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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended June 30, 2010

OR

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

For the transition period from                to               

Commission file number 1-11692

Ethan Allen Interiors Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (203) 743-8000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes  x No

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  o No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  o Yes  o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

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

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

The aggregate market value of the Registrant’s common stock, par value $.01 per share, held by non-affiliates (based upon the closing sale price on the New York Stock Exchange) on December 31, 2009, (the last day of the Registrant’s most recently completed second fiscal quarter) was approximately $388,065,187.  As of July 31, 2010, there were 28,740,575 shares of the Registrant’s common stock, par value $.01 per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:  The Registrant’s definitive Proxy Statement for the 2010 Annual Meeting of stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, is incorporated by reference into Part III hereof.

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PART I

Item 1. Business

Background

Incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through its wholly-owned subsidiary, Ethan Allen Global, Inc., and Ethan Allen Global, Inc.’s subsidiaries (collectively, “We,” “Us,” “Our,” “Ethan Allen” or the “Company”), is a leading manufacturer and retailer of quality home furnishings and accessories, offering a full complement of home decorating and design solutions through one of the country’s largest home furnishing retail networks.  We refer to our Ethan Allen retail outlets as “design centers” instead of “stores” to better reflect these expanded capabilities.  We have made, and continue to make, considerable investment in our business in order to expand and improve our interior design capabilities and to leverage our domestic manufacturing and logistics operations.  The Company was founded in 1932 and has sold products under the Ethan Allen brand name since 1937.

Mission Statement

Our primary business objective is to provide our customers with a convenient, full-service, one-stop shopping solution for their home decorating needs by offering stylish, high-quality products at good value.  In order to meet our stated objective, we have developed and adhere to a focused and comprehensive business strategy.  The elements of this strategy, each of which is integral to our solutions-based philosophy, include (i) our vertically integrated operating structure, (ii) our stylish products and related marketing initiatives, (iii) our retail design center network, (iv) our people, and (v) our focus on providing design solutions.

Operating Segments

Our products are sold through a dedicated network of 281 retail design centers. As of June 30, 2010, the Company operated 145 design centers (our retail segment) and our independent retailers operated 136 design centers (as compared to 159 and 134, respectively, at the end of the prior fiscal year). Our wholesale segment net sales include sales to our retail segment and sales to our independent retailers.  Our retail segment net sales accounted for 74% of our consolidated net sales in fiscal 2010 while wholesale segment net sales to independent retailers accounted for 26%. Our net sales to the ten largest independent retailers, who operate 68 design centers, accounted for approximately 15% of our consolidated net sales in fiscal 2010.

Our wholesale and retail operating segments represent strategic business areas of our vertically integrated business that operate separately and provide their own distinctive services (further outlined below).  This enables us to more effectively offer our complete line of home furnishings and accessories and more efficiently control quality and cost. For certain financial information regarding our operating segments, see Note 16 to the Consolidated Financial Statements included under Item 8 of this Annual Report and incorporated herein by reference.

While the manner in which our home furnishings and accessories are marketed and sold is consistent between our wholesale and retail segments, the nature of the underlying recorded sales (i.e. wholesale versus retail) and the specific services that each operating segment provides (i.e. wholesale manufacturing, sourcing, and distribution versus retail selling) are different.  Within the wholesale segment, we maintain revenue information according to each respective product line (i.e. case goods, upholstery, or home accessories and other).  Sales of case good items include, but are not limited to, beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture, and wooden accents. Sales of upholstery home furnishing items include sleepers, recliners, chairs, sofas, loveseats, cut fabrics and leather.  Skilled craftsmen cut, sew and upholster custom-designed upholstery items which are available in a variety of frame and fabric options.  Home accessory and

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other items include window treatments, wall decor, lighting, clocks, bedding and bedspreads, decorative accessories, area rugs, and home and garden furnishings.

Revenue information by product line is not as easily determined within the retail segment. However, because wholesale sales are matched, for the most part, to incoming orders, we believe that the allocation of retail sales by product line would be similar to that of the wholesale segment.

We evaluate performance of the respective segments based upon revenues and operating income. Inter-segment eliminations result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin.

Wholesale Segment Overview:

Wholesale net sales for each of the last three fiscal years are summarized below (in millions):

Wholesale net sales for each of the last three fiscal years, allocated by product line, were as follows:

The wholesale segment, principally involved in the development of the Ethan Allen brand, encompasses all aspects of design, manufacture, sourcing, sale, and distribution of our broad range of home furnishings and accessories.  Wholesale revenue is generated upon the wholesale sale and shipment of our products to our network of independently operated design centers and Ethan Allen operated design centers (see Company operated retail comments below) through its national distribution center and one other smaller fulfillment center.

During the past year, independent retailers opened 12 new design centers (of which two were relocations), and closed seven design centers. We continue to promote the growth and expansion of our independent retailers through ongoing support in the areas of market analysis, site selection, and business development.  As in the past, our independent retailers are required to enter into license agreements with us, which (i) authorize the use of certain Ethan Allen service marks and (ii) require adherence to certain standards of operation, including a requirement to fulfill related warranty service agreements.  We are not subject to any territorial or exclusive retailer agreements in North America. The wholesale segment also develops and implements related marketing and brand awareness programs.

Wholesale profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale net sales price and the cost associated with manufacturing and/or sourcing the related product, and (ii) other operating costs associated with wholesale segment activities.

The Company’s domestic manufacturing is included in the results of the wholesale segment. During fiscal years 2009 and 2010, we consolidated two upholstery plants and one case goods sawmill plant and dramatically reduced operations of another case goods plant. All redundant operations were moved into other existing plants, thereby improving overall utilization of our domestic manufacturing. During fiscal 2010, we also converted our domestic case goods manufacturing to custom operations. Case goods products are no longer produced to a

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forecast and held in inventory; but rather, are produced to specific customer orders with the options specified by our clients. We now operate three case goods plants (including one sawmill), three upholstery plants (two upholstery plants on our Maiden, North Carolina campus and one cut and sew plant in Mexico) and one home accessory plant. We also source selected case good, upholstery, and home accessory items from third-party suppliers located both domestically and outside the United States.

As of June 30, 2010, we maintained a wholesale backlog of $57.0 million (as compared to $20.6 million as of June 30, 2009) which is anticipated to be serviced in the first quarter of fiscal 2011.  Backlog at a point in time is a result, primarily, of net orders booked in prior periods, manufacturing schedules, timing associated with the receipt of sourced product, and the timing and volume of wholesale shipments. Because orders may be rescheduled and/or canceled, the measure of backlog at a point in time may not necessarily be indicative of future sales performance.

For the twelve months ended June 30, 2010, net orders booked at the wholesale level, which includes orders generated by independently operated and Company operated design centers, totaled $403.7 million as compared to $398.5 million for the twelve months ended June 30, 2009.  In any given period, net orders booked may be impacted by the timing of floor sample orders received in connection with new product introductions.  New product offerings may be made available to the retail network at any time during the year, including in connection with our periodic retailer conferences.

Retail Segment Overview:

Retail net sales for each of the last three fiscal years are summarized below (in millions):

The retail segment sells home furnishings and accessories to consumers through a network of Company-operated design centers. During fiscal 2010 we acquired one design center from an independent retailer, opened four new design centers (of which three were relocations), and closed sixteen design centers.  In addition, we recently initiated a program that provides the opportunity for Ethan Allen designers to work with independent interior design affiliates that apply and meet Ethan Allen standards. This program provides the opportunity for the Company to reach additional clients with over 1,300 interior designers (serving both Company operated and independent retail operations) not otherwise affiliated with Ethan Allen and compensates them for the incremental business. Retail revenue is generated upon the retail sale and delivery of our products to our retail customers through its network of 18 service centers (as of June 30, 2010). Retail profitability includes (i) the retail gross margin, which represents the difference between the retail net sales price and the cost of goods purchased from the wholesale segment, and (ii) other operating costs associated with retail segment activities.

