratiowas 5.0-to-1 at December 31, 2006 compared to 4.4-to-1at December 31, 2005. The main increase in working capital was the $69.3million increase in inventory. This increase was primarily at Broyhill as theycompleted the transition from domestic production to imported product.Additions for quick-ship programs, improved service positions and expandedretail operations accounted for the balance of the inventory increase.

At December 31, 2006,long-term debt totaled $300.8 million compared to $301.6 million at December 31,2005. Our funded debt-to-capitalization ratio was 24.8% at December 31,2006 compared to 25.0% at December 31, 2005.

**Financing Arrangements**

As of December 31,2006, long-term debt consisted of the following:

| Revolving credit  facility (unsecured) |   | $     | 150.0  |   |
|----------------------------------------|--------|-------|--------|--------|
| 6.83% Senior  Notes                    |   | 150.0 |   |
| Other                                  |   | 0.8   |   |
|                                   |   | $     | 300.8  |   |

 

On April 21, 2006, we refinanced our revolvingcredit facility with a group of financial institutions. The facility is anunsecured revolving credit facility with a commitment of $400.0 million and amaturity date of April 21, 2011. The revolving credit facility allows forcash borrowings and the issuance of letters of credit. Letters of creditoutstanding are limited to no more than $100.0 million, with cash borrowingslimited only by the facility’s maximum availability less letters of creditoutstanding. On December 31, 2006, there were $160.0 million in cashborrowings ($10.0 million of which was classified as current maturities) and$9.2 million in letters of credit outstanding, leaving an excess of $230.8million available under the facility for future liquidity needs.

Cash borrowings under the revolving credit facilitybear interest at a base rate or at an adjusted Eurodollar rate plus anapplicable margin, depending upon the type of loan we select. The applicablemargin over the Eurodollar rate is subject to adjustment based upon certaincredit ratings. At December 31, 2006, loans outstanding under therevolving credit facility consisted of $160.0 million based on the adjustedEurodollar rate currently at an annual interest rate of 6.10%.

On May 17, 2006, we entered into a Note PurchaseAgreement with a group of private investors. The Note Purchase Agreementallowed for the issuance and sale of $150.0 million of 6.83% Senior Notes, and 

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the proceeds were used toreduce borrowings under the revolving credit facility. The notes mature overvarying dates ranging from May 17, 2014 through May 17, 2018.

The revolving credit facility requires us to meetcertain financial covenants including: (1) leverage ratio (defined in thecredit agreement as Consolidated Debt divided by Consolidated EBITDA (earningsbefore interest, income taxes, depreciation and amortization expense) from thepreceding four quarters) less than 3.25 to 1.0 and (2) coverage ratio (definedin the credit agreement as Consolidated EBITDAR (EBITDA plus rent expense)divided by the sum of Consolidated Interest Expense and Consolidated Net RentalExpense in each case from the preceding four quarters) greater than 2.75 to 1.0(increasing to 3.00 to 1.0 after December 31, 2008). The note purchaseagreement contains the same financial covenants as the revolving creditfacility except the maximum leverage ratio is 3.50 to 1.0 and the minimumcoverage ratio is 2.50 to 1.0 (increasing to 2.75 to 1.0 after December 31,2008). In addition the two agreements have certain cross-default provisionswith each other.

Though we are currently in compliance with thefinancial covenants in our revolving credit facility and note purchase agreement,the present outlook for business conditions indicates we will likely not be incompliance as of March 31, 2007. As such we are currently in negotiations withboth lending groups to amend the agreements to include less restrictivecovenants. These negotiations could result in economic concessions to thelending groups including increased costs, reduction in the size of therevolving credit facility or other modifications to the terms and conditions ofthe agreements. Based upon several considerations underlying our overallfinancial position, including our historical profitability and ability togenerate positive operating cash flow, we expect these negotiations to becompleted in a timely manner. However, if these negotiations are unsuccessfuland we are in default under the credit agreements, the lending groups havecertain rights including the termination of commitments and acceleration ofprincipal and interest payments. The successful completion of thesenegotiations or the refinancing of the credit agreements would be necessary tomeet our future liquidity requirements.

Thefollowing table summarizes the payments related to our outstanding contractualobligations as of December 31, 2006:

| ** **                   | ** ** | **Less**        | ** ** | ** ** | ** ** | ** ** | ** ** | **More**        | ** ** | ** ** | ** ** |
|------------------------------|------------|-----------------|------------|------------|------------|------------|------------|-----------------|------------|------------|------------|
| ** **                   | ** ** | **than 1** | ** ** | **1-3**    | ** ** | **4-5**    | ** ** | **than 5** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **year**        | ** ** | **years**  | ** ** | **years**  | ** ** | **years**       | ** ** | **Total**  | ** ** |
| Long-term debt  obligations: |       |            |       |       |       |       |       |            |       |       |       |
| Revolving Credit Facility    |       | $               | 10.0       |       | $          | —     |       | $               | 150.0      |       | $          | — |   | $ | 160.0 |   |
| 6.83% Senior Notes           |       | —          |       | —     |       | —     |       | 150.0           |       | 150.0      |       |
| Other                        |       | 0.8             |       | 0.8        |       | —     |       | —          |       | 1.6        |       |
| Interest expense (2)         |       | 19.5            |       | 38.8       |       | 32.5       |       | 44.9            |       | 135.7      |       |
| Operating lease  obligations |       |            |       |       |       |       |       |            |       |       |       |
| (net of subleases)           |       | 40.0            |       | 68.0       |       | 49.9       |       | 56.0            |       | 213.9      |       |
| Purchase  obligations (1)    |       | —          |       | —     |       | —     |       | —          |       | —     |       |
|                         |       | $               | 70.3       |       | $          | 107.6      |       | $               | 232.4      |       | $          | 250.9 |   | $ | 661.2 |   |

 

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(1)          We are not a party toany long-term supply contracts. We do, in the normal course of business,initiate purchase orders for the procurement of finished goods, raw materialsand other services. All purchase orders are based upon current requirements andare fulfilled within a short period of time.

(2)          Interestpayments calculated at rates in effect at December 31, 2006.

18

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**Other**

**Market Risk**

We have exposure to marketrisk from changes in interest rates. Our exposure to interest rate riskconsists of interest expense on our floating rate revolving credit facility andinterest income on our cash equivalents. A 10% interest rate increase wouldresult in additional interest expense of $0.9 million.

**Funded Status of the DefinedBenefit Pension Plan**

As of December 31,2006, the projected benefit obligation of our defined benefit pension planexceeded the fair value of the plan’s assets. As a result, pension liability of$61.4 million was recorded at December 31, 2006 a decrease from the $74.0million liability at December 31, 2005. This decrease resulted from thefavorable return on plan assets in 2006.

**Critical Accounting Policies**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires us to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reported period. Actual resultscould differ from those estimates.

**Revenue Recognition**

Revenues (sales) arerecognized when the following criteria are met: (1) persuasive evidence ofan arrangement exists; (2) there is a fixed or determinable price; (3) deliveryhas occurred; and (4) collectibility is reasonably assured. These criteriaare satisfied and revenue recognized primarily upon shipment of product.Appropriate provisions for customer returns and discounts are recorded basedupon historical results.

**Allowance for Doubtful Accounts**

We maintain an allowancefor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. The allowance for doubtful accounts isbased upon the review of specific customer account balances, historicalexperience and an overall aging of the accounts receivable.

**Inventories**

Inventories are stated atthe lower of cost (first-in, first-out) or market. Inventories are regularlyreviewed for excess quantities and obsolescence based upon historicalexperience, specific identification of discontinued items, future demand andmarket conditions and appropriate adjustments are recorded. If actual demand ormarket conditions are less favorable than estimated then additional inventorywrite-downs would be required.

**Long-lived Assets**

Long-lived assets, whichconsist primarily of goodwill, trademarks and property, plant and equipment,are reviewed for impairment annually or whenever events or changes in businesscircumstances indicate the carrying values of the assets may not berecoverable. If we determine the carrying value of the long-lived asset may notbe recoverable a permanent impairment charge would be recorded in the amount bywhich the long-lived asset exceeds fair value.

19

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**Retirement Plans**

Defined benefit planexpense and obligation calculations are dependent on various assumptions. Theseassumptions include discount rate, expected return on plan assets and rate ofcompensation increase. The discount rate used to calculate the retirementobligations at December 31, 2006 was 6.0% and was determined using Moody’sAa bond index customized to the plan’s projected benefit cash flow. In 2006,retirement plan expense was calculated using an expected return on plan assetsof 7.5% and the rate of compensation increases of 3.5%. The expected return onplan assets was developed through analysis of historical market returns byasset class, current market conditions and the trust funds past experience. Therate of compensation increases was based upon historical experience. We believethese assumptions to be reasonable; however, differences in assumptions wouldimpact the calculated obligation and future expense. For example, a 0.25%change in the discount rate would result in a $15 million change in the pensionobligation and a 0.25% change in the expected return on plan assets would resultin a $0.9 million change in pension expense.

On December 31, 2005the defined benefit plans were amended, freezing and ceasing future benefitaccruals as of that date. Certain transition benefits will be provided toparticipants who have attained age 50 and have completed 10 years of servicesas of December 31, 2005. We currently provide benefits to our employeesthrough an increased match in the defined contribution plan.

**Recently Issued Statements ofFinancial Accounting Standards**

In September, 2006the FASB issued Statement of Financial Accounting Standard (SFAS) No. 158 “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106 and 132 (r)”. This standardrequires an employer to:

·       Recognizethe funded status of a benefit plan in its statement of financial position.

·       Recognizeas a component of other comprehensive income the actuarial gains and losses andthe prior service costs or credits that arise during the period but are notrecognized as components of net periodic benefit costs.

The standard is effective for fiscal years endingafter December 15, 2006. The adoption of SFAS No. 158 resulted in anincrease in our liability for pension expense and an increase in accumulated othercomprehensive loss (before income tax benefits) of $8.1 million.

In July 2006, theFinancial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109” (FIN 48). FIN 48 clarifies the recognition threshold andmeasurement of an uncertain tax position taken in a tax return. FIN 48 alsorequires expanded disclosure with respect to the uncertainty of income taxes.FIN 48 is effective for fiscal years beginning after December 15, 2006.The adoption of FIN 48 on January 1, 2007 is expected to result in areduction of $1.0 to $3.0 million to our tax accruals and an increase toretained earnings.

**Outlook**

Business conditions remainrelatively unchanged from the end of January when we last commented oncurrent trends. Orders are tracking down and we expect sales to be down around10 percent versus the first quarter of last year. We reaffirm the guidance wegave at the end of January—net earnings per common share of 12 to 16 centsincluding the effect of 2 cents of previously disclosed restructuring, assetimpairment and severance charges and the effect of 3 cents in increasedinterest expense due to the upfront recognition of a gain on the interest rateswaps.

20

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**Forward-Looking Statements**

We have madeforward-looking statements within the meaning of the “safe harbor” provisionsof the Private Securities Litigation Reform Act of 1995. These forward-lookingstatements include our expected sales, net earnings per share, profit margins, and cash flows, the effects ofcertain manufacturing realignments and other business strategies, the prospectsfor the overall business environment, and other statements containing the words“expects,” “anticipates,” “estimates,” “believes,” and words of similar import.We caution investors any such forward-looking statements are not guarantees offuture performance and certain factors may cause actual results to differmaterially from those in the forward-looking statements. Such factors include,but are not limited to: changes in economic conditions; loss of market sharedue to competition; failure to forecast demand or anticipate or respond tochanges in consumer tastes and fashion trends; failure to achieve projected mixof product sales; business failures of large customers; distribution and costsavings programs; manufacturing realignments; increased reliance on offshore(import) sourcing of various products; fluctuations in the cost, availabilityand quality of raw materials; product liability uncertainty; environmentalregulations; future acquisitions; impairment of goodwill and other intangibleassets; anti-takeover provisions which could result in a decreased valuation ofour Common Stock; loss of funding sources and our ability to open and operatenew retail stores successfully. Other risk factors may be listed from time totime in our future public releases and SEC reports.

**Item 7A. Quantitativeand Qualitative Disclosures About Market Risk**

We have exposure to market risk from changes ininterest rates. Our exposure to interest rate risk consists of interest expenseon our floating rate revolving credit facility and interest income on our cashequivalents. A 10% interest rate increase would result in additional interestexpense of $0.9 million.