We pursue further expansion of the Company-operated retail business by opening new design centers, relocating existing design centers and, when appropriate, acquiring design centers from independent retailers. The geographic distribution of retail design center locations is included under Item 2 of Part I of this Annual Report.

Products

Our strategy has been to position Ethan Allen as a preferred brand with superior style, quality and value while, at the same time, providing consumers with a comprehensive, one-stop shopping solution for their home furnishing and design needs.  In carrying out our strategy, we continue to expand our reach to a broader consumer base through a diverse selection of attractively priced products, designed to complement one another, reflecting the popular trend toward eclectic home decorating.  Regular product introductions, a broad range of styles and selections within our custom upholstery and case good lines, new finishes for, and redesigns of, previous product introductions, and expanded product offerings to accommodate today’s home decorating trends, continue to

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redefine Ethan Allen, positioning us as a leader in style. During fiscal 2010, we further enhanced the opportunities to create individualized design solutions for our clients with the conversion of our entire domestic case goods products to custom, made-to-order manufacturing.

In an effort to more effectively position ourselves as a provider of interior design solutions, we offer a merchandising strategy which involves the grouping of our product offerings, previously categorized by collection, into seven distinct product “lifestyles”, each reflecting the diversity and eclecticism that we believe represents the best in American design.  In accordance with this merchandising strategy, new products are designed and developed to reflect unique elements applicable to one or more of the following lifestyles: Country House; Estate; Glamour; Global; Loft; Metro; and Villa.

All of our case goods, upholstered products, and home accessories are styled with distinct design characteristics. Home accessories play an important role in our marketing strategy as they enable us to offer the consumer the convenience of one-stop shopping by creating a comprehensive home furnishing solution. The interior of our design centers is organized to facilitate display of our product offerings, both in room settings that project the category lifestyle and by product grouping to facilitate comparisons of the styles and tastes of our clients. To further enhance the experience, technology is used to expand the range of products viewed by including content from our award-winning website and advanced large touch-screen flat panel displays.

We continuously monitor changes in home design trends through attendance at international industry events and fashion shows, internal market research, and regular communication with our retailers and design center design consultants who provide valuable input on consumer tendencies.  We believe that the observations and input gathered enables us to incorporate appropriate style details into our products to react quickly to changing consumer tastes. For example, since 2006, 58% of our current product lines are new. Much of the balance has been refined and enhanced through product redesign, additions, deletions, and/or finish changes. Such undertakings are indicative of our ability to adapt to the current consumer trend toward more casual and eclectic lifestyles while, at the same time, maintaining a classic appeal.

In response to the demands of our clients for even greater values during the recession of 2009 and 2010, the Company began offering special savings on many products during specified marketing initiatives. This was a necessary move away from our discipline of an everyday best price on all of our product offerings.  While we believe that a stable uniform everyday best price approach best allows us to differentiate ourselves through strategies focused on customer credibility and excellence in service, we recognize that in today’s economy, consumers demand the even greater values obtained through our periodic savings events. We will continue to monitor consumer sentiments and adjust our promotional activity accordingly.

Product Sourcing Activities

We are one of the largest manufacturers of home furnishings in the United States, manufacturing and/or assembling approximately 70% of our products in our six domestic manufacturing facilities. Our facilities are located in the Northeast and Southeast regions of the United States where they are close to sources of raw materials and skilled craftsmen. Our domestic upholstery manufacturing is supported by our high quality upholstery cut and sew plant in Mexico that doubled in size during fiscal 2010. The balance of our production is outsourced according to our own internally-developed design specifications, through third-party suppliers, most of which are located outside the United States. These suppliers, primarily in Asia, have been carefully selected and generally have supplied us for many years.  We believe that strategic investment in our manufacturing facilities, combined with an appropriate level of outsourcing through both foreign and domestic suppliers, will accommodate future sales growth and allow us to maintain an appropriate degree of control over cost, quality and service to our customers.

We also take pride in our “green” initiatives that include, in select product offerings, the use of responsibly harvested Appalachian woods, water based finishes, organic textiles and recycled materials.

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Raw Materials and Other Suppliers

The most important raw materials we use in furniture manufacturing are lumber, veneers, plywood, hardware, glue, finishing materials, glass, mirrored glass, laminates, fabrics, foam, and filling material.  The various types of wood used in our products include cherry, ash, oak, maple, prima vera, mahogany, birch and pine, substantially all of which are purchased domestically.

Fabrics and other raw materials are purchased both domestically and outside the United States.  We have no significant long-term supply contracts, and have sufficient alternate sources of supply to prevent disruption in supplying our operations.  We maintain a number of sources for our raw materials which, we believe, contributes to our ability to obtain competitive pricing.  Lumber prices fluctuate over time based on factors such as weather and demand, which, in turn, impact availability.  Higher material prices could have an adverse effect on margins.

Appropriate amounts of lumber and fabric inventory are typically stocked so as to maintain adequate production levels.  We believe that our sources of supply for these materials are sufficient and that we are not dependent on any one supplier.

We enter into standard purchase agreements with certain foreign and domestic suppliers to source selected case good, upholstery, and home accessory items.  The terms of these arrangements are customary for the industry and do not contain any long-term contractual obligations on our behalf.  We believe we maintain good relationships with our suppliers.

Distribution and Logistics

We continued to streamline our logistics operations during fiscal 2010 in both our wholesale and retail segments.

In the wholesale segment, the conversion of our domestic case goods to custom manufacturing enabled us to consolidate the warehousing and distribution of our products through one primary distribution center, owned by the Company, strategically located in the Southeast United States. This national distribution center is supported by a smaller Company-owned order fulfillment center located in the South Central United States. Our primary distribution center provides efficient cross-dock operations to receive and ship product from our manufacturing facilities and third-party suppliers to our network of retail design centers and retail service centers.  While we manufacture to custom order the majority of our products, we also stock selected case goods, upholstery and accessories to provide for quick delivery of in-stock items and to allow for more efficient production runs. We have established two large “supermarkets of parts” within our existing manufacturing sites for the components used in our custom case goods manufacturing.

Wholesale shipments utilize our own fleet of trucks and trailers or are subcontracted with independent carriers.  Approximately 45% of our fleet (trucks and trailers) is leased under operating lease agreements with remaining terms ranging from one to 27 months.

Our policy is to sell our products at the same delivered cost to all Company-operated and independently operated design centers nationwide, regardless of their shipping point. The adoption of this policy has created pricing credibility with our wholesale customers and provided our retail network the opportunity to achieve more consistent margins as fluctuations attributable to the cost of shipping have been eliminated.  Further, this policy has eliminated the need for our independent retailers to carry significant amounts of inventory in their own warehouses.  As a result, we obtain more accurate end-consumer product demand information.

Retail service centers are operated by the Company and the independent retailers to prepare products for delivery into clients’ homes. We continued to streamline Company-operated service centers and reduced the total number

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from 26 at the end of fiscal 2009 to 18 at the end of fiscal 2010. We continue to evaluate the entire logistics and distribution model to further improve these operations.

Marketing Programs

Our marketing and advertising strategies are developed to drive traffic into our network of design centers or to shop online at ethanallen.com.  We believe these strategies give Ethan Allen a strong competitive advantage in the home furnishings industry.  We create and coordinate print and television campaigns nationally, as well as assist in local marketing and promotional efforts. The Company’s network of approximately 280 retail design centers and more than 1,300 independent members of the Interior Design Affiliate program benefit from these marketing efforts, and we believe these efforts position us to consistently fulfill our brand promise.

Our in-house team of advertising specialists in collaboration with outside professionals sends consistent, clear messages that Ethan Allen is a leader in style and service, with everything for the well-designed home. We use several forms of media to accomplish this, including television (national and local), direct mail, newspapers, shelter magazines, email, and online, at ethanallen.com. A strong national email marketing campaign delivers emails and design and product brochures to a growing database of clients.

Our national television and print advertising campaigns are designed to leverage our strong brand equity, finding creative and compelling ways to remind consumers of our tremendous range of products, services, special programs, and custom options. We believe that we consistently deliver the most cohesive national advertising campaign in the home furnishings industry. Coordinated local television and print, to the extent these media are utilized, serve to support our national programs.

The Ethan Allen direct mail magazine, which brands our product lifestyles and communicates the breadth of our products and services, is one of our most important marketing tools. We publish these magazines and sell them to Company and independently operated design centers who use demographic information collected through independent market research to target potential clients. Given the importance of this advertising medium, direct mail marketing lists are continually refined to target those consumers who are most likely to purchase, and improve the return on direct mail expenditures. Approximately 11 million copies of our direct mail magazine were distributed to consumers during fiscal 2010.

Our television advertising and direct mail efforts are supported by strong print campaigns. We also update our Style Book approximately every six months. In addition to its use as a catalog of our case goods and upholstery products, the Style Book is full of quality, design, and service stories, and looks and ideas to spark inspiration. This publication is a comprehensive and effective resource for clients.

The Company’s award winning website, ethanallen.com, provides our customers and design associates a great way to shop and design with videos, feature stories, design and style solutions, and fresh, new looks. Visitors will find all our latest news and promotional information here too. The site’s myprojects tool lets visitors create idea boards and room plans. If they like, a design professional from their local Ethan Allen design center can give them feedback.

The website’s Inspire section includes editorial features, new product stories, design trend information, decorating solutions, and a collection of creative films and TV clips showcasing the many looks of Ethan Allen. The As Seen In area shows visitors how Ethan Allen products have influenced style around the globe. Ethan Allen’s direct mail magazines are viewable online with full browsing and shopping capabilities. In the Design section, visitors can find their own style with our style quiz and shop the full assortment of furnishings. Nearly all of Ethan Allen’s products are now available for purchase online.

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We also have a robust and informative extranet available to our retailers and design professionals. It is the primary source of communication in and among members of our retail network. It provides information about every aspect of the business of Ethan Allen at retail, including advertising materials, prototype floor plan displays, and extensive product details.

Retail Design Center Network

Ethan Allen design centers are typically located in busy urban settings as freestanding destinations or as part of suburban strip malls, depending upon the real estate opportunities in a particular market.  Our design centers average approximately 16,000 square feet in size but range from approximately 3,000 square feet to 35,000 square feet.

We maximize uniformity of presentation throughout the retail design center network through a comprehensive set of standards and display planning assistance. These standard interior design formats assist each design center in presenting a high quality image by using focused lifestyle settings and select product category groupings to display our products and information to facilitate design solutions and to educate consumers. We also create a uniform design center image with consistent exterior facades in addition to the interior layouts.  The adherence to all of these standards have helped position Ethan Allen as a leader in home furnishings retailing.

We have strengthened the retail network with many initiatives, including the opening of new and relocated design centers in desirable locations, introduction of Lifestyle presentations and floor plans, strengthening of the professionalism of our designers through training and certification, and the consolidation of certain design centers and service centers. This continuous improvement resulted in fiscal 2010 with four new Company-operated design centers and twelve new independently operated design centers during the year including relocations. Sixteen Company-operated and seven independently operated design centers in underperforming markets were closed or consolidated into existing design centers. The Company also converted a Company-owned wholesale distribution center into a regional retail service center and consolidated nine service centers into larger regional service centers. These actions effectively completed the project begun with the consolidation of 27 service centers during fiscal 2008 and 2009, significantly reducing the retail logistics infrastructure needed to provide “white glove” delivery service to our customers.

People

At June 30, 2010, the Company had approximately 4,400 employees (“associates”), less than one percent of whom are represented by unions whose collective bargaining agreements expire within the next year.  We expect no significant changes in our relations with the unions and believe we maintain good relationships with our employees.

The retail network, which includes both Company-operated and independently operated design centers, is staffed with a sales force of design consultants and service professionals who provide customers with effective home decorating solutions at no additional charge. Our interior design associates receive specialty training with respect to the distinctive design and quality features inherent in each of our products and programs. This enables them to more effectively communicate the elements of style and value that serve to differentiate us from our competition. As such, we believe our design consultants, and the complimentary service they provide, create a distinct competitive advantage over other home furnishing retailers. We continue to strengthen the level of service, professionalism, interior design competence, efficiency, and effectiveness of retail design center personnel.

The Company’s interior design affiliate program, launched in fiscal 2010, resulted in the registration with the Company of more than 1,300 qualified professional interior designers who add strength and breadth to our interior design reach. We believe that this program augments the Company and independent retailer design staffs to reach more clients and improve market penetration. This structure, along with the emphasis in our messaging to clients that “we can help as little or as much as you like”SM, continues to improve the customer service experience.

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We recognize the importance of our retail design center network to our long-term success. Accordingly, we believe we (i) have established a strong management team within Company-operated design centers and (ii) continue to work closely with our independent retailers in order to assist them.  With this in mind, we make our services available to every design center, whether independently operated or Company-operated, in support of their marketing efforts, including coordinated advertising, merchandising and display programs, and extensive training seminars and educational materials.  We believe that the development of design consultants, service and delivery personnel, and retailers is important for the growth of our business. As a result, we have committed to make available comprehensive retail training programs intended to increase the customer service capabilities of each individual.

Customer Service Offerings

We offer numerous customer service programs, each of which has been developed and introduced to consumers in an effort to make their shopping experience easier and more enjoyable.

Gift Card

This program allows customers to purchase, through our website or at any participating retail design center, gift cards which can be redeemed for any of our products or services.

On-Line Room Planning

We offer, via our website, an interactive on-line room planning resource which serves to further assist consumers with their home decorating needs. Through the use of this web-based tool, customers can determine which of our product offerings best fit their particular needs based on their own individual home floor plan.

Ethan Allen Consumer Credit Programs

The Ethan Allen Finance Plus program offers consumers (clients) a menu of custom financing options through the use of just one account.  Clients can choose between (i) “Fixed Payment” which offers fixed monthly payments the customer chooses (12, 24, or 36 months) at an interest rate of 9.99% per annum, and (ii) “Deferred Interest” which offers clients a way to borrow interest free for six months with small minimum monthly payments. If the purchase is not paid by the due date, interest is charged from the date of purchase at a fixed interest rate of 29.99% per annum. All plans provide credit lines from $1,000 to $20,000, or greater, if the customer qualifies.  Financing offered is administered by a third-party financial institution and is granted to our customers on a non-recourse basis to the Company.  Clients may apply for an Ethan Allen Finance Plus card at any participating design center or on-line at ethanallen.com.

Competition

The home furnishings industry has faced numerous challenges, not the least of which is an influx of low-priced products from overseas. As a result, we believe a trend toward product commoditization has developed.  In fiscal 2009, the economic recession resulted in many small furniture retailers going out of business and other well-established competitors resorting to heavy discounts to liquidate inventory. Instead of following this trend, we differentiated ourselves as a preferred brand by adhering to a business strategy focused on providing (i) high-quality, well designed and often custom handmade products at good value, (ii) a comprehensive complement of home furnishing design solutions, including our complimentary design service, and (iii) excellence in customer service. We consider our vertical integration a significant competitive advantage in the current environment as it allows us to design, manufacture and source, distribute, market, and sell our products through one of the industry’s largest single-source retail networks.

Industry globalization has provided us an opportunity to adhere to a blended sourcing strategy, establishing relationships with certain manufacturers, both domestically and outside the United States, to source selected case

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goods, upholstery, and home accessory items. We intend to continue to balance our domestic production with opportunities to source from foreign and domestic manufacturers, as appropriate, in order to maintain our competitive advantage.