21

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**Item 8.**                        FinancialStatements and Supplementary Data

**CONSOLIDATEDBALANCE SHEETS**

| ** **                                                                                                                                                    | ** ** | **December 31,**                | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2006**                             | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Assets                                                                                                                                                        |       |                                 |       |                  |       |   |   |   |   |
| Current assets:                                                                                                                                               |       |                                 |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                    |       |                                 | $          | 26,565                |       |   |   | $ | 114,322 |   |   |
| Receivables, less  allowances of $29,025 ($23,368 at December 31, 2005)                                                                                  |       |                                 | 362,557    |                  |       |   | 349,202 |   |   |
| Inventories (Note 4)                                                                                                                                          |       |                                 | 502,070    |                  |       |   | 432,814 |   |   |
| Deferred income taxes                                                                                                                                         |       |                                 | 31,600     |                  |       |   | 25,540 |   |   |
| Prepaid expenses and  other current assets                                                                                                                    |       |                                 | 18,382     |                  |       |   | 9,790 |   |   |
| Total current assets                                                                                                                                          |       |                                 | 941,174    |                  |       |   | 931,668 |   |   |
| Property, plant and equipment:                                                                                                                                |       |                                 |       |                  |       |   |   |   |   |
| Land                                                                                                                                                          |       |                                 | 17,701     |                  |       |   | 19,682 |   |   |
| Buildings and  improvements                                                                                                                                   |       |                                 | 244,629    |                  |       |   | 258,369 |   |   |
| Machinery and equipment                                                                                                                                       |       |                                 | 347,661    |                  |       |   | 388,028 |   |   |
|                                                                                                                                                          |       |                                 | 609,991    |                  |       |   | 666,079 |   |   |
| Less accumulated  depreciation                                                                                                                                |       |                                 | 388,593    |                  |       |   | 415,262 |   |   |
| Net property, plant and  equipment                                                                                                                            |       |                                 | 221,398    |                  |       |   | 250,817 |   |   |
| Goodwill (Note 5)                                                                                                                                             |       |                                 | 182,652    |                  |       |   | 182,507 |   |   |
| Other intangible assets  (Note 5)                                                                                                                             |       |                                 | 169,671    |                  |       |   | 169,671 |   |   |
| Other assets                                                                                                                                                  |       |                                 | 43,308     |                  |       |   | 47,561 |   |   |
|                                                                                                                                                          |       |                                 | $          | 1,558,203             |       |   |   | $ | 1,582,224 |   |   |
| Liabilities and Shareholders’ Equity                                                                                                                     |       |                                 |       |                  |       |   |   |   |   |
| Current liabilities:                                                                                                                                          |       |                                 |       |                  |       |   |   |   |   |
| Current maturities of  long-term debt                                                                                                                         |       |                                 | $          | 10,800                |       |   |   | $ | 800 |   |   |
| Accounts payable                                                                                                                                              |       |                                 | 94,515     |                  |       |   | 101,860 |   |   |
| Accrued employee  compensation                                                                                                                                |       |                                 | 27,462     |                  |       |   | 30,605 |   |   |
| Other accrued expenses                                                                                                                                        |       |                                 | 55,779     |                  |       |   | 80,220 |   |   |
| Total current  liabilities                                                                                                                                    |       |                                 | 188,556    |                  |       |   | 213,485 |   |   |
| Long-term debt (Note 6)                                                                                                                                       |       |                                 | 300,800    |                  |       |   | 301,600 |   |   |
| Deferred income taxes                                                                                                                                         |       |                                 | 44,637     |                  |       |   | 46,875 |   |   |
| Other long-term  liabilities                                                                                                                                  |       |                                 | 113,495    |                  |       |   | 116,312 |   |   |
| Shareholders’ equity:                                                                                                                                    |       |                                 |       |                  |       |   |   |   |   |
| Preferred stock,  authorized 10,000,000 shares, no par value—issued, none                                                                                |       |                                 | —     |                  |       |   | — |   |   |
| Common stock, authorized  200,000,000 shares, $1.00 stated value—issued 56,482,541 shares at December 31,  2006 and December 31, 2005 (Note 8) |       |                                 | 56,483     |                  |       |   | 56,483 |   |   |
| Paid-in capital                                                                                                                                               |       |                                 | 227,520    |                  |       |   | 221,754 |   |   |
| Retained earnings                                                                                                                                             |       |                                 | 843,811    |                  |       |   | 820,025 |   |   |
| Accumulated other  comprehensive income (expense) (Note 12)                                                                                                   |       |                                 | (33,188    | )                     |       |   | (41,382 | ) |   |
| Treasury stock at cost 8,146,289  shares at December 31, 2006 and 6,814,963 shares at December 31,  2005)                                           |       |                                 | (183,911   | )                     |       |   | (152,928 | ) |   |
| Total shareholders’  equity                                                                                                                              |       |                                 | 910,715    |                  |       |   | 903,952 |   |   |
|                                                                                                                                                          |       |                                 | $          | 1,558,203             |       |   |   | $ | 1,582,224 |   |   |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

| ** **                                       | ** ** | **Year Ended December 31,**                                     | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2006**                                                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                       | ** ** | **(Dollars in thousands except per share data)** | ** ** |
| Net sales                                        |       | $                                                                              | 2,418,175  |   | $ | 2,386,774 |   | $ | 2,447,430 |   |
| Cost of sales                                    |       | 1,888,140                                                                      |       | 1,846,823 |   | 1,867,614 |   |
| Gross profit                                     |       | 530,035                                                                        |       | 539,951 |   | 579,816 |   |
| Selling, general  and administrative expenses    |       | 446,313                                                                        |       | 440,603 |   | 424,160 |   |
| Earnings from  operations                        |       | 83,722                                                                         |       | 99,348 |   | 155,656 |   |
| Interest expense                                 |       | 17,669                                                                         |       | 11,877 |   | 15,314 |   |
| Other income, net  (Note 15)                     |       | 14,869                                                                         |       | 4,523 |   | 2,298 |   |
| Earnings before  income tax expense              |       | 80,922                                                                         |       | 91,994 |   | 142,640 |   |
| Income tax  expense (Note 9)                     |       | 25,867                                                                         |       | 30,558 |   | 51,073 |   |
| Net earnings                                     |       | $                                                                              | 55,055     |   | $ | 61,436 |   | $ | 91,567 |   |
| Earnings per  common share—basic (Note 8)   |       | $                                                                              | 1.13       |   | $ | 1.18 |   | $ | 1.68 |   |
| Earnings per common  share—diluted (Note 8) |       | $                                                                              | 1.13       |   | $ | 1.18 |   | $ | 1.66 |   |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                           | ** ** | **(Dollars in thousands)**       | ** ** |
| Cash flows from  operating activities:                                               |       |                                       |       |   |   |   |   |
| Net earnings                                                                         |       | $                                          | 55,055     |   | $ | 61,436 |   | $ | 91,567 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                        |       | 36,670                                     |       | 45,240 |   | 49,050 |   |
| Compensation expense related to stock option grants  and restricted stock awards     |       | 6,142                                      |       | 253 |   | — |   |
| Provision (benefit) for deferred income taxes                                        |       | (14,973                                    | )          | (11,989 | ) | 6,018 |   |
| Other, net                                                                           |       | (5,915                                     | )          | 10,084 |   | 2,048 |   |
| Changes in  operating assets and liabilities:                                        |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                  |       | (13,355                                    | )          | 25,531 |   | (8,285 | ) |
| Inventories                                                                          |       | (69,256                                    | )          | 12,014 |   | (30,144 | ) |
| Prepaid expenses and intangible and other assets                                     |       | (2,795                                     | )          | (6,903 | ) | (13,616 | ) |
| Accounts payable, other accrued expenses                                             |       | (31,971                                    | )          | 28,872 |   | 12,574 |   |
| Other long-term liabilities                                                          |       | 13,525                                     |       | 24,445 |   | (1,875 | ) |
| Net cash provided by (used in) operating activities                                  |       | (26,873                                    | )          | 188,983 |   | 107,337 |   |
| Cash flows from  investing activities:                                               |       |                                       |       |   |   |   |   |
| Proceeds from the disposal of assets                                                 |       | 9,941                                      |       | 9,829 |   | 8,103 |   |
| Additions to property, plant and equipment                                           |       | (24,713                                    | )          | (28,541 | ) | (30,593 | ) |
| Net cash used in investing activities                                                |       | (14,772                                    | )          | (18,712 | ) | (22,490 | ) |
| Cash flows from  financing activities:                                               |       |                                       |       |   |   |   |   |
| Proceeds from termination of cash flow hedges                                        |       | 8,623                                      |       | — |   | — |   |
| Payments for debt issuance costs                                                     |       | (1,307                                     | )          | — |   | — |   |
| Additions to long-term debt                                                          |       | 470,000                                    |       | — |   | — |   |
| Payments of long-term debt                                                           |       | (460,800                                   | )          | (800 | ) | (800 | ) |
| Proceeds from exercise of stock options                                              |       | 8,305                                      |       | 7,552 |   | 12,977 |   |
| Tax benefit from the exercise of stock options                                       |       | 411                                        |       | — |   | — |   |
| Payments of cash dividends                                                           |       | (31,269                                    | )          | (31,267 | ) | (28,643 | ) |
| Payments for the purchase of treasury stock                                          |       | (40,075                                    | )          | (82,682 | ) | (88,801 | ) |
| Net cash used in financing activities                                                |       | (46,112                                    | )          | (107,197 | ) | (105,267 | ) |
| Net increase (decrease) in cash and cash equivalents                                 |       | (87,757                                    | )          | 63,074 |   | (20,420 | ) |
| Cash and cash  equivalents at beginning of period                                    |       | 114,322                                    |       | 51,248 |   | 71,668 |   |
| Cash and cash  equivalents at end of period                                          |       | $                                          | 26,565     |   | $ | 114,322 |   | $ | 51,248 |   |
| Supplemental  Disclosure:                                                            |       |                                       |       |   |   |   |   |
| Cash payments for income taxes, net                                                  |       | $                                          | 59,447     |   | $ | 40,570 |   | $ | 32,577 |   |
| Cash payments for  interest expense                                                  |       | $                                          | 15,581     |   | $ | 11,954 |   | $ | 16,202 |   |

 

See accompanying notes to consolidated financial statements.

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**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY ANDCOMPREHENSIVE INCOME**

| ** **                                                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                    | ** ** | **(Dollars in thousands)**       | ** ** |
| Common Stock:                                                                                                 |       |                                       |       |   |   |   |   |
| Beginning balance                                                                                             |       | $                                          | 56,483     |   | $ | 56,483 |   | $ | 56,277 |   |
| Stock plans activity (Note 7)                                                                                 |       | —                                     |       | — |   | 206 |   |
| Ending balance                                                                                                |       | $                                          | 56,483     |   | $ | 56,483 |   | $ | 56,483 |   |
| Paid-In Capital:                                                                                              |       |                                       |       |   |   |   |   |
| Beginning balance                                                                                             |       | $                                          | 221,754    |   | $ | 226,602 |   | $ | 221,388 |   |
| Stock plans activity (Note 7)                                                                                 |       | 5,766                                      |       | (4,848 | ) | 5,214 |   |
| Ending balance                                                                                                |       | $                                          | 227,520    |   | $ | 221,754 |   | $ | 226,602 |   |
| Retained Earnings:                                                                                            |       |                                       |       |   |   |   |   |
| Beginning balance                                                                                             |       | $                                          | 820,025    |   | $ | 789,856 |   | $ | 726,932 |   |
| Net earnings                                                                                                  |       | 55,055                                     |       | 61,436 |   | 91,567 |   |
| Cash dividends (per share 2006-$0.64, 2005-$0.60,  2004-$0.525)                                               |       | (31,269                                    | )          | (31,267 | ) | (28,643 | ) |
| Ending balance                                                                                                |       | $                                          | 843,811    |   | $ | 820,025 |   | $ | 789,856 |   |
| Accumulated Other  Comprehensive Income (Expense): (Note 12)                                                  |       |                                       |       |   |   |   |   |
| Beginning balance                                                                                             |       | $                                          | (41,382    | ) | $ | (31,076 | ) | $ | (31,446 | ) |
| Other comprehensive income (expense)                                                                          |       | 13,244                                     |       | (10,306 | ) | 370 |   |
| Adjustment to initially apply SFAS No. 158, net  of income tax benefit of $3,031                         |       | (5,050                                     | )          | — |   | — |   |
| Ending balance                                                                                                |       | $                                          | (33,188    | ) | $ | (41,382 | ) | $ | (31,076 | ) |
| Treasury Stock:                                                                                               |       |                                       |       |   |   |   |   |
| Beginning balance                                                                                             |       | $                                          | (152,928   | ) | $ | (84,382 | ) | $ | (6,249 | ) |
| Stock plans activity (Note 7)                                                                                 |       | 9,092                                      |       | 14,136 |   | 10,668 |   |
| Purchase of treasury stock (1,734,951 shares in  2006, 4,125,588 shares in 2005 and 3,431,600 shares in 2004) |       | (40,075                                    | )          | (82,682 | ) | (88,801 | ) |
| Ending balance                                                                                                |       | $                                          | (183,911   | ) | $ | (152,928 | ) | $ | (84,382 | ) |
| Total Shareholders’ Equity                                                                               |       | $                                          | 910,715    |   | $ | 903,952 |   | $ | 957,483 |   |
| Comprehensive  income (expense):                                                                              |       |                                       |       |   |   |   |   |
| Net earnings                                                                                                  |       | $                                          | 55,055     |   | $ | 61,436 |   | $ | 91,567 |   |
| Other  comprehensive income, net of tax:                                                                      |       |                                       |       |   |   |   |   |
| Financial instruments accounted for as hedges                                                                 |       | (5,663                                     | )          | 1,655 |   | 6,646 |   |
| Pension liability                                                                                             |       | 17,736                                     |       | (12,516 | ) | (5,922 | ) |
| Foreign currency translation                                                                                  |       | 1,171                                      |       | 555 |   |  (354 | ) |
| Other comprehensive income (expense)                                                                          |       | 13,244                                     |       | (10,306 | ) | 370 |   |
|                                                                                                          |       | $                                          | 68,299     |   | $ | 51,130 |   | $ | 91,937 |   |