We believe the home furnishings industry competes primarily on the basis of product styling and quality, personal service, prompt delivery, product availability and price.  We further believe that we effectively compete on the basis of each of these factors and that, more specifically, our retail format, our award winning website, and complimentary design service create a distinct competitive advantage, further supporting our mission of providing consumers with a complete home decorating and design solution.  We also believe that we differentiate ourselves further with the quality of our design service through our internal training and certification programs along with our interior design affiliate program.  Our objective is to continue to develop and strengthen our retail network by (i) expanding the Company-operated retail business through the relocation of existing design centers, opening of new design centers, and, when appropriate, acquiring design centers from, or selling design centers to, independent retailers, and (ii) obtaining and retaining independent retailers, encouraging such retailers to expand their business through the opening or relocation of new design centers with the objective of increasing the volume of their sales and (iii) further expanding our sales network through our interior designer affiliate program.

Trademarks

We currently hold, or have registration applications pending for, numerous trademarks, service marks and design patents for the Ethan Allen name, logos and designs in a broad range of classes for both products and services in the United States and in many foreign countries. In addition, we have registered, or have applications pending for, many of our major collection names as well as certain of our slogans utilized in connection with promoting brand awareness, retail sales and other services.  We view such trade and service marks as valuable assets and have an ongoing program to diligently monitor and defend, through appropriate action, against their unauthorized use.

Available Information

We make available, free of charge via our website, all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information filed with, or furnished to, the Securities and Exchange Commission (the “SEC” or the “Commission”), including amendments to such reports. This information is available at www.ethanallen.com/investors as soon as reasonably practicable after it is electronically filed with, or furnished to, the SEC.  In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding companies that file electronically with the Commission.  This information is available at www.sec.gov.

In addition, charters of all committees of our Board of Directors, as well as our Corporate Governance guidelines, are available on our website at www.ethanallen.com/governance or, upon written request, in printed hardcopy form. Written requests should be sent to Office of the Secretary, Ethan Allen Interiors Inc., Ethan Allen Drive, Danbury, Connecticut 06811.

Item 1A.  Risk Factors

The following information describes certain significant risks and uncertainties inherent in our business that should be carefully considered, along with other information contained elsewhere in this report and in other filings, when making an investment decision with respect to us.   If one or more of these risks actually occurs, the impact on our business, including our financial condition, results of operations, and cash flows could be adverse.

A prolonged economic downturn may continue to materially adversely affect our business.

Our business and results of operations are affected by international, national and regional economic conditions.  The United States and many other international economies experienced a major recession, with continuing effects

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for our industry. Our primary customer base, direct or indirect, is composed of individual consumers.  A hesitant recovery in the U.S. economy, high unemployment, volatile capital markets, depressed housing prices and tight consumer lending practices have resulted in considerable negative pressure on consumer spending.  We believe these events have impacted consumers in our markets in ways that have negatively affected our business.  In the event the current economic conditions worsen, our current and potential customers may be inclined to further delay their purchases.  In addition, further tightening of credit markets may restrict our customers’ ability and willingness to make purchases.

Access to consumer credit could be interrupted and reduce sales and profitability.

Our ability to continue to access consumer credit for our clients could be negatively affected by conditions outside our control. Given the difficult capital markets, there is a risk that, though we have agreements that do not expire until July 2014, our business partner which issues our private label credit card program, may not be able to fulfill their obligations under that agreement.

We may be unable to obtain sufficient external funding to finance our operations and growth.

Historically, we have relied upon our cash from operations to fund our operations and growth. As we operate and expand our business, we may rely on external funding sources, including the proceeds from the issuance of debt or the $60 million revolving bank line of credit under our existing credit facility. Any unexpected reduction in cash flow from operations could increase our external funding requirements to levels above those currently available. During fiscal 2010, the credit rating agencies Moody’s Corporation and Standard and Poor’s lowered our corporate and senior unsecured credit ratings to Ba2 and B+ respectively. If our credit ratings were lowered further, the Company’s access to debt could be negatively impacted. There can be no assurance that we will not experience unexpected cash flow shortfalls in the future or that any increase in external funding required by such shortfalls will be available.

Continued operating losses could reduce our liquidity and impact our dividend policy.

Historically, we have relied on our cash from operations to fund our operations and the payment of cash dividends.  If the Company continues to experience operating losses we may not be able to fund a shortfall from operations and would require external funding.  Some financing instruments used by the Company historically may not be available to the Company in the future. We cannot assure that additional sources of financing would be available to the Company on commercially favorable terms should the Company’s capital requirements exceed cash available from operations and existing cash and cash equivalents.  In such circumstances, the Company may further reduce its quarterly dividends.

Additional impairment charges could reduce our profitability.

We have significant long-lived tangible and intangible assets recorded on our balance sheets.  If our operating results decline, we may incur additional impairment charges in the future, which could have a material impact on our financial results.  We evaluate the recoverability of the carrying amount of our long-lived tangible and intangible assets on an ongoing basis.  There can be no assurance that the outcome of such future reviews will not result in substantial impairment charges.  Impairment assessment inherently involves judgments as to assumptions about expected future cash flows and the impact of market conditions on those assumptions.  Future events and changing market conditions may impact our assumptions as to prices, costs or other factors that may result in changes in our estimates of future cash flows.  Although we believe the assumptions we use in testing for impairment are reasonable, significant changes in any of our assumptions could produce a significantly different result.

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We face changes in global and local economic conditions that may adversely affect consumer demand and spending, our manufacturing operations or sources of merchandise.

Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Such uncertainty, as well as other variations in global economic conditions such as rising fuel costs and increasing interest rates, may continue to cause inconsistent and unpredictable consumer spending habits, while increasing our own fuel, utility, transportation or security costs. These risks, as well as industrial accidents or work stoppages, could also severely disrupt our manufacturing operations, which could have a material adverse effect on our financial performance.

We import a portion of our merchandise from foreign countries. As a result, our costs may be increased by events affecting international commerce and businesses located outside the United States, including changes in international trade, central bank actions, changes in the relationship of the U.S. dollar versus other currencies, and other governmental policies of the U.S. and the countries from which we import a portion of our merchandise. The inability to import products from certain foreign countries or the imposition of significant tariffs could have a material adverse effect on our results of operations.

Competition from overseas manufacturers continues to increase and may adversely affect our business, operating results or financial condition.

Our wholesale business segment is involved in the development of our brand, which encompasses the design, manufacture, sourcing, sales and distribution of our home furnishings products, and competes with other U.S. and foreign manufacturers.  Our retail business segment sells home furnishings to consumers through a network of Company-operated design centers, and competes against a diverse group of retailers ranging from specialty stores to traditional furniture and department stores, any of which may operate locally, regionally and nationally.  We also compete with these and other retailers for appropriate retail locations as well as for qualified design consultants and management personnel. Such competition could adversely affect our future financial performance.

Industry globalization has led to increased competitive pressures brought about by the increasing volume of imported finished goods and components, particularly for case good products, and the development of manufacturing capabilities in other countries, specifically within Asia. The increase in overseas production capacity has created over-capacity for many U.S. manufacturers, including us, which has led to industry-wide plant consolidation. In addition, because many foreign manufacturers are able to maintain substantially lower production costs, including the cost of labor and overhead, imported product may be capable of being sold at a lower price to consumers, which, in turn, could lead to some measure of further industry-wide price deflation.

We cannot provide assurance that we will be able to establish or maintain relationships with certain manufacturers, whether foreign or domestic, to supply us with selected case goods, upholstery and home accessory items to enable us to maintain our competitive advantage. In addition, the emergence of foreign manufacturers has served to broaden the competitive landscape. Some of these competitors produce furniture types not manufactured by us and may have greater financial and other resources available to them. This competition could adversely affect our future financial performance.

Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition.