 

See accompanying notes to consolidated financial statements.

25

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share data)**

**1.****                 TheCompany**

Furniture Brands International, Inc. is one ofthe largest furniture companies in the United States. We market our productsthrough four operating subsidiaries: Broyhill Furniture Industries, Inc.;Lane Furniture Industries, Inc.; Thomasville Furniture Industries, Inc.,and HDM Furniture Industries, Inc. Through these four subsidiaries, wedesign, manufacture, source, market and distribute a full-line of brandedproducts consisting of both wood and upholstered furniture.

Substantially allof our sales are made to unaffiliated furniture retailers. We have adiversified customer base with no one customer accounting for 10% or more ofconsolidated net sales and no particular concentration of credit risk in oneeconomic sector. Foreign operations and foreign net sales are not material.

**2.****                 SignificantAccounting Policies**

Our significant accountingpolicies are set forth below.

**Use of Estimates**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of sales and expenses during the reported period. Actual results coulddiffer from those estimates.

**Principles ofConsolidation**

The consolidated financialstatements include the Furniture Brands accounts and those of our subsidiaries.All material intercompany transactions are eliminated in consolidation. TheCompany’s fiscal year ends on December 31. The subsidiaries included inthe consolidated financial statements report their results of operations as ofthe Saturday closest to December 31. Accordingly, the results ofoperations will periodically include a 53-week fiscal year. Fiscal years2006, 2005 and 2004 were all 52-week years.

**Cash and CashEquivalents**

We consider all short-terminvestments with an original maturity of three months or less to be cashequivalents.

**Inventories**

Inventories are stated atthe lower of cost (first-in, first-out) or market. Inventories are regularlyreviewed for excess quantities and obsolescence based upon historicalexperience, specific identification of discontinued items, future demand andmarket conditions and appropriate adjustments are recorded.

**Property, Plant andEquipment**

Property, plant andequipment are recorded at cost when acquired. Depreciation is calculated usingboth accelerated and straight-line methods based on the estimated useful livesof the respective assets, which generally range from 3 to 45 years forbuildings and improvements and from 3 to 12 years for machinery and equipment.Long-lived assets are reviewed for impairment whenever events or changes in 

26

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS) (Continued) (Dollars in thousands except per share data)**

businesscircumstances indicate the carrying value of the assets may not be recoverable.Impairment losses are recognized if expected future cash flows of the relatedassets are less than their carrying value.

**Intangible Assets**

Intangible assets consist of goodwill and trademarks.In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,“Goodwill and Other Intangible Assets,” goodwill and intangible assets withindefinite lives are no longer amortized, but instead tested for impairment.Intangible assets are reviewed for impairment annually or whenever events orchanges in business circumstances indicate the carrying value of the assets maynot be recoverable.

Goodwill is tested by estimating the fair value ofeach reporting unit using a discounted cash flow model with an appropriate riskadjusted discount rate. The fair value of each reporting unit is then comparedwith the carrying value to determine if any impairment exists.

The fair value oftrademarks is calculated using a “relief from royalty payments” methodology.This approach involves two steps: (i) estimating reasonable royalty ratesfor each trademark and (ii) applying these royalty rates to a net salesstream and discounting the resulting cash flows to determine fair value. Thisfair value is then compared with the carrying value of each trademark.

**Fair Value ofFinancial Instruments**

We consider the carrying amounts of cash and cashequivalents, receivables, and accounts payable to approximate fair valuebecause of the short maturity of these financial instruments.

Amounts outstanding under the revolving creditagreement are considered to be carried in the financial statements at theirestimated fair values because they accrue interest at rates which generallyfluctuate with interest rate trends. The fair value of the $150,000 outstandingunder the note purchase agreement was $151,300 as of December 31, 2006.

We periodically useinterest rate swap agreements (derivative financial instruments) to hedge riskassociated with our floating rate long-term debt. Under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, each derivativeinstrument is recorded on the balance sheet at fair value as an asset orliability with any gain or loss recorded as a component of accumulated othercomprehensive income (expense) until recognized in earnings. The fair value ofthe swap agreements is based upon quoted market prices. The net amount to bepaid or received under the interest rate swap agreements is recorded as acomponent of interest expense. As of December 31, 2006 we had a notionalamount of $150,000 of interest rate swaps; however, we terminated hedgeaccounting treatment in the first quarter of 2006 (Note 6).

**Revenue Recognition**

Revenues (sales) arerecognized when the following criteria are met: (1) persuasive evidence ofan arrangement exists; (2) there is a fixed or determinable price; (3) deliveryhas occurred; and (4) collectibility is reasonably assured. These criteriaare satisfied and revenue recognized primarily upon shipment of product.Appropriate provisions for customer returns and discounts are recorded basedupon historical experience.

27

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS) (Continued) (Dollars in thousands except per share data)**

**Advertising Costs**

Advertising productioncosts are expensed when advertisements are first aired or distributed. Totaladvertising costs were $72,419 for 2006, $76,183 for 2005, and $82,089 for2004.

**Income Taxes**

Deferred tax assets andliabilities are recognized for the estimated future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates in effect for theyear in which those temporary differences are expected to be recovered orsettled. The effect of a change in tax rates on deferred tax assets andliabilities is recognized as income tax expense (benefit) in the period thatincludes the enactment date.

**Stock-BasedCompensation**

Effective January 1,2006 we adopted Statement of Financial Accounting Standard No. 123(Revised 2004)—Share-Based Payment (SFAS No. 123R) using the modifiedprospective application transition method. Under the modified prospectiveapproach, the provisions of SFAS No. 123R are applied to new awards and toawards modified, repurchased or cancelled after the effective date.Additionally, compensation cost is also recognized for the unvested portion ofawards granted prior to adoption. Prior year financial statements are notrestated.

The adoption of SFAS No. 123R resulted in pretaxshare-based compensation expense of $5,734 ($3,647 net of income tax benefit)for the twelve months ended December 31, 2006. Prior to the adoption ofSFAS No. 123R, we accounted for stock based compensation plans under APBOpinion No. 25 “Accounting for Stock Issued to Employees”. The followingtable illustrates the impact on net earnings and earnings per common share ifthe fair value method had been applied.

| ** **                                                                                                               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                               | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| Net earnings                                                                                                             |       | $                                          | 61,436     |   | $ | 91,567 |   |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method, net of income tax benefits |       | 4,212                                      |       | 4,729 |   |
| Net earnings—pro  forma                                                                                             |       | $                                          | 57,224     |   | $ | 86,838 |   |
| Earnings per  share—basic:                                                                                          |       |                                       |       |   |   |
| As reported                                                                                                              |       | $                                          | 1.18       |   | $ | 1.68 |   |
| Pro forma                                                                                                                |       | $                                          | 1.10       |   | $ | 1.59 |   |
| Earnings per  share—diluted:                                                                                        |       |                                       |       |   |   |
| As reported                                                                                                              |       | $                                          | 1.18       |   | $ | 1.66 |   |
| Pro forma                                                                                                                |       | $                                          | 1.10       |   | $ | 1.58 |   |

 

**Reclassifications**

Certain amounts in theconsolidated financial statements have been reclassified to conform to the 2006presentation. These reclassifications have no effect on net earnings orstockholders’ equity as previously reported.

28

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS) (Continued) (Dollars in thousands except per share data)**

**3. Restructuringand Asset Impairment Charges**

In 2001 we began implementing a plan to reduce ourdomestic manufacturing capacity. As of December 31, 2006, this planincluded the closing, consolidation or reconfiguration of 34 manufacturingfacilities. Restructuring activity included the closing or the realignment ofthree manufacturing facilities in 2006, the closing of eight manufacturingfacilities in 2005 and the closing of three manufacturing facilities in 2004.

Asset impairment charges were recorded to reduce thecarrying value of all idle facilities and related machinery and equipment totheir net realizable value. The determination of the impairment charges werebased primarily upon (i) consultations with real estate brokers retainedto assist in disposal efforts and (ii) proceeds from recent sales ofCompany facilities and the market prices being obtained for similar long-livedassets.

Restructuringand asset impairment charges were as follows:

| ** **                                                   | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Restructuring  charges:                                      |       |                                       |       |   |   |   |   |
| Costs to shutdown, cleanup and vacate facilities             |       | $                                          | 1,675      |   | $ | 3,793 |   | $ | 1,848 |   |
| One-time termination benefits (includes executive severance) |       | 2,873                                      |       | 7,628 |   | 669 |   |
| Inventory write-downs                                        |       | 713                                        |       | — |   | 4,678 |   |
|                                                         |       | 5,261                                      |       | 11,421 |   | 7,195 |   |
| Impairment  charges                                          |       | 2,142                                      |       | 9,988 |   | 2,054 |   |
|                                                         |       | $                                          | 7,403      |   | $ | 21,409 |   | $ | 9,249 |   |
| Statement of  Operations classification:                     |       |                                       |       |   |   |   |   |
| Cost of operations                                           |       | $                                          | 5,280      |   | $ | 7,427 |   | $ | 5,953 |   |
| Selling, general and administrative expenses                 |       | 2,123                                      |       | 13,982 |   | 3,296 |   |
|                                                         |       | $                                          | 7,403      |   | $ | 21,409 |   | $ | 9,249 |   |

 

Realestate held for sale with a carrying value of $5,007 and $603 was included inother assets as of December 31, 2006 and 2005. There were no restructuringcharges included in other accrued expenses at December 31, 2006 and 2005.

**4.****                 Inventories**

Inventories are summarized as follows:

| ** **        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Finished products |       |                  | $          | 360,442               |       |   |   | $ | 275,985 |   |   |
| Work-in-process   |       |                  | 35,411     |                  |       |   | 43,747 |   |   |
| Raw materials     |       |                  | 106,217    |                  |       |   | 113,082 |   |   |
|              |       |                  | $          | 502,070               |       |   |   | $ | 432,814 |   |   |

 

29

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

**5.****                 Goodwilland Other Intangible Assets**

Goodwill and otherintangible assets include the following:

| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Goodwill                        |       |                  | $          | 265,390               |       |   |   | $ | 265,245 |   |   |
| Less: accumulated  amortization |       |                  | 82,738     |                  |       |   | 82,738 |   |   |
| Goodwill                        |       |                  | $          | 182,652               |       |   |   | $ | 182,507 |   |   |
| Trademarks and trade  names     |       |                  | $          | 206,179               |       |   |   | $ | 206,179 |   |   |
| Less: accumulated  amortization |       |                  | 36,508     |                  |       |   | 36,508 |   |   |
| Other intangible assets         |       |                  | $          | 169,671               |       |   |   | $ | 169,671 |   |   |

 

SFAS No. 142,“Goodwill and Other Intangible Assets”, requires that goodwill and other intangible assets with indefinite livesno longer be amortized, but instead be tested annually for impairment orwhenever events or changes in business circumstances indicate the carryingvalue of the assets may not be recoverable. No impairment was recorded in 2006,2005 or 2004. Our other intangible assets consist of trademarks and trade namesall having indefinite lives.