Sales of our products are dependent upon consumer acceptance of our product designs, styles, quality and price. We continuously monitor changes in home design trends through attendance at international industry events and fashion shows, internal marketing research, and regular communication with our retailers and design center design consultants who provide valuable input on consumer tendencies.  However, as with all retailers, our business is susceptible to changes in consumer tastes and trends.  Such tastes and trends can change rapidly and

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any delay or failure to anticipate or respond to changing consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition.

The consolidation of manufacturing and logistics operations into fewer sites may increase the exposure to business disruption and could result in higher transportation costs.

The Company has reduced the number of redundant manufacturing sites in both our case goods and upholstery operations and operates a single accessories plant. Our upholstery operations consist of two upholstery plants on our Maiden, North Carolina campus supported by one cut and sew plant in Mexico. If any of these upholstery manufacturing sites experience significant business interruption, our ability to manufacture products timely would likely be impacted. The Company operates one sawmill in support of our case goods operations. Our plants require various raw materials and commodities such as logs and lumber for our case good plants and foam, springs and engineered hardwood board for our upholstery plants. While we have long-standing relationships with multiple outside suppliers of our raw materials and commodities, there can be no assurance of their ability to fulfill our supply needs on a timely basis. The consolidation to fewer wholesale and retail logistics operations has resulted in longer distances for delivery and could result in higher costs to transport products if fuel costs increase significantly.

Our current and former manufacturing and retail operations and products are subject to increasingly stringent environmental, health and safety requirements.

We use and generate hazardous substances in our manufacturing and retail operations. In addition, both the manufacturing properties on which we currently operate and those on which we have ceased operations are and have been used for industrial purposes. Our manufacturing operations and, to a lesser extent, our retail operations involve risk of personal injury or death. We are subject to increasingly stringent environmental, health and safety laws and regulations relating to our products, current and former properties and our current operations. These laws and regulations provide for substantial fines and criminal sanctions for violations and sometimes require product recalls and/or redesign, the installation of costly pollution control or safety equipment, or costly changes in operations to limit pollution or decrease the likelihood of injuries. In addition, we may become subject to potentially material liabilities for the investigation and cleanup of contaminated properties and to claims alleging personal injury or property damage resulting from exposure to or releases of hazardous substances or personal injury because of an unsafe workplace.

We have been identified as a potentially responsible party in connection with one site that is currently listed, or proposed for inclusion, on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or its state counterpart.  In addition, noncompliance with, or stricter enforcement of, existing laws and regulations, adoption of more stringent new laws and regulations, discovery of previously unknown contamination or imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could be material.

Fluctuations in the price, availability and quality of raw materials could result in increased costs or cause production delays which might result in a decline in sales, either of which could adversely impact our earnings.

We use various types of wood, foam, fibers, fabrics, leathers, and other raw materials in manufacturing our furniture. Certain of our raw materials, including fabrics, are purchased domestically and outside the United States. Fluctuations in the price, availability and quality of raw materials could result in increased costs or a delay in manufacturing our products, which in turn could result in a delay in delivering products to our customers. For example, lumber prices fluctuate over time based on factors such as weather and demand, which in turn, impact availability. Production delays or upward trends in raw material prices could result in lower sales or margins, thereby adversely impacting our earnings.

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In addition, certain suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time may require us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand and trends, and any further downturn in the U.S. economy.

We depend on key personnel and could be affected by the loss of their services.

The success of our business depends upon the services of certain senior executives, and in particular, the services of M. Farooq Kathwari, Chairman of the Board, President and Chief Executive Officer, who is the only one of our senior executives who operates under a written employment agreement. The loss of any such person or other key personnel could have a material adverse effect on our business and results of operations.

Our business is sensitive to increasing labor costs, competitive labor markets, our continued ability to retain high-quality personnel and risks of work stoppages.

The market for qualified employees and personnel in the retail and manufacturing industries is highly competitive. Our success depends upon our ability to attract, retain and motivate qualified craftsmen, professional and clerical associates and upon the continued contributions of these individuals. We cannot provide assurance that we will be successful in attracting and retaining qualified personnel. A shortage of qualified personnel may require us to enhance our wage and benefits package in order to compete effectively in the hiring and retention of qualified employees.  Our labor costs may continue to increase and such increases may not be recovered. In addition, some of our employees are covered by collective bargaining agreements with local labor unions. Although we do not anticipate any difficulty renegotiating these contracts as they expire, a labor-related stoppage by these unionized employees could adversely affect our business and results of operations. The loss of the services of such personnel or our failure to attract additional qualified personnel could have a material adverse effect on our business, operating results and financial condition.

Our success depends upon our brand, marketing and advertising efforts and pricing strategies. If we are not able to maintain and enhance our brand, or if we are not successful in these other efforts, our business and operating results could be adversely affected.

Maintaining and enhancing our brand is critical to our ability to expand our base of customers and may require us to make substantial investments. Our advertising campaign utilizes television, direct mail, newspapers, magazines and radio to maintain and enhance our existing brand equity. We cannot provide assurance that our marketing, advertising and other efforts to promote and maintain awareness of our brand will not require us to incur substantial costs. If these efforts are unsuccessful or we incur substantial costs in connection with these efforts, our business, operating results and financial condition could be adversely affected.

We may not be able to maintain our current design center locations at current costs. We may also fail to successfully select and secure design center locations.

Our design centers are typically located in busy urban settings as freestanding destinations or as part of suburban strip malls, depending upon the real estate opportunities in a particular market. Our business competes with other retailers and as a result, our success may be affected by our ability to renew current design center leases and to select and secure appropriate retail locations for existing and future design centers.

Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year.

Sales of furniture and other home furnishing products fluctuate from quarter to quarter due to such factors as changes in global and regional economic conditions, changes in competitive conditions, changes in production schedules in response to seasonal changes in energy costs and weather conditions, and changes in consumer order patterns. From time to time, we have experienced, and may continue to experience, volatility with respect

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to demand for our home furnishing products. Accordingly, results of operations for any quarter are not necessarily indicative of the results of operations for a full year.

Failure to protect our intellectual property could adversely affect us.

We believe that our patents, trademarks, service marks, trade secrets, copyrights and all of our other intellectual property are important to our success. We rely on patent, trademark, copyright and trade secret laws, and confidentiality and restricted use agreements, to protect our intellectual property and may seek licenses to intellectual property of others. Some of our intellectual property is not covered by any patent, trademark, or copyright or any applications for the same. We cannot provide assurance that agreements designed to protect our intellectual property will not be breached, that we will have adequate remedies for any such breach, or that the efforts we take to protect our proprietary rights will be sufficient or effective. Any significant impairment of our intellectual property rights or failure to obtain licenses of intellectual property from third parties could harm our business or our ability to compete. Moreover, we cannot provide assurance that the use of our technology or proprietary know-how or information does not infringe the intellectual property rights of others. If we have to litigate to protect or defend any of our rights, such litigation could result in significant expense.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our corporate headquarters, located in Danbury, Connecticut, consists of one building containing 144,000 square feet, situated on approximately 18.0 acres of land, all of which is owned by us.  Located adjacent to the corporate headquarters, and situated on approximately 5.4 acres, is the Ethan Allen Hotel and Conference Center, containing 193 guestrooms. This hotel, owned by a wholly-owned subsidiary of Ethan Allen, is used in connection with Ethan Allen functions and training programs, as well as for functions and accommodations for the general public.

We operate seven manufacturing facilities located in five states and Mexico. All of these facilities are owned by the Company and include three case goods plants (including one sawmill) totaling 1,548,845 square feet, three upholstery furniture plants (consisting of two upholstery plants on our Maiden, North Carolina campus and one cut and sew plant in Mexico) totaling 649,396 square feet, and one home accessory plant of 295,000 square feet. In our wholesale division, we own and operate one national distribution center supported by one owned small parcel and fulfillment center which are a combined 823,414 square feet. Our U.S. manufacturing and distribution facilities are located in North Carolina, Vermont, Virginia, Oklahoma, and New Jersey, and our Mexico plant is located in Guanajuato.