**6.****                 Long-TermDebt**

Long-term debtconsists of the following:

| ** **                 | ** ** | **December 31,** | ** ** | **December 31.** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Revolving credit  facility |       |                  | $          | 150,000               |       |   |   | $ | 300,000 |   |   |
| 6.83% Senior Notes         |       |                  | 150,000    |                  |       |   | — |   |   |
| Other                      |       |                  | 800        |                  |       |   | 1,600 |   |   |
|                       |       |                  | $          | 300,800               |       |   |   | $ | 301,600 |   |   |

 

On April 21, 2006, werefinanced our revolving credit facility with a group of financialinstitutions. The new facility is an unsecured revolving credit facility with acommitment of $400,000 and a maturity date of April 21, 2011. The facilityallows for cash borrowings and issuance of letters of credit. Cash borrowingsunder the revolving credit facility bear interest at a base rate or at anadjusted Eurodollar rate plus an applicable margin, depending upon which typeof loan we select. The applicable margin over the adjusted Eurodollar rate isdependent upon our credit ratings. The revolving credit facility has no mandatoryprincipal payments.

On May 17, 2006, weentered into a Note Purchase Agreement with a group of private investors. TheNote Purchase Agreement allowed for the issuance and sale of $150,000 of 6.83%Senior Notes, and the proceeds were used to reduce borrowings under therevolving credit facility. These notes mature over varying dates ranging from May 17,2014 through May 17, 2018.

The revolving creditfacility requires us to meet certain financial covenants including: (1)leverage ratio (defined in the credit agreement as Consolidated Debt divided byConsolidated EBITDA (earnings before interest, income taxes, depreciation andamortization expense)  from the precedingfour quarters) less than 3.25 to 1.0 and (2) coverage ratio (defined in thecredit agreement as Consolidated EBITDAR (EBITDA plus rent expense) divided bythe sum of Consolidated Interest Expense and Consolidated Net Rental Expense ineach case from the preceding four quarters) greater than 2.75 to 1.0(increasing to 3.00 to 1.0 after December 31, 2008). The note purchaseagreement contains the same financial covenants as the revolving creditfacility except the maximum leverage ratio is 3.50 to 1.0 and the minimumcoverage 

30

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

ratio is2.50 to 1.0 (increasing to 2.75 to 1.0 after December 31, 2008). In additionthe two agreements have certain cross-default provisions with each other.

Though we are currently incompliance with the financial covenants in our revolving credit facility andnote purchase agreement, the present outlook for business conditions indicateswe will likely not be in compliance as of March 31, 2007. As such we arecurrently in negotiations with both lending groups to amend the agreements toinclude less restrictive covenants. Based upon several considerationsunderlying our overall financial position, including our historicalprofitability and ability to generate positive operating cash flow, we expectthese negotiations to be completed in a timely manner. However, if thesenegotiations are unsuccessful and we are in default under the credit agreements,the lending groups have certain rights including the termination of commitmentsand acceleration of principal and interest payments. The successful completionof these negotiations or the refinancing of the credit agreements would berequired to meet our future liquidity requirements.

In May 2004,in order to reduce the impact of changes in interest rates on our floating ratelong-term debt, we entered into three interest rate swap agreements, eachhaving a notional amount of $100,000 and a termination date in May 2007.As a result of the April 21, 2006 refinancing we discontinued accountingfor the interest rate swaps as cash flow hedges as of March 31, 2006 andreclassified the gain of $8,503 ($5,408 net of income tax expense) fromaccumulated other comprehensive income into earnings. As a result of reducingthe amount of floating rate debt outstanding with the proceeds of the NotePurchase Agreement, on May 18, 2006 we terminated $150 million notionalamount of interest rate swap agreements.

**7.****                 StockOptions and Restricted Stock Awards**

We have outstanding optiongrants pursuant to the 1992 Stock Option Plan and the 1999 Long-Term IncentivePlan. These plans are administered by the Executive Compensation and StockOption Committee of the Board of Directors and permit certain key employees tobe granted nonqualified options, performance-based options, restricted stock,or combinations thereof. Options must be issued at market value on the date ofgrant and expire in a maximum of ten years. As of December 31, 2006 therewere 761,576 shares available for grant. Shares issued upon exercise of stockoptions or issuance of restricted shares may be from new shares or fromtreasury stock.

The fair value of theaward is recognized as compensation expense on a straight-line basis over thevesting period, generally four years for stock options and various termsranging from one to seventeen years for the restricted stock and restrictedstock units.

The fair value of eachstock option is estimated on the date of grant using the Black-Scholes optionpricing model. The following weighted-average assumptions were used todetermine the fair value of options granted in the periods indicated.

| ** **               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|----------|------------|
| Risk-free interest rate  |       | 4.4      | %          | 3.8      | %          | 3.2      | %          |
| Expected dividend yield  |       | 2.5      | %          | 2.6      | %          | 1.7      | %          |
| Expected life (in years) |       | 5.6      |       | 6.0      |       | 6.0      |       |
| Expected volatility      |       | 39.8     | %          | 42.6     | %          | 50.8     | %          |

 

The risk-free interestrate is based upon U.S. Treasury Securities with a term similar to the expectedlife of the option grant. The dividend yield is calculated based upon thedividend rate on the date of the grant. The expected term of the option grantis based upon historical exercise results. Expected volatility is calculatedbased upon the historical volatility over a period equal to the expected termof the option grant.

31

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

Other informationpertaining to option activity during the years ended December 31, 2006,2005 and 2004 is as follows:

| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Fair value per share of  options granted         |       | $        | 8.37       |     | $          | 8.19     |       | $ | 13.28 |   |
| Total intrinsic value of stock options exercised |       | $        | 1,481      |     | $          | 4,361    |       | $ | 7,745 |   |

 

Asummary of option activity is presented below:

| ** **                             | ** ** | ** ** | ** ** | ** **   | ** ** | **Weighted**          | ** ** | ** **    | ** ** |
|----------------------------------------|------------|------------|------------|--------------|------------|-----------------------|------------|---------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Average**           | ** ** | ** **    | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Average**  | ** ** | **Remaining**         | ** ** | **Aggregate** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Contractual**       | ** ** | **Intrinsic** | ** ** |
| ** **                             | ** ** | **Shares** | ** ** | **Price**    | ** ** | **Term (Years)** | ** ** | **Value**     | ** ** |
| Outstanding at  December 31, 2005 |       | 3,916,350  |       |         | $          | 23.88                 |       |          |       |   |   |   |   |   |   |   |
| Granted                                |       | 730,800    |       |         | 24.27      |                  |       |          |       |   |   |   |   |   |   |
| Exercised                              |       | (408,125   | )          |         | 20.35      |                  |       |          |       |   |   |   |   |   |   |
| Forfeited or expired                   |       | (377,725   | )          |         | 24.35      |                  |       |          |       |   |   |   |   |   |   |
| Outstanding at  December 31, 2006 |       | 3,861,300  |       |         | $          | 24.28                 |       |          |       | 5.4 |   |   |   | $ | 123 |   |   |
| Exercisable at  December 31, 2006 |       | 2,485,675  |       |         | $          | 24.30                 |       |          |       | 3.8 |   |   |   | $ | 123 |   |   |

 

The aggregate intrinsic value was calculated using thedifference between the market price at year end and the exercise price for onlythose options that have an exercise price that is less than the market price.

Non-vested restrictedstock and restricted stock unit activity is presented below.

| ** **                        | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|-----------------------------------|------------|------------|------------|---------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                        | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| ** **                        | ** ** | **Shares** | ** ** | **Fair Value** | ** ** |
| Outstanding at December  31, 2005 |       | 52,166     |       |                | $          | 27.58 |   |   |
| Granted                           |       | 60,190     |       |                | 24.55      |   |   |
| Vested                            |       | (13,334    | )          |                | 32.70      |   |   |
| Forfeited                         |       | (14,941    | )          |                | 23.97      |   |   |
| Outstanding at December 31, 2006  |       | 84,081     |       |                | $          | 25.24 |   |   |

 

As of December 31,2006 there was $9,216 of total unrecognized compensation cost related tonon-vested share-based compensation arrangements under the plan. This cost isexpected to be recognized over a weighted-average period of 2.0 years.

**8.****                 CommonStock**

The Company’s restatedcertificate of incorporation includes authorization to issue up to 200 millionshares of Common Stock with a $1.00 per share stated value. As of December 31,2006, 56,482,541 shares of Common Stock were issued.

The Company has been authorized by its Board ofDirectors to repurchase our Common Stock from time to time in open market orprivately negotiated transactions. Common Stock repurchases are recorded astreasury stock and may be used for general corporate purposes. On July 28,2005 the Board of Directors authorized the repurchase of $100 million of ourcommon stock over the next 12 month period. During 2006, 1,734,951 shares werepurchased at a cost of $40.1 million. The balance of the authorization expired 

32

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

on July 28, 2006. On January 26,2006 an authorization of $50,000 was approved. This authorization expired on January 26,2007 with no shares having been purchased.

Weightedaverage shares used in the computation of basic and diluted earnings per commonshare for 2006, 2005, and 2004 are as follows:

| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                          | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average shares  used for basic earnings per common share   |       | 48,753,006                                 |       | 51,976,417 |   | 54,653,995 |   |
| Effect of dilutive  securities:                                     |       |                                       |       |   |   |   |   |
| Stock options                                                       |       | —                                     |       | 127,558 |   | 565,577 |   |
| Weighted average shares used for diluted earnings  per common share |       | 48,753,006                                 |       | 52,103,975 |   | 55,219,572 |   |

 

Excluded from the computation of diluted earnings percommon share for 2006 and 2005 were options to purchase 3,309,850 and 3,008,825shares at an average price of $25.47 and $25.30 per share. These options havebeen excluded from the diluted earnings per share calculation because theirinclusion would be antidilutive.

Approximately 2 million preferred shares are reservedfor issuance under a Preferred Stock Purchase Rights Plan. Under certainconditions involving the acquisition of or an offer for 15 percent or more ofthe Company’s common stock, all holders of Rights except an acquiring entity,would be entitled (i) to purchase, at an exercise price of $135, commonstock of the Company, or an acquiring entity with a value twice the exerciseprice, or (ii) at the option of the Board, to exchange each Right for oneshare of common stock. The Rights remain in existence until July 30, 2008,unless earlier redeemed (at one cent per Right) exercised, or exchanged underthe terms of the Plan.