We own five and lease 13 retail service centers, totaling 1,099,500 square feet. Our retail service centers are located throughout the United States and Canada and serve to support our various retail sales districts.

The geographic distribution of our retail design center network as of June 30, 2010 is as follows:

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Of the 145 Company-operated retail design centers, 68 of the properties are owned and 77 of the properties are leased from independent third parties.  Of the 68 owned design centers, 18 are subject to land leases. We own nine additional retail properties, one of which is leased to an independent Ethan Allen retailer, and two of which are leased to unaffiliated third parties. See Note 8 to the Consolidated Financial Statements included under Item 8 of this Annual Report for more information with respect to our operating lease obligations.

Our Ethan Allen Hotel and Conference Center located in Danbury, Connecticut, was financed, in part, with industrial revenue bonds.  The bonds bear interest at a fixed rate of 7.50% and have a remaining balance at June 30, 2010 of $3.9 million which matures in one year.  The Beecher Falls, Vermont manufacturing facility was financed, in part, by the Town of Canaan, Vermont. The associated remaining debt bears interest at a fixed rate of 3.00% and a balance at June 30, 2010 of $0.3 million, with maturities of two to 17 years. We believe that all of our properties are well maintained and in good condition.

We estimate that our manufacturing plants are currently operating at approximately 65% of capacity.  We believe we have additional capacity at selected facilities, which we could utilize with minimal additional capital expenditures.

Item 3. Legal Proceedings

We are a party to various legal actions with customers, employees and others arising in the normal course of our business. We maintain liability insurance, which is deemed to be adequate for our needs and commensurate with other companies in the home furnishings industry. We believe that the final resolution of pending actions (including any potential liability not fully covered by insurance) will not have a material adverse effect on our financial condition, results of operations, or cash flows.

Environmental Matters

We and our subsidiaries are subject to various environmental laws and regulations. Under these laws, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment of the disposal or release of certain hazardous materials.

During fiscal 2009, three locations where we and/or our subsidiaries had been named as a Potentially Responsible Party (“PRP”) were resolved. In each case, we were not a major contributor based on the very small volume of waste generated by us in relation to total volume at those sites and were able to take part in de minimis settlement arrangements.  One additional site in Carroll, New York continued to be evaluated as of June 30, 2010. We believe that we are not a major contributor. Liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended may be joint and several. As such, to the extent certain named PRPs are unable, or unwilling, to accept responsibility and pay their apportioned costs, we could be required to pay in excess of our pro rata share of incurred remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in the determination of our estimated liability.  As of June 30, 2010, we believe that established reserves related to these environmental contingencies are adequate to cover probable and reasonably estimable costs associated with the remediation and restoration of this site.  We believe our currently anticipated capital expenditures for environmental control facility matters are not material.

We are subject to other federal, state and local environmental protection laws and regulations and are involved, from time to time, in investigations and proceedings regarding environmental matters.  Such investigations and proceedings typically concern air emissions, water discharges, and/or management of solid and hazardous wastes. We believe that our facilities are in material compliance with all such applicable laws and regulations.

Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these requirements has been facilitated through the introduction of high solids coating technology

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and alternative formulations. In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection plans and controls, and further development of related inspection/audit teams, all of which have served to reduce emissions per unit of production. We remain committed to implementing new waste minimization programs and/or enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which serve to minimize emissions and safety risks for employees. We will continue to evaluate the most appropriate, cost effective, control technologies for finishing operations and design production methods to reduce the use of hazardous materials in the manufacturing process.

Item 4. Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the New York Stock Exchange under ticker symbol “ETH”. The following table sets forth, for each of the past two fiscal years, (i) closing, and intraday high and low and stock prices as reported on the New York Stock Exchange and (ii) the dividend per share paid by us:

As of August 13, 2010, there were 336 shareholders of record of our common stock.  Management estimates there are over eleven thousand beneficial shareholders of the Company’s common stock.  On July 20, 2010, we declared a dividend of $0.05 per common share, payable on October 25, 2010 to shareholders of record as of October 11, 2010.  We expect to continue to declare quarterly dividends for the foreseeable future, business conditions permitting.

Equity Compensation Plan Information

The information required by this Item 5 with respect to Equity Compensation Plan Information is set forth in Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, contained in this Annual Report and incorporated herein by reference.

Issuer Purchases of Equity Securities

Certain information regarding purchases made by or on behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of our common stock during the three months ended June 30, 2010 is provided below:

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(a)                Purchased in two separate open market transactions on two different trading days.

(b)               On November 21, 2002, our Board of Directors approved a share repurchase program authorizing us to repurchase up to 2,000,000 shares of our common stock, from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to us. Subsequent to that date, the Board of Directors increased the remaining authorization on seven separate occasions, the last of which was on November 13, 2007.

Subsequent to June 30, 2010 and through August 19, 2010, we repurchased, in three separate open market transactions, an additional 204,286 shares of our common stock at a total cost of $2.8 million, representing a weighted average price per share of $13.65.  As of August 19, 2009, we had a remaining Board authorization to repurchase 1,180,783 million shares.

Stockholder Rights Plan

We have a Stockholder Rights Plan, a description of which is set forth in Note 9 to the Consolidated Financial Statements included under Item 8 of this Annual Report and incorporated herein by reference.  Such description contains all of the required information with respect thereto.

Comparative Company Performance

The following line graph compares cumulative total stockholder return for the Company with a performance indicator of the overall stock market, the Standard & Poor’s 500 Index, and an industry index, the Peer Issuer Group Index, assuming $100 was invested on June 30, 2005.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Ethan Allen Interiors Inc., the S&P 500 Index

and a Peer Group

*$100 invested on 6/30/05 in stock or index, including reinvestment of dividends.

Fiscal years ending June 30.

Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Peer group includes Bassett Furniture Industries, Inc., Chromcraft Revington, Inc., Flexsteel Industries, Inc., Furniture Brands International, Inc., Haverty Furniture Companies, Inc., La-Z-boy Inc., Legett & Platt, Inc., and Pier 1 Imports Inc.  The returns of each company have been weighted according to each company’s market capitalization.

Item 6. Selected Financial Data

The following table presents selected financial data for the fiscal years ended June 30, 2010, 2009, 2008, 2007 and 2006 which has been derived from our consolidated financial statements.  The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included under Item 7 of this Annual Report and our Consolidated Financial Statements (including the notes thereto) included under Item 8 of this Annual Report.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion of financial condition and results of operations is based upon, and should be read in conjunction with, our Consolidated Financial Statements (including the notes thereto) included under Item 8 of this Annual Report.

Forward-Looking Statements

Management’s discussion and analysis of financial condition and results of operations and other sections of this Annual Report contain forward-looking statements relating to our future results. Such forward-looking statements are identified by use of forward-looking words such as “anticipates”, “believes”, “plans”, “estimates”, “expects”, and “intends” or words or phrases of similar expression. These forward-looking statements are subject to management decisions and various assumptions, risks and uncertainties, including, but not limited to: the effects of terrorist attacks or conflicts or wars involving the United States or its allies or trading partners; the effects of labor strikes; weather conditions that may affect sales; volatility in fuel, utility, transportation and security costs; changes in global or regional political or economic conditions, including changes in governmental and central bank policies; changes in business conditions in the furniture industry, including changes in consumer spending patterns and demand for home furnishings; effects of our brand awareness and marketing programs, including changes in demand for our existing and new products; our ability to locate new design center sites and/or negotiate favorable lease terms for additional design centers or for the expansion of existing design centers; competitive factors, including changes in products or marketing efforts of others; pricing pressures; fluctuations in interest rates and the cost, availability and quality of raw materials; those matters discussed in Items 1A and 7A of this Annual Report and in our SEC filings; and our future decisions. Accordingly, actual circumstances and results could differ materially from those contemplated by the forward-looking statements.