33

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

**9.****                 IncomeTaxes**

Income tax expense is comprised of the following:

| ** **      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------|------------|--------------------------------------------|------------|
| ** **      | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:        |       |                                       |       |   |   |   |   |
| Federal         |       | $                                          | 37,065     |   | $ | 39,557 |   | $ | 40,899 |   |
| State and local |       | 2,430                                      |       | 2,331 |   | 3,443 |   |
| Foreign         |       | 1,345                                      |       | 659 |   | 713 |   |
|            |       | 40,840                                     |       | 42,547 |   | 45,055 |   |
| Deferred        |       | (14,973                                    | )          | (11,989 | ) | 6,018 |   |
|            |       | $                                          | 25,867     |   | $ | 30,558 |   | $ | 51,073 |   |

 

Thefollowing table reconciles the differences between the federal corporatestatutory rate and our effective income tax rate:

| ** **                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal corporate  statutory rate                         |       | 35.0                                       | %          | 35.0 | % | 35.0 | % |
| State and local  income taxes, net of federal tax benefit |       | 1.8                                        |       | 1.2 |   | 1.8 |   |
| Foreign rate  differential                                |       | (1.7                                       | )          | — |   | — |   |
| Non taxable  income                                       |       | (1.3                                       | )          | (1.6 | ) | (0.5 | ) |
| Other (includes  tax credits)                             |       | (1.8                                       | )          | (1.4 | ) | (0.5 | ) |
| Effective income tax  rate                                |       | 32.0                                       | %          | 33.2 | % | 35.8 | % |

 

Thesources of the tax effects for temporary differences that give rise to thedeferred tax assets and liabilities were as follows:

| ** **                                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Deferred tax assets  attributable to:      |       |                  |       |                  |       |   |   |   |   |
| Expense accruals                           |       |                  | $          | 24,393                |       |   |   | $ | 19,503 |   |   |
| Valuation allowances                       |       |                  | 22,009     |                  |       |   | 14,755 |   |   |
| Asset impairment charges                   |       |                  | 2,569      |                  |       |   | 3,118 |   |   |
| Employee pension and other benefit plans   |       |                  | 24,659     |                  |       |   | 27,147 |   |   |
| Other                                      |       |                  | 909        |                  |       |   | 1,679 |   |   |
| Total deferred tax assets                  |       |                  | 74,539     |                  |       |   | 66,202 |   |   |
| Deferred tax  liabilities attributable to: |       |                  |       |                  |       |   |   |   |   |
| Fair value adjustments                     |       |                  | (45,764    | )                     |       |   | (45,150 | ) |   |
| Other intangible assets                    |       |                  | (34,534    | )                     |       |   | (30,374 | ) |   |
| Depreciation                               |       |                  | (3,584     | )                     |       |   | (7,263 | ) |   |
| Inventory costs capitalized                |       |                  | (2,393     | )                     |       |   | (3,555 | ) |   |
| Qualifying prepaid expenses                |       |                  | (1,301     | )                     |       |   | (1,195 | ) |   |
| Total deferred tax liabilities             |       |                  | (87,576    | )                     |       |   | (87,537 | ) |   |
| Net deferred tax  liabilities              |       |                  | $          | (13,037               | )          |   |   | $ | (21,335 | ) |   |

 

34

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

The undistributedcumulative earnings of foreign subsidiaries that are considered permanentlyreinvested outside the U.S. were $20.7 at December 31, 2006 and $17.3million at December 31, 2005. Foreign withholding taxes have not beenprovided on these earnings.

**10.****          EmployeeBenefits**

We sponsor or contribute to retirement plans coveringsubstantially all employees. The total costs of these plans were as follows:

| ** **                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Defined benefit  plan                  |       | $                                          | 11,409     |   | $ | 19,867 |   | $ | 13,542 |   |
| Defined  contribution plan (401k plan) |       | 11,662                                     |       | 793 |   | 793 |   |
| Other                                  |       | 453                                        |       | 898 |   | 2,612 |   |
|                                   |       | $                                          | 23,524     |   | $ | 21,558 |   | $ | 16,947 |   |

 

**Company-Sponsored Defined BenefitPlans**

Through 2005, employees were covered primarily bynoncontributory plans, funded by Company contributions to trust funds, which areheld for the sole benefit of employees. No contributions were made to the trustfund in 2005 or 2006, and we do not expect to make any cash contribution during2007. At December 31, 2006 expected benefit payments to retirees and/orbeneficiaries are as follows.

| **Year**       | ** ** | ** ** | ** ** | **Amount** | ** ** |
|----------------|------------|------------|------------|------------|------------|
| 2007           |       | 22,412     |       |
| 2008           |       | 23,576     |       |
| 2009           |       | 24,740     |       |
| 2010           |       | 25,938     |       |
| 2011           |       | 27,204     |       |
| 2012—2016 |       | 157,236    |       |

 

As of December 31, 2005 we amended the definedbenefit plans, freezing and ceasing future benefit accruals as of that date.Certain transition benefits are being provided to participants who had attainedage 50 and had completed 10 years of service as of December 31, 2005. Wecurrently provide future retirement benefits to our employees through a definedcontribution plan.

The investment objective of the trust funds is toensure, over the long-term life of the trusts, an adequate asset balance tosupport the benefit obligations to participants, retirees and beneficiaries. Inmeeting this objective, we seek to achieve investment returns at or aboveselected benchmarks consistent with a prudent level of diversification. Weretain registered investment advisors to manage specific asset classes.Investment advisors are selected from established and financially soundorganizations with proven records in managing funds in the appropriate assetclass. Investment advisors are given strict investment guidelines andperformance benchmarks. The assets of the various plans include corporateequities, government securities, corporate debt securities and insurancecontracts.

Annual cost for defined benefit plans is determinedusing the projected unit credit actuarial method. Prior service cost isamortized on a straight-line basis over the average remaining service period ofemployees expected to receive benefits.

35

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

It isour practice to fund pension costs to the extent such costs are tax deductibleand in accordance with ERISA. The assets of the various plans include corporateequities, government securities, corporate debt securities and insurancecontracts. The table below summarizes the funded status of our sponsoreddefined benefit plans.

| ** **                               | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **Qualified**                   | ** ** | **Non-Qualified**               | ** ** | **Qualified** | ** ** | **Non-Qualified** | ** ** |
| ** **                               | ** ** | **Plan**                        | ** ** | **Plan**                        | ** ** | **Plan** | ** ** | **Plan** | ** ** |
| Change in projected  benefit obligation: |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Beginning of year                        |       | $                               | 403,780    |                            |       | $ | 26,695 |   |   | $ | 391,041 |   |   | $ | 27,273 |   |   |
| Service cost                             |       | 4,893                           |       |                            | 388        |   |   | 12,302 |   |   | 667 |   |   |
| Interest cost                            |       | 23,051                          |       |                            | 1,548      |   |   | 23,500 |   |   | 1,557 |   |   |
| Actuarial (gain) loss                    |       | (9,171                          | )          |                            | 523        |   |   | 20,087 |   |   | (729 | ) |   |
| Benefits paid                            |       | (20,351                         | )          |                            | (1,372     | ) |   | (20,518 | ) |   | (1,352 | ) |   |
| Curtailments                             |       | —                          |       |                            | —     |   |   | (22,632 | ) |   | (721 | ) |   |
| End of year                              |       | $                               | 402,202    |                            |       | $ | 27,782 |   |   | $ | 403,780 |   |   | $ | 26,695 |   |   |
| Change in fair  value of plan assets:    |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Beginning of year                        |       | $                               | 348,480    |                            |       | $ | — |   |   | $ | 348,450 |   |   | — |   |   |
| Actual return on plan assets             |       | 40,500                          |       |                            | —     |   |   | 20,548 |   |   | — |   |   |
| Employer contributions                   |       | —                          |       |                            | 1,372      |   |   | — |   |   | 1,352 |   |   |
| Benefits paid                            |       | (20,351                         | )          |                            | (1,372     | ) |   | (20,518 | ) |   | (1,352 | ) |   |
| End of year                              |       | $                               | 368,629    |                            |       | $ | — |   |   | $ | 348,480 |   |   | — |   |   |
| Funded status                            |       | $                               | (33,573    | )                               |       | $ | (27,782 | ) |   | $ | (55,300 | ) |   | $ | (26,695 | ) |   |
| Fair value  adjustment                   |       | —                          |       |                            | —     |   |   | (9,818 | ) |   | — |   |   |
| Recognition of  minimum liability        |       | —                          |       |                            | —     |   |   | (73,982 | ) |   | — |   |   |
| Unrecognized net  actuarial loss         |       | —                          |       |                            | —     |   |   | 89,795 |   |   | 3,221 |   |   |
| Unrecognized  prior service cost         |       | —                          |       |                            | —     |   |   | 75 |   |   | 510 |   |   |
| Accrued pension cost                     |       | $                               | (33,573    | )                               |       | $ | (27,782 | ) |   | $ | (49,230 | ) |   | $ | (22,964 | ) |   |
| Accumulated  benefit obligation          |       | $                               | 395,361    |                            |       | $ | 27,035 |   |   | $ | 396,948 |   |   | $ | 26,080 |   |   |

 

The fair value adjustment relates to our 1992reorganization.

Theasset allocations for our defined benefit plans are as follows:

| ** **        | ** ** | **Percentage of Plan Assets** | ** ** |
|-------------------|------------|----------------------------------------------|------------|
| ** **        | ** ** | ** **                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **        | ** ** | **Target**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity securities |       |                                         | 55         | % |   |   | 56 | % |   |   | 59 | % |   |
| Debt securities   |       |                                         | 45         | % |   |   | 44 | % |   |   | 41 | % |   |
|              |       |                                         | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

36

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

Netperiodic pension expense for 2006, 2005, and 2004 included the followingcomponents:

| ** **                                         | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service  cost-benefits earned during the period    |       | $                                          | 5,281      |   | $ | 12,969 |   | $ | 12,411 |   |
| Interest cost on  the projected benefit obligation |       | 24,600                                     |       | 25,057 |   | 24,429 |   |
| Expected return  on plan assets                    |       | (25,499                                    | )          | (26,007 | ) | (27,004 | ) |
| Net amortization  and deferral                     |       | 7,027                                      |       | 6,503 |   | 3,706 |   |
| Curtailment  charge                                |       | —                                     |       | 1,345 |   | — |   |
| Net periodic pension  expense                      |       | $                                          | 11,409     |   | $ | 19,867 |   | $ | 13,542 |   |

 

Actuarialassumptions used to determine costs and benefit obligations are as follows:

| ** **                                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Assumptions used  to determine net pension expense:                       |       |     |       |     |       |     |       |
| Expected long-term rate of return on plan assets                          |       | 7.50     | %          | 7.50     | %          | 7.50     | %          |
| Average discount rate                                                     |       | 5.75     | %          | 6.00     | %          | 6.25     | %          |
| Long-term rate of compensation increase                                   |       | 3.50     | %          | 3.50     | %          | 3.50     | %          |
| Assumptions used to determine benefit obligation as of  December 31: |       |     |       |     |       |     |       |
| Average discount rates                                                    |       | 6.00     | %          | 5.75     | %          | 6.00     | %          |
| Long-term rate of  compensation increase                                  |       | 3.50     | %          | 3.50     | %          | 3.50     | %          |

 

The expected long-term rate of return assumption wasdeveloped through analysis of historical market returns by asset class, currentmarket conditions and the trust funds past experience.

Theadoption of SFAS No. 158 resulted in the following adjustments toindividual line items on our statement of financial position as of December 31,2006:

| ** **                                             | ** ** | **Before  Application of   SFAS No. 158** | ** ** | **Adjustments** | ** ** | **After  Application of  SFAS No. 158** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------|------------|
| Other long-term  liabilities (accrued pension expense) |       |                                                          | 105,414    |            |       |                                                   | 8,081      |   |   |   | 113,495 |   |   |
| Deferred income  taxes                                 |       |                                                          | 47,668     |            |       |                                                   | (3,031     | ) |   |   | 44,637 |   |   |
| Accumulated other  comprehensive income                |       |                                                          | (28,138    | )               |       |                                                   | (5,050     | ) |   |   | (33,188 | ) |   |

 

**Defined Contribution Plan**

We sponsor a defined contribution plan which coversall domestic employees. Employees are eligible to participate after six monthsof service. Participating employees may contribute a percentage of theircompensation to the plan, subject to limitations imposed by the InternalRevenue Service. We match a portion of the employee’s contribution andemployees vest immediately in the company match. Effectively January 1,2006 the company matching formula was increased when the defined benefit planwas frozen as previously discussed.

37

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

**11. Other long-termliabilities**

Otherlong-term liabilities consist of the following:

| ** **        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Pension liability |       |                  | 61,935     |                  |       |   | 72,678 |   |   |
| Other             |       |                  | 51,560     |                  |       |   | 43,634 |   |   |
|              |       |                  | 113,495    |                  |       |   | 116,312 |   |   |

 

Other long-termliabilities includes the non-current portion of accrued workers compensation,accrued rent associated with leases with escalating payments, liabilities forunrecognized tax benefits, deferred compensation and long-term incentive plansand various other non-current liabilities.