Critical Accounting Policies

Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles that require, in some cases, that certain estimates and assumptions be made that affect the amounts and disclosures reported in those financial statements and the related accompanying notes. Estimates are based on currently known facts and circumstances, prior experience and other assumptions believed to be reasonable. We use our best judgment in valuing these estimates and may, as warranted, solicit external advice. Actual results could differ from these estimates, assumptions and judgments, and these differences could be material. The following critical accounting policies, some of which are impacted significantly by estimates, assumptions and judgments, affect our consolidated financial statements.

Inventories — Inventories (finished goods, work in process and raw materials) are stated at the lower of cost, determined on a first-in, first-out basis, or market. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory (i.e. material, labor and manufacturing overhead costs). We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-downs, taking into account future demand and market conditions.  If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required.

Revenue Recognition — Revenue is recognized when all of the following have occurred: persuasive evidence of a sales arrangement exists (e.g. a wholesale purchase order or retail sales invoice); the sales arrangement specifies a fixed or determinable sales price; product is shipped or services are provided to the customer; and collectibility is reasonably assured. As such, revenue recognition occurs upon the shipment of goods to independent retailers or, in the case of Ethan Allen-operated retail design centers, upon delivery to the customer. Recorded sales provide for estimated returns and allowances. We permit our customers to return defective products and incorrect shipments, and terms we offer are standard for the industry.

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Allowance for Doubtful Accounts — We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis.  Judgments are made with respect to the collectibility of accounts receivable based on historical experience and current economic trends.  Actual losses could differ from those estimates.

Retail Design Center Acquisitions - We account for the acquisition of retail design centers and related assets with the purchase method.  Accounting for these transactions as purchase business combinations requires the allocation of purchase price paid to the assets acquired and liabilities assumed based on their fair values as of the date of the acquisition. The amount paid in excess of the fair value of net assets acquired is accounted for as goodwill.

Impairment of Long-Lived Assets and Goodwill — We periodically evaluate whether events or circumstances have occurred that indicate that long-lived and indefinite-lived assets may not be recoverable or that the remaining useful life may warrant revision.  When such events or circumstances are present, the Company determines whether the carrying value exceeds the fair value as described below.

The recoverability of long-lived assets are evaluated for impairment by determining whether the carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the asset.  In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the excess of the asset’s carrying value over its fair value is recorded.  The long-term nature of these assets requires the estimation of cash inflows and outflows several years into the future and only takes into consideration technological advances known at the time of the impairment test.

Goodwill and other indefinite-lived intangible assets are evaluated for impairment on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of the goodwill or other intangible asset may exceed its fair value. We conduct our required annual impairment test of goodwill and other intangible assets during the fourth quarter of each fiscal year.

To evaluate goodwill, the Company determines the current fair value of the Reporting Units using a combination of “Market” and “Income” approaches.  In the Market approach, the “Guideline Company” method is used, which focuses on comparing the Company’s risk profile and growth prospects to reasonably similar publicly traded companies.  Key assumptions used for the Guideline Company method are total invested capital (“TIC”) multiples for revenues and operating cash flows, as well as consideration of control premiums.  The TIC multiples are determined based on public furniture companies within our peer group, and if appropriate, recent comparable transactions are also considered.  Control premiums are determined using recent comparable transactions in the open market. Under the Income approach, a discounted cash flow method is used, which includes a terminal value, and is based on external analyst financial projection estimates, as well as internal financial projection estimates prepared by management. The long-term terminal growth rate assumptions reflect our current long-term view of the market in which we compete.  Discount rates use the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors.

The fair value of our trade name, which is the Company’s only indefinite-lived intangible asset other than goodwill, is valued using the relief-from-royalty method. Significant factors used in trade name valuation are rates for royalties, future growth, and a discount factor.  Royalty rates are determined using an average of recent comparable values.  Future growth rates are based on the Company’s perception of the long-term values in the market in which we compete, and the discount rate is determined using the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors.

The economic downturn that began in the fall of 2008 negatively impacted the Company’s revenues and operating margins.  In response, the Company reduced headcount, consolidated its manufacturing, retail, and

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logistics footprint and repositioned its marketing approach.  The Company’s cash flow forecasts were updated regularly to reflect the rapid changes in the business and the industry.  The cash flow projections used in its fair value evaluations are the best estimates of the Company and require significant management judgment.  During fiscal 2009, the Company determined that $48.4 million of goodwill in the Retail segment was considered impaired and fully written off. The Company performed its annual impairment test in fiscal 2009 and determined that no impairment of its remaining goodwill, reported in its wholesale segment was appropriate as the fair value of its net assets exceeded the book value by approximately 10%.

During fiscal 2010, the Company concluded that no interim impairment test of its indefinite lived assets was required.  Net sales, gross profit, operating income, net income, written orders, and other indicators improved from previous quarters, and though some financial metrics were below management forecasts, our long-term outlook had not changed significantly.  The Company’s average quarterly stock price increased from $12.11 for the quarter ended June 30, 2009, to $16.91 for the quarter ended March 31, 2010), and cash (including restricted cash) and marketable securities increased to $85.2 million at March 31, 2010 from $53.0 million at June 30, 2009. During the third and fourth quarters of fiscal 2010, business performance improved with net sales up sequentially and from the previous year, gross margin improved and cash (including restricted cash) and marketable securities increased to $102.2 million by fiscal year end. The average price of our stock during the fourth fiscal quarter of 2010 was $19.67. In the fourth fiscal quarter ended June 30, 2010, the Company performed its annual impairment test and determined that the fair values of the Wholesale reporting unit and trade name exceeded their carrying value by a substantial margin.

To calculate fair value of the assets described above, management relies on estimates and assumptions which by their nature have varying degrees of uncertainty. Wherever possible, management therefore looks for third party transactions as described above to provide the best possible support for the assumptions incorporated. Management considers several factors to be significant when estimating fair value including expected financial outlook of the business, changes in the Company’s stock price, the impact of changing market conditions on financial performance and expected future cash flows, and other factors. Deterioration in any of these factors may result in a lower fair value assessment, which could lead to impairment of the long-lived assets and goodwill of the Company.

Income Taxes — Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Additional factors that we consider when making judgments about the deferred tax valuation include tax law changes, a recent history of cumulative losses, and variances in future projected profitability.

The Company evaluates quarterly uncertain tax positions taken or expected to be taken on tax returns for recognition, measurement, presentation, and disclosure in its financial statements. If an income tax position exceeds a 50% probability of success upon tax audit, based solely on the technical merits of the position, the Company recognizes an income tax benefit in its financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The liability associated with an unrecognized tax benefit is classified as a long-term liability except for the amount for which a cash payment is expected to be made or tax positions settled within one year. We recognize interest and penalties related to income tax matters as a component of income tax expense.

Business Insurance Reserves — We have insurance programs in place to cover workers’ compensation and property/casualty claims.  The insurance programs, which are funded through self-insured retention, are subject

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to various stop-loss limitations. We accrue estimated losses using actuarial models and assumptions based on historical loss experience.  Although we believe that the insurance reserves are adequate, the reserve estimates are based on historical experience, which may not be indicative of current and future losses.  In addition, the actuarial calculations used to estimate insurance reserves are based on numerous assumptions, some of which are subjective.  We adjust insurance reserves, as needed, in the event that future loss experience differs from historical loss patterns.

Other Loss Reserves — We have a number of other potential loss exposures incurred in the ordinary course of business such as environmental claims, product liability, litigation, tax liabilities, restructuring charges, and the recoverability of deferred income tax benefits.  Establishing loss reserves for these matters requires the use of estimates and judgment with regard to maximum risk exposure and ultimate liability or realization.  As a result, these estimates are often developed with our counsel, or other appropriate advisors, and are based on our current understanding of the underlying facts and circumstances. Because of uncertainties related to the ultimate outcome of these issues or the possibilities of changes in the underlying facts and circumstances, additional charges related to these issues could be required in the future.