**12. OtherComprehensive Income (Expense)**

Othercomprehensive income (expense) consists of the following:

| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Change in fair value of  financial instruments accounted for as hedges |       | $                                     | (8,714     | ) | $  | 2,547 |   | $  | 10,225 |   |
| Pension liability                                                      |       | 27,787                                     |       | (19,348 | ) | (9,490 | ) |
| Foreign currency  translation                                          |       | 1,171                                      |       | 555 |   | (354 | ) |
|                                                                   |       | 20,244                                     |       | (16,246 | ) | 381 |   |
| Income tax expense  (benefit)                                          |       | 7,000                                      |       | (5,940 | ) | 11 |   |
|                                                                   |       | $                                          | 13,244     |   | $ | (10,306 | ) | $ | 370 |   |

 

Thecomponents of accumulated other comprehensive income (expense), each presentednet of tax, are as follows:

| ** **                                                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Market value of  financial instruments accounted for as hedges |       |                  | $     | —                |       |   |   | $  | 5,663 |   |   |
| Pension liability                                              |       |                  | (28,872    | )                     |       |   | (46,608 | ) |   |
| Foreign currency  translation                                  |       |                  | 734        |                  |       |   | (437 | ) |   |
| Adjustment to initially  apply SFAS No. 158               |       |                  | (5,050     | )                     |       |   | — |   |   |
|                                                           |       |                  | $          | (33,188               | )          |   |   | $ | (41,382 | ) |   |

 

**13. Leases**

Certainof our real properties and equipment are operated under lease agreements. Rentalexpense under operating leases was as follows:

| ** **       | ** ** | **Year Ended December 31,** | ** ** |
|------------------|------------|--------------------------------------------|------------|
| ** **       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Rent expense     |       | $                                          | 57,396     |   | $ | 51,660 |   | $ | 34,716 |   |
| Sublease income  |       | (16,912                                    | )          | (11,882 | ) | (4,106 | ) |
| Net rent expense |       | $                                          | 40,484     |   | $ | 39,778 |   | $ | 30,610 |   |

 

38

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

Annualminimum payments under operating leases are as follows:

| ** ** | ** ** | **Minimum** | ** ** | ** **   | ** ** | **Net Minimum** | ** ** |
|------------|------------|-------------|------------|--------------|------------|----------------------|------------|
| ** ** | ** ** | **Lease**   | ** ** | **Sublease** | ** ** | **Lease**            | ** ** |
| **Year**   | ** ** | ** **  | ** ** | **Payments** | ** ** | **Income**           | ** ** | **Payments** | ** ** |
| 2007       |       | $           | 56,634     |         | $          | 16,675               |       |   | $ | 39,959 |   |   |
| 2008       |       | 53,271      |       | 17,052       |       |                 | 36,219     |   |   |
| 2009       |       | 48,733      |       | 16,917       |       |                 | 31,816     |   |   |
| 2010       |       | 44,131      |       | 17,419       |       |                 | 26,712     |   |   |
| 2011       |       | 40,946      |       | 17,748       |       |                 | 23,198     |   |   |
| thereafter |       | 112,998     |       | 56,993       |       |                 | 56,005     |   |   |
|       |       | $           | 356,713    |         | $          | 142,804              |       |   | $ | 213,909 |   |   |
|            |            |             |            |              |            |                      |            |  |  |  |  |  |  |  |

 

We have providedguarantees related to store leases for certain independent dealers openingCompany-brand stores (e.g., Thomasville Home Furnishings Stores). Theguarantees range from rolling 5-year guarantees (approximately 80%) tofull-term guarantees (usually 10 years) and generally require us to make leasepayments in the event of default by the dealer. In the event of default, wehave the right to assign or assume the lease. The total future lease paymentsguaranteed at December 31, 2006 were $86,083. We consider the estimatedloss on these guarantees to be insignificant; therefore, as of December 31,2006 we have not recorded any contingent liability for lease guarantees.

**14. ContingentLiabilities**

We are or may become a defendant in a number ofpending or threatened legal proceedings in the ordinary course of business. Inour opinion, our ultimate liability, if any, from all such proceedings is notreasonably likely to have a material adverse effect upon the consolidatedfinancial position or results of operations of Furniture Brands or those of oursubsidiaries.

Weoffer limited warranties on certain products. In addition, we accept returns ofdefective product. Our accounting policy is to accrue an estimated liabilityfor these returns at the time revenue is recognized. This estimate is basedupon historical returns and adjusted for any warranty or return issues atperiod end. The warranty reserve is included partially as a valuation allowanceagainst accounts receivable and partially as an accrued expense. The followingtable summarizes reserve for returns activity:

| ** **                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance                        |       | $        | 9,351      |     | $          | 7,651    |       | $ | 7,736 |   |
| Additions charged to costs  and expenses |       | 28,474   |       | 25,130   |       | 24,678   |       |
| Deductions from reserves                 |       | 27,491   |       | 23,430   |       | 24,763   |       |
| Ending balance                           |       | $        | 10,334     |     | $          | 9,351    |       | $ | 7,651 |   |

 

**15. Other Income,Net**

Otherincome, net consists of the following:

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                       |       | $        | 2,594      |     | $          | 2,562    |       | $ | 1,135 |   |
| Gain on interest rate  swaps (Note 6) |       | 8,916    |       | —   |       | —   |       |
| Other, net                            |       | 3,359    |       | 1,961    |       | 1,163    |       |
|                                  |       | $        | 14,869     |     | $          | 4,523    |       | $ | 2,298 |   |

 

39

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

**16. QuarterlyFinancial Information (Unaudited)**

Followingis a summary of unaudited quarterly information:

| ** **                          | ** ** | **Fourth**  | ** ** | **Third**   | ** ** | **Second**  | ** ** | **First**   | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| Year ended  December 31, 2006: |       |        |       |        |       |        |       |        |       |
| Net sales                           |       | $           | 586,538    |        | $          | 568,917     |       | $           | 601,275    |   | $ | 661,445 |   |
| Gross profit                        |       | 117,174     |       | 122,767     |       | 136,155     |       | 153,939     |       |
| Net earnings                        |       | $           | 2,058      |        | $          | 5,797       |       | $           | 16,978     |   | $ | 30,222 |   |
| Earnings per  common share:         |       |        |       |        |       |        |       |        |       |
| Basic                               |       | $           | 0.04       |        | $          | 0.12        |       | $           | 0.35       |   | $ | 0.61 |   |
| Diluted                             |       | $           | 0.04       |        | $          | 0.12        |       | $           | 0.35       |   | $ | 0.61 |   |
| Dividends declared per common share |       | $           | 0.16       |        | $          | 0.16        |       | $           | 0.16       |   | $ | 0.16 |   |
| Common stock  price range:          |       |        |       |        |       |        |       |        |       |
| High                                |       | $           | 20.96      |        | $          | 22.21       |       | $           | 25.00      |   | $ | 25.34 |   |
| Low                                 |       | $           | 15.90      |        | $          | 18.10       |       | $           | 18.79      |   | $ | 21.20 |   |
| Year ended  December 31, 2005: |       |        |       |        |       |        |       |        |       |
| Net sales                           |       | $           | 593,529    |        | $          | 557,927     |       | $           | 593,753    |   | $ | 641,565 |   |
| Gross profit                        |       | 136,940     |       | 119,778     |       | 133,296     |       | 149,937     |       |
| Net earnings                        |       | $           | 17,142     |        | $          | 9,919       |       | $           | 9,591      |   | $ | 24,784 |   |
| Earnings per  common share:         |       |        |       |        |       |        |       |        |       |
| Basic                               |       | $           | 0.34       |        | $          | 0.19        |       | $           | 0.18       |   | $ | 0.47 |   |
| Diluted                             |       | $           | 0.34       |        | $          | 0.19        |       | $           | 0.18       |   | $ | 0.46 |   |
| Dividends declared per common share |       | $           | 0.15       |        | $          | 0.15        |       | $           | 0.15       |   | $ | 0.15 |   |
| Common stock  price range:          |       |        |       |        |       |        |       |        |       |
| High                                |       | $           | 23.77      |        | $          | 22.44       |       | $           | 23.01      |   | $ | 25.40 |   |
| Low                                 |       | $           | 16.07      |        | $          | 17.25       |       | $           | 18.81      |   | $ | 21.62 |   |

 

Earnings per common share were computed independentlyfor each of the quarters presented. The sum of the quarters may not equal thetotal year amount due to the impact of computing average quarterly sharesoutstanding for each period.

The closing market priceof the Common Stock on December 31, 2006 was $16.23 per share.

***Item 9. Changes in andDisagreements With Accountants on Accounting and Financial Disclosure***

None

***Item 9A. Controls and Procedures***

**Disclosure controlsand procedures**

Our chief executiveofficer and chief financial officer have conducted an evaluation of the Company’sdisclosure controls and procedures and have concluded that disclosure controlsand procedures were effective based on their evaluation of these controls andprocedures as of December 31, 2006.

40

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands except per share data)**

**Internal Controlover Financial Reporting**

(a)   Management’s Report on Internal Control over Financial Reporting

Our management report on internal control overfinancial reporting as of December 31, 2006 is set forth on page 50and is incorporated herein by reference.

(b)   AttestationReport of the Independent Registered Public Accounting Firm

Management’s report on internal control over financialreporting as of December 31, 2006 has been audited by KPMG LLP, theindependent registered public accounting firm that also audited ourconsolidated financial statements. KPMG LLP’s attestation report on ourinternal control over financial reporting is set forth on page 51.

(c)   Changes ininternal control over reporting.

There was no change in our internal control overfinancial reporting during the fourth fiscal quarter ended December 31,2006 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

***Item 9B. Other Information***

None

41

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**PART III**

**Item 10.**                 Directors,Executive Officers and Corporate Governance

The sections entitled “Nominees” and “Section 16(a) BeneficialOwnership Reporting Compliance” of our Definitive Proxy Statement for theAnnual Meeting of Stockholders on May 3, 2007 are incorporated herein byreference.

Executive Officers of the Registrant

| Name                 | ** ** | ** ** | ** ** | **Age**                                                                                                          | ** ** | **Position** | ** ** | **Current  Positions** | ** ** | **Appointed  or  Elected** |
|----------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|------------------------|------------|----------------------------|
| *Wilbert G. Holliman |       | 69         |       | President of the Subsidiary—Action Industries, Inc.                                                    |       |         |       | 1989                   |
|                      |       |       |       | Chief Executive Officer of the Subsidiary—Action  Industries, Inc.                                     |       |         |       | 1994                   |
|                      |       |       |       | Director                                                                                                         |       | X            |       | 1996                   |
|                      |       |       |       | President                                                                                                        |       |         |       | 1996                   |
|                      |       |       |       | Chief Executive Officer                                                                                          |       | X            |       | 1996                   |
|                      |       |       |       | Chairman of the Board                                                                                            |       | X            |       | 1998                   |
| John T. Foy          |       | 59         |       | President and Chief Executive Officer of the  Operating Company—Lane Furniture Industries, Inc.        |       |         |       | 1996                   |
|                 |       |       |       | Director                                                                                                         |       | X            |       | 2004                   |
|                 |       |       |       | President                                                                                                        |       | X            |       | 2004                   |
|                 |       |       |       | Chief Operating Officer                                                                                          |       | X            |       | 2004                   |
| Nancy W. Webster     |       | 53         |       | President and Chief Executive Officer of the  Operating Company—Thomasville Furniture Industries, Inc. |       | X            |       | 2005                   |
| C. Jeffrey Young     |       | 56         |       | President and Chief Executive Officer of the  Operating Company—Drexel Heritage                             |       |         |       | 2002                   |
|                      |       |       |       | HDM Furniture Industries, Inc                                                                               |       | X            |       | 2005                   |
| Lynn Chipperfield    |       | 55         |       | General Counsel                                                                                                  |       |         |       | 1993                   |
|                      |       |       |       | Vice-President                                                                                                   |       |         |       | 1996                   |
|                      |       |       |       | Secretary                                                                                                        |       |         |       | 1996                   |
|                      |       |       |       | Chief Administrative Officer                                                                                     |       |         |       | 2000                   |
|                      |       |       |       | Senior Vice President                                                                                            |       | X            |       | 2000                   |
|                      |       |       |       | General Counsel                                                                                                  |       | X            |       | 2006                   |
| Denise L. Ramos      |       | 50         |       | Senior Vice President                                                                                            |       | X            |       | 2005                   |
|                 |       |       |       | Treasurer                                                                                                        |       |         |       | 2005                   |
|                 |       |       |       | Chief Financial Officer                                                                                          |       | X            |       | 2005                   |
| Mary E. Sweetman     |       | 42         |       | Vice President, Human Resources                                                                                  |       |         |       | 2006                   |
|                      |       |       |       | Senior Vice President, Human Resources                                                                           |       | X            |       | 2007                   |
| Steven W. Alstadt    |       | 52         |       | Controller                                                                                                       |       | X            |       | 1994                   |
|                 |       |       |       | Chief Accounting  Officer                                                                                        |       | X            |       | 1994                   |

----

*Member of the Executive Committee

There are no family relationships between any of theexecutive officers of the Registrant.

42

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The executive officers are elected at theorganizational meeting of the Board of Directors which follows the annualmeeting of stockholders and serve for one year or until their successors areelected and qualified.

Each of the executiveofficers has held the same position or other positions with the same employerduring the past five years, except Denise L. Ramos, who became Senior VicePresident, Treasurer and Chief Financial Officer of the Company in 2005 andprior thereto was Chief Financial Officer of the KFC division of YUM! Brands, Inc.and Senior Vice President and Treasurer of YUM! Brands, Inc.; C. JeffreyYoung who became President and Chief Executive Officer of Drexel Heritage in2002 and prior thereto was a participant in a joint venture now known as FineFurniture Design and Marketing; Mary E. Sweetman, who became Vice President,Human Resources in 2006 and prior thereto was Vice President, Human Resources,North America; Vice President, Human Resources, North America & LatinAmerica; and Vice President, International for Monsanto Company; and Nancy W.Webster, who became President and Chief Executive Officer of Thomasville in2005 and prior thereto was Vice President of Hardlines Product Design andDevelopment for Target Corporation and Senior Vice President CreativeDevelopment for Springs Industries, Inc.

**Code of Corporate Conduct**

We have adopted a code of business conduct for directors,officers (including the Company’s principal executive officer, principalfinancial officer and controller) and employees, known as the Code of CorporateConduct. Any person may request a free copy of the Code of Corporate Conductfrom:

|        |   | Furniture Brands International, Inc. |   |   |
|--------|--------|-------------------------------------------|--------|--------|
|   |   | 101 S. Hanley Road                        |   |   |
|   |   | St. Louis, MO 63105                       |   |   |
|   |   |                                      |   |   |
|   |   | Attn: Corporate Secretary                 |   |   |
|   |   | 314-863-1100                              |   |   |

 

The Code of CorporateConduct is available on our website: furniturebrands.com (Investor Information,Corporate Governance). We intend to satisfy the disclosure requirement underItem 5.05 of Form 8-K by posting any amendment or waiver to our Codeof Corporate Conduct, within four business days, on our website for at least a12 month period. Our website does not constitute part of this Annual Report on Form 10-K.

**Audit Committee and Audit CommitteeFinancial Expert**

The sections entitled “Boardof Directors and Committees” and “Audit Committee Disclosure” of our ProxyStatement for the Annual Meeting of Stockholders on May 3, 2007 areincorporated herein by reference.

**Item 11.**                 ExecutiveCompensation

The sections entitled “ExecutiveCompensation” and “Compensation of Board of Directors” of our Definitive ProxyStatement for the Annual Meeting of Stockholders on May 3, 2007 areincorporated herein by reference.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholdersMatters

The section entitled “SecurityOwnership” of our Definitive Proxy Statement for the Annual Meeting ofStockholders on May 3, 2007 is incorporated herein by reference.

43

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**Item 13.**                 CertainRelationships and Related Transactions, and Director Independence

The sections entitled “Boardof Directors and Committees” and “Certain Relationships and Related Transactions”of our Definitive Proxy Statement for the Annual Meeting of Stockholders on May 3,2007 are incorporated herein by reference.

**Item 14.**                 PrincipalAccountant Fees and Services

The section “AuditCommittee Disclosure” of our Definitive Proxy Statement for the Annual Meetingof Stockholders on May 3, 2007 is incorporated herein by reference.

**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

(a)           List of documents filedas part of this report:

1.                FinancialStatements:

Consolidated balance sheets, December 31, 2006and 2005

Consolidated statements of operations for each of theyears in the three-year period ended December 31, 2006

Consolidated statements of cash flows for each of theyears in the three-year period ended December 31, 2006

Consolidated statements of shareholders’ equity andcomprehensive income (expense) for each of the years in the three-year periodended December 31, 2006

Notes to consolidated financial statements

Report of Independent Registered Public AccountingFirm

2.                FinancialStatement Schedules:

Valuation and qualifying accounts (Schedule II).

All other schedules are omitted as the requiredinformation is presented in the consolidated financial statements or relatednotes or are not applicable.

3.                Exhibits:

The following exhibits are filed herewith or areincorporated by reference to exhibits previously filed with the SEC. We shallfurnish copies of exhibits for a reasonable fee (covering the expense offurnishing copies) upon request.

| 3(a) |   | Restated Certificate of Incorporation of the  Company, as amended. (Incorporated by reference to Exhibit 3(a) to  Furniture Brands International, Inc.’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2002) |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| 3(b) |   | By-Laws of the Company  revised and amended to May 6, 1998. (Incorporated by reference to  Exhibit 3(a) to Furniture Brands International, Inc.’s  Quarterly Report on Form 10-Q for the quarter ended March 31,  1998) |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

44

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| 3(c)  |   | Rights Agreement, dated  as of July 30, 1998, between the Company and Bank of New York, as Rights  Agent. (Incorporated by reference to Exhibit 4 (b) to Furniture  Brands International, Inc.’s Report on Form 10-Q for the  quarter ended June 30, 1998)                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3(d)  |   | Certificate of  Designations, Preferences and Rights of Series A Junior Participating  Preferred Stock of the Company. (Incorporated by reference to  Exhibit 4(c) to Furniture Brands International, Inc.’s Report  on Form 10-Q for the quarter ended June 30, 1998)                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4(a)  |   | Credit Agreement, dated  April 21, 2006, among the Company, Broyhill Furniture  Industries, Inc., HDM Furniture Industries, Inc., and Thomasville  Furniture Industries, Inc. as Borrowers, Various Lenders, The Bank of  Tokyo-Mitsubishi, UFJ, LTD., PNC Bank, National Association, Wachovia Bank,  National Association and Wells Fargo Bank, NA, as Co-Syndication Agents, JP  Morgan Chase Bank, N.A. as Administrative Agent, and J.P. Morgan  Securities, Inc., as Sole Bookrunner and Sole Lead Arranger.  (Incorporated by reference to Exhibit 10 to Furniture Brands International, Inc.’s  Current Report on Form 8-K, dated April 26, 2006) |
| 4(b)  |   | Note Purchase Agreement  dated May 17, 2006, for $150,000,000 6.83% Senior Notes due May 17,  2018 among Furniture Brands International, Inc., Broyhill Furniture  Industries, Inc., HDM Furniture Industries, Inc., Lane Furniture  Industries, Inc., and Thomasville Furniture Industries, Inc., and  various institutional investors, and J.P. Morgan Securities Inc., Mitsubishi  Securities (USA), Inc., Wachovia Capital Markets, LLC and Wells Fargo  Capital Markets as agents. (Incorporated by reference to Exhibit 10 to  Furniture Brands International, Inc.’s Current Report on Form 8-K,  May 23, 2006)                     |
| 10(a) |   | Furniture Brands  International, Inc. 1992 Stock Option Plan, as amended. (Incorporated by  reference to Exhibit 10 (a) to Furniture Brands  International, Inc.’s Form 10-Q for the quarter ended  March 31, 2000) *                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10(b) |   | Furniture Brands  International, Inc. 1999 Long-Term Incentive Plan, as amended.  (Incorporated by reference to Exhibit 4(f) to Furniture Brands  International, Inc.’s Registration Statement on Form S-8,  File No. 333-100133) *                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10(c) |   | Furniture Brands  Internal, Inc. 2005 Long-Term Performance Bonus Plan (Incorporated by  reference to Exhibit 10(a) to Furniture Brands  International, Inc.’s Current Report on Form 8-K, dated  May 3, 2005.)                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(d) |   | Form of Stock  Option Grant Letter (Incorporated by reference to Exhibit 10(b) to  Furniture Brands International, Inc.’s Current Report on Form 8-K,  dated February 2, 2005) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10(e) |   | Form of Restricted  Stock Grant Letter (Incorporated by reference to Exhibit 10(c) to  Furniture Brands International, Inc’s. Current Report on Form 8-K,  dated February 11, 2005) *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10(f) |   | Form of  Indemnification Agreement between the Company and the Company’s directors.  (Incorporated by reference to Exhibit 10(c) to Furniture Brands  International Inc.’s Annual Report on Form 10-K for the year ended  December 31, 2001) *                                                                                                                                                                                                                                                                                                                                                                                                                           |

45

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| 10(g) |   | Furniture Brands  International, Inc. Amended and Restated Restricted Stock Plan for  Outside Directors, dated as of January 27, 2005. (Incorporated by  reference to Exhibit 10(b) to Furniture Brands  International, Inc.’s current Report on Form 8-K, dated  May 3, 2005) * |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(h) |   | Retirement Plan for  Directors. (Incorporated by reference to Exhibit 10 (g) to Furniture  Brands International, Inc.’s Annual Report on Form 10-K for  the year ended December 31, 1994) *                                                                                                |
| 10(i) |   | First Amendment to  Retirement Plan for Directors. (Incorporated by reference to Exhibit 10  (e) to Furniture Brands International, Inc.’s Annual Report on  Form 10-K for the year ended December 31, 1994) *                                                                             |
| 10(j) |   | Furniture Brands  International, Inc. Executive Incentive Plan, as amended on  October 25, 2001. (Incorporated by reference to  Exhibit 10(g) to Furniture Brands International Inc.’s Annual  Report on Form 10-K for the year ended December 31, 2001) *                            |
| 10(k) |   | Thomasville Furniture  Industries, Inc. Executive Incentive Plan, as amended on  January 24, 2002. (Incorporated by reference to  Exhibit 10(i) to Furniture Brands International Inc.’s Annual  Report on Form 10-K for the year ended December 31, 2001) *                          |
| 10(l) |   | Drexel Heritage  Furniture Industries, Inc. Executive Incentive Plan, dated  January 24, 2002. (Incorporated by reference to  Exhibit 10(k) to Furniture Brands International Inc.’s Annual Report  on Form 10-K for the year ended December 31, 2001) *                              |
| 10(m) |   | Form of Executive  Incentive Plan Grant Letter to Company Executives (Incorporated by reference  to Exhibit 10(a) to Furniture Brands International, Inc.’s  Current Report on Form 8-K, dated February 2, 2005) *                                                                    |
| 10(n) |   | Form of Executive  Incentive Plan Grant Letter to Operating Company Executives. (Incorporated by  reference to Exhibit 10(q) to Furniture Brands  International, Inc.’s Annual Report on Form 10-K for the year  ended December 31, 2004) *                                           |
| 10(o) |   | Employment Agreement,  dated as of January 1, 2000, between the Company and Wilbert G.  Holliman. (Incorporated by reference to Exhibit 10 (j) to Furniture  Brands International, Inc.’s Annual Report on Form 10-K for  the year ended December 31, 1998) *                         |
| 10(p) |   | Employment Agreement,  dated as of February 10, 2004, between the Company and John T. Foy.  (Incorporated by reference to Exhibit 10 (o), to Furniture Brands  International, Inc.’s Annual Report on Form 10-K for the year  ended December 31, 2003) *                                   |
| 10(q) |   | Employment Agreement,  dated as of February 7, 2005, between the Company and Denise L. Ramos  (Incorporated by reference to Exhibit 10(a) to Furniture Brands  International, Inc.’s Current Report On Form 8-K, dated  February 11, 2005) *                                          |

 

46

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| 10(r) |   | Employment Agreement,  dated as of August 1, 1996, between the Company and Lynn Chipperfield.  (Incorporated by reference to Exhibit 10 (c) to Furniture Brands  International, Inc.’s Annual Report on Form 10-K for the year  ended December 31, 1996) *                     |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10(s) |   | Employment Agreement,  dated as of September 6, 2005, between Thomasville Furniture  Industries, Inc. and Nancy W. Webster. *                                                                                                                                                                           |
| 10(t) |   | Form of Agreement  Not To Compete between the Company and Wilbert G. Holliman, John T. Foy, and  Lynn Chipperfield (Incorporated by reference to Exhibit 10 (r) to  Furniture Brands International, Inc.’s Annual Report on Form 10-K  for the year ended December 31, 1998) * |
| 10(u) |   | Furniture Brands  Supplemental Executive Retirement Plan, dated as of January 1, 2002.  (Incorporated by reference to Exhibit 10(v) to Furniture Brands  International, Inc.’s Annual Report on Form 10-K for the year  ended December 31, 2002) *                             |
| 10(v) |   | Form of Deferred  Executive Compensation Agreement (Incorporated by reference to  Exhibit 10(a) to Furniture Brands International, Inc.’s  Current Report on Form 8-K, dated December 9, 2004) *                                                                               |
| 10(w) |   | Form of Cash Option  Deferred Executive Compensation Agreement (Incorporated by reference to  Exhibit 10 (b) to Furniture Brands International, Inc.’s Current  Report on Form 8-K, dated December 9, 2004) *                                                                  |
| 10(x) |   | Furniture Brands  International, Inc. Deferred Compensation Plan, effective  January 1, 2006 (Incorporated by reference to Furniture Brands  International, Inc.’s Registration Statement on Form S-8, File  No. 333-130322)                                                        |
| 10(y) |   | Form of Long-Term  Performance Cash Bonus Letter (Incorporated by reference to  Exhibit 10(c) to Furniture Brands International, Inc.’s  Current Report on Form 8-K, dated February 2, 2005) *                                                                                 |
| 14    |   | Code of Corporate  Conduct                                                                                                                                                                                                                                                                                        |
| 21    |   | List of Subsidiaries of  the Company                                                                                                                                                                                                                                                                              |
| 23    |   | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                         |
| 31    |   | Certifications of W.G.  Holliman, Chief Executive Officer of the Company, and Denise L. Ramos,  Chief Financial Officer of the Company, Pursuant to Rule 13a-14(a)/15d-14(a),  as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               |
| 32    |   | Certifications of W.G.  Holliman, Chief Executive Officer of the Company, and Denise L. Ramos,  Chief Financial Officer of the Company, Pursuant to 18 U.S.C. Section 1350,  as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                 |
|       |        |                                                                                                                                                                                                                                                                                                                   |  |

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*Indicates management contract or compensatory plan,contract or arrangement

47

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**FURNITURE BRANDSINTERNATIONAL, INC. AND SUBSIDIARIESIndex to Consolidated Financial Statements and Schedules**

|                                                                                                                                                             | ** **     | **Page No.** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------|-------------------|------------|
| Consolidated Financial  Statements:                                                                                                                         |           |              |       |   |   |
| Consolidated Balance Sheets as of December 31,  2006 and 2005                                                                                          |           |              | 22         |   |   |
| Consolidated Statements of Operations for each of  the years in the three-year period ended December 31, 2006                                          |           |              | 23         |   |   |
| Consolidated Statements of Cash Flows for each of  the years in the three-year period ended December 31, 2006                                          |           |              | 24         |   |   |
| Consolidated Statements of Shareholders’ Equity and  Comprehensive Income for each of the years in the three-year period ended  December 31, 2006 |           |              | 25         |   |   |
| Notes to Consolidated Financial Statements                                                                                                                  |           |              | 26         |   |   |
| Financial Statement Schedule                                                                                                                                |           |              | 44         |   |   |
| Report of Independent Registered Public Accounting  Firm                                                                                                    |           |              | 51         |   |   |
| Consolidated  Financial Statement Schedules:                                                                                                                |           |              |       |   |   |
|                                                                                                                                                        | *Schedule  II* |              |       |   |   |   |   |
| Valuation and qualifying  accounts                                                                                                                          |           |              | 49         |   |   |
|                                                                                                                                                             |                |                   |            |  |  |  |  |

 

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**Schedule II**

**FURNITUREBRANDS INTERNATIONAL, INC. AND SUBSIDIARIESValuation and Qualifying Accounts**

| ** **                                              | ** ** | ** **                           | ** ** | **Additions**       | ** ** | ** **     | ** ** | ** **          | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|---------------------|------------|----------------|------------|---------------------|------------|
| ** **                                              | ** ** | **Balance at**                  | ** ** | **Charged to** | ** ** | **Deductions** | ** ** | **Balance at** | ** ** |
| ** **                                              | ** ** | **Beginning**                        | ** ** | **Costs and**  | ** ** | **From**       | ** ** | **End of**     | ** ** |
| **Description**                                         | ** ** | ** **                           | ** ** | **of Period**  | ** ** | **Expenses**   | ** ** | **Reserves**        | ** ** | **Period** | ** ** |
| ** **                                              | ** ** | **(Dollars in Thousands)** | ** ** |
| Year Ended  December 31, 2006                      |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |
| Allowances  deducted from receivables on balance sheet: |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts                         |       |                                 | $          | 16,053              |       |           |       | $                   | 13,410     |   |   |   | $ | (7,868 | )(a) |   |   | $ | 21,595 |   |   |
| Allowance for cash discounts/ chargebacks/other         |       |                                 | 7,315      |                |       |           | 30,052     |                |       |   | (29,937 | )(b) |   |   | 7,430 |   |   |
|                                                    |       |                                 | $          | 23,368              |       |           |       | $                   | 43,462     |   |   |   | $ | (37,805 | ) |   |   | $ | 29,025 |   |   |
| Year Ended  December 31, 2005                      |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |
| Allowances  deducted from receivables on balance sheet: |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts                         |       |                                 | $          | 15,390              |       |           |       | 9,047               |       |   |   | (8,384 | )(a) |   |   | 16,053 |   |   |
| Allowance for cash discounts/ chargebacks/other         |       |                                 | 5,529      |                |       |           | 26,108     |                |       |   | (24,322 | )(b) |   |   | 7,315 |   |   |
|                                                    |       |                                 | $          | 20,919              |       |           |       | $                   | 35,155     |   |   |   | $ | (32,706 | ) |   |   | $ | 23,368 |   |   |
| Year Ended  December 31, 2004                      |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |
| Allowances  deducted from receivables on balance sheet: |       |                                 |       |                |       |           |       |                |       |   |   |   |   |   |   |   |   |
| Allowance for doubtful accounts                         |       |                                 | $          | 13,287              |       |           |       | $                   | 16,425     |   |   |   | $ | (14,322 | )(a) |   |   | $ | 15,390 |   |   |
| Allowance for cash discounts/ chargebacks/other         |       |                                 | 6,091      |                |       |           | 25,266     |                |       |   | (25,828 | )(b) |   |   | 5,529 |   |   |
|                                                    |       |                                 | $          | 19,378              |       |           |       | $                   | 41,691     |   |   |   | $ | (40,150 | ) |   |   | $ | 20,919 |   |   |
|                                                         |            |                                      |            |                     |            |                |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Uncollectible accountswritten off, net of recoveries.

(b)          Cash discounts taken bycustomers and claims allowed to customers.

See accompanying Report of Independent Registered Public Accounting Firm.

49

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**Management’s Reporton Internal Control Over Financial Reporting**

Management of Furniture Brands International, Inc.is responsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in the Securities Exchange Act of1934 Rule 13a-15(f). Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness ofthe Company’s internal control over financial reporting as of December 31,2006 as required by the Securities Exchange Act of 1934 Rule 13a-15(c).In making this assessment, we used the criteria set forth in the framework in *Internal Control-Integrated Framework* issued by the Committeeof Sponsoring Organizations of the Treadway Commission. Based on our evaluationunder the framework in *InternalControl-Integrated Framework* our management concluded that ourinternal control over financial reporting was effective as of December 31,2006.

Ourmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of December 31, 2006 has been audited by KPMG LLP,an independent registered public accounting firm, as stated in their reportwhich is set forth on page 51.
| Furniture Brands International, Inc. |
|-------------------------------------------|
| St. Louis, Missouri                       |
| March 1, 2007                        |

 

50

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**Report of Independent RegisteredPublic Accounting Firm**

**The Board of Directors andShareholdersFurniture Brands International, Inc.:**

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting*,*thatFurniture Brands International, Inc. maintained effective internal controlover financial reporting as of December 31, 2006, based on the criteriaestablished in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that Furniture Brands International, Inc. maintained effectiveinternal control over financial reporting as of December 31, 2006, isfairly stated, in all material respects, based on the criteria established in *Internal Control—Integrated Framework*issued by COSO. Also,in our opinion, Furniture Brands International, Inc. maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2006, based the on the criteria establishedin *Internal Control—Integrated Framework*issuedby COSO.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of FurnitureBrands International, Inc. and subsidiaries as of December 31, 2006and 2005, and the related consolidated statements of operations, shareholders’equity and comprehensive income, and cash flows for each of the years in thethree-year period ended December 31, 2006, and our report dated March 1,2007 expressed an unqualified opinion on those consolidated financialstatements.
| /s/ KPMG LLP        |
|---------------------|
| St. Louis, Missouri |
| March 1, 2007       |

 

51

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**Report of Independent Registered Public AccountingFirm**

The Board of Directors andShareholdersFurniture Brands International, Inc.:

We have audited the accompanying consolidated balancesheets of Furniture Brands International, Inc. and subsidiaries as of December 31,2006 and 2005, and the related consolidated statements of operations,shareholders’ equity and comprehensive income, and cash flows for each of theyears in the three-year period ended December 31, 2006. In connection withour audits of the consolidated financial statements, we have also audited theaccompanying financial statement schedule. These consolidated financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedule based on ouraudits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Furniture Brands International, Inc. and subsidiaries as of December 31,2006 and 2005, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2006, inconformity with U.S. generally accepted accounting principles. Also in ouropinion, the related financial statement schedule, when considered in relationto the basic consolidated financial statements taken as a whole, presentsfairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the consolidated financialstatements, the Company adopted Statement of Financial Accounting Standards No. 123(Revised 2004), “Share Based Payments”, effective January 1, 2006. Asdiscussed in Note 10 to the consolidated financial statements, the Companyadopted Statement of Financial Accounting Standards No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans”,effective December 31, 2006.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of internal control overfinancial reporting of Furniture Brands International, Inc. as of December 31,2006, based on the criteria established in *Internal Control—IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), and our report dated March 1, 2007 expressedan unqualified opinion on management’s assessment of, and the effectiveoperation of, internal control over financial reporting.
| /s/ KPMG LLP        |       |       |
|---------------------|------------|------------|
| St. Louis, Missouri | ** ** | ** ** |
| March 1, 2007  | ** ** | ** ** |

 

52

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**SIGNATURES**

Pursuant to the requirements of Section 13 of 15 (d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.
|                                                         |   |   | Furniture Brands International, Inc. |
|---------------------------------------------------------|--------|--------|-------------------------------------------|
|                                                    |   |   |                                      | (Registrant) |
|                                                    |   | By:    |                                      | /s/ WILBERT G. HOLLIMAN |
|                                                    |   |   |                                      | Chairman of the Board and |
|                                                    |   |   |                                      | Chief Executive  Officer |
| Date:      March 1,  2007 |   |   |                                      |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated on March 1, 2007.
| Signature                     | ** ** | **Title**                     |
|-------------------------------|------------|-------------------------------|
| /s/  WILBERT G. HOLLIMAN      |       | Chairman of the Board         |
| Wilbert G.  Holliman          |       | (Principal Executive Officer) |
| /s/  JOHN T. FOY              |       | Director and President        |
| John T. Foy                   |       |                          |
| /s/  KATHERINE BUTTON BELL    |       | Director                      |
| Katherine Button  Bell        |       |                          |
| /s/  JOHN R. JORDAN, JR. |       | Director                      |
| John R.  Jordan, Jr.     |       |                          |
| /s/  LEE M. LIBERMAN          |       | Director                      |
| Lee M. Liberman               |       |                          |
| /s/  RICHARD B. LOYND         |       | Director                      |
| Richard B. Loynd              |       |                          |
| /s/  BOB L. MARTIN            |       | Director                      |
| Bob L. Martin                 |       |                          |
| /s/  AUBREY B. PATTERSON      |       | Director                      |
| Aubrey B.  Patterson          |       |                          |
| /s/  MATTHEW E. RUBEL         |       | Director                      |
| Matthew E. Rubel              |       |                          |
| /s/  ALBERT E. SUTER          |       | Director                      |
| Albert E. Suter               |       |                          |
|                          |       |                          |
| /s/ DENISE L. RAMOS           |       | Senior Vice-President         |
| Denise L. Ramos               |       | (Principal Financial Officer) |
|                          |       |                          |
| /s/ STEVEN W. ALSTADT         |       | Controller                    |
| Steven W. Alstadt             |       | (Principal Accounting         |
|                          |       | Officer)                      |

 

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