Basis of Presentation

As of June 30, 2010, Ethan Allen Interiors Inc. has no material assets other than its ownership of the capital stock of Ethan Allen Global, Inc. and conducts all significant transactions through Ethan Allen Global, Inc.; therefore, substantially all of the financial information presented herein is that of Ethan Allen Global, Inc.

Results of Operations

Our business has been severely impacted by the economic factors in the United States and abroad which we began to feel in earnest during our second quarter of fiscal 2009.  High unemployment, volatile capital markets, depressed housing prices and tight consumer spending all put negative stress on the economy and continue to have a negative impact on our business.  As we work through these difficult times, we have taken dramatic actions to significantly reduce costs in all facets of our business including closing and realigning manufacturing plants, consolidating logistics operations, and closing under-performing retail design centers. These actions have been taken with appropriate consideration for demand and management believes it has retained sufficient scalable capacity.  We have also launched initiatives to increase sales, such as special savings product promotions, our designer affiliate program, and completed the conversion of our case goods products to custom this fiscal year.

Income Tax Valuation Allowance:

As a result of losses we sustained for fiscal 2010 and 2009, which were brought on by the severe economic factors discussed earlier, we reassessed the likelihood that we would be able to realize the benefits of our deferred federal, state and foreign deferred tax assets.  As a result, we recorded a $34.1 million valuation allowance against those assets, with a non-cash charge to earnings in the fourth quarter of fiscal 2010.

Restructuring Activities:

In recent years, we have announced and executed plans to consolidate our operations as part of an overall strategy to maximize production efficiencies and maintain our competitive advantage. Activity in the Company’s restructuring reserves is classified with accrued expenses and other current liabilities in the Consolidated Balance Sheets:

In fiscal 2009, the Company announced (i) upholstery plants in Eldred, Pennsylvania and Chino, California were consolidated into the Maiden, North Carolina and Silao, Mexico operations, (ii) closure of the Andover, Maine sawmill, (iii) the move of assembly and finishing operations from Beecher Falls, Vermont to Orleans, Vermont, and (iv) wholesale distribution and retail service centers were consolidated. We also began the conversion of our

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domestic case goods manufacturing from producing to a forecast to producing to fill custom orders already written. The total pre-tax restructuring, impairment, accelerated depreciation and other related charges for these fiscal 2009 actions was $29 million ($23 million in the wholesale segment and $6 million in the retail segment). The charges arose from (i) a $17 million impact on long-lived assets, (ii) $8 million in employee severance, compensation, and benefit costs, and (iii) $4 million in other associated costs.  Current fiscal year charges for these actions include $6.6 million in accelerated depreciation charges for Wholesale (included in cost of sales in the Statement of Operations) partially offset by $0.2 million of restructuring credits, and $2.7 million of restructuring charges for the Retail segment (primarily due to adjustments on non-cancellable leases). These restructuring actions announced in fiscal 2009 were completed during fiscal 2010, with the remaining liability at June 30, 2010 primarily for non-cancellable lease obligations (expirations of less than one year up to five years).

In fiscal 2008, we announced a plan to consolidate the operations of certain Ethan Allen-operated retail design centers and retail service centers. In connection with this initiative, we permanently ceased operations at ten design centers and six retail service centers which, for the most part, were consolidated into other existing operations.  The restructuring is now complete, with the remaining liability at June 30, 2010 primarily for non-cancellable lease obligations (expirations of less than one year up to 23 years) and other employee benefit costs.   Costs for these actions in the current fiscal year resulted in a net $0.2 million credit in the Retail segment due primarily to non-cancellable lease adjustments. Cumulative charges to date for these actions total $5.7 million.

All charges for the fiscal 2009 and 2008 restructuring activities above are included as restructuring and impairment charges in the Statement of Operations unless otherwise noted above.

Business Results:

Our revenues are comprised of (i) wholesale sales to independently operated and Company-operated retail design centers and (ii) retail sales of Company-operated design centers.  See Note 16 to our Consolidated Financial Statements for the year ended June 30, 2010 included under Item 8 of this Annual Report.

The components of consolidated revenues and operating income (loss) are as follows (in millions):

(1)          Operating income for the Wholesale segment for the twelve months ended June 2010 and 2009 includes pre-tax restructuring and impairment charges (credit) of ($0.2) million and $17.4 million, respectively.

(2)          Operating income for the Retail segment for the twelve months ended June 2010, 2009 and 2008 includes pre-tax restructuring and impairment charges of $2.7 million, $49.6 million and $6.8 million, respectively.

(3)          Represents the change in wholesale profit contained in Ethan Allen-operated design center inventory existing at the end of the period.

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Fiscal 2010 Compared to Fiscal 2009

Consolidated revenue for the fiscal year ended June 30, 2010 decreased by $84.2 million, or 12.5%, to $590.1 million, from $674.3 million in fiscal 2009. Net sales for the period largely reflect the delivery of product associated with booked orders and the change in backlog from the beginning to the end of the period.  Especially in the first half of fiscal 2010, sales continued to be affected by the negative economic stresses mentioned earlier which we experienced since the second quarter of fiscal 2009.  These factors were partially offset by (i) several new marketing initiatives that focus on the exceptional value proposition of our offerings through special savings promotions and our interactive web site ethanalleninc.com, (ii) the continued use of national television media supported by direct mail and electronic magazines, and (iii) the positive effects of efforts to reposition the retail network. These efforts resulted in a 21% increase in incoming retail orders during the second half of fiscal 2010.

Wholesale revenue for fiscal 2010 decreased by $40.9 million, or 10.1%, to $362.5 million from $403.4 million in the prior year.  The year-over-year decrease was primarily attributable to a decline in the incoming order rate during the first half of fiscal 2010 as a result of the continued soft retail environment for home furnishings.  This was partly offset by an increase in the incoming order rate during the second half of fiscal 2010, and from an increase in independent retail design centers to 136 from 134 including one location transferred in to the company’s Retail division during the year. Wholesale orders increased 30% during the second half of fiscal 2010 compared to the second half of fiscal 2009, after decreasing 20% during the first half of fiscal 2010 compared to the first half of fiscal 2009.

Retail revenue from Ethan Allen-operated design centers for the twelve months ended June 30, 2010 decreased by $70.1 million, or 13.8%, to $438.5 million from $508.6 million for the twelve months ended June 30, 2009.  The decrease in retail sales by Ethan Allen-operated design centers was attributable to a decrease in comparable design center delivered sales of $84.6 million, or 30% during the first half of the fiscal year. This unfavorable variance was partially offset during the second half of the fiscal year by a $31.2 million, or 17% increase in comparable design center delivered sales compared to prior year.  Newly opened (including relocated) or acquired design centers contributed sales of $13.7 million. The number of Ethan Allen-operated design centers decreased to 145 at June 30, 2010 from 159 at June 30, 2009.  During that twelve month period, we acquired one design center from an independent retailer, and opened four new design centers (of which three were relocations).

Comparable design centers are those that have been operating for at least 15 months.  Minimal net sales, derived from the delivery of customer ordered product, are generated during the first three months of operations of newly opened (including relocated) design centers.  Design centers acquired by us from independent retailers are included in comparable design center sales in their 13th full month of Ethan Allen-operated operations.

Year-over-year, written business of Ethan Allen-operated design centers increased 1.4% for the year, and comparable design center written business increased 4.9%, reflecting to some degree the benefit of our retail consolidation strategy to serve given markets with fewer design centers but to improve the use of technology and design support.  While written business continues to reflect the soft retail environment for home furnishings noted throughout the current year, retail written orders during the second half of fiscal 2010 have increased 21% from the prior year, having decreased 15% from the prior year during the first half.   We believe that over time, we will benefit from our (i) repositioning the retail network, (ii) new product introductions including custom case good products, (iii) several new marketing initiatives described previously, and (iv) our continued use of national television and shelter magazines as advertising media supported by direct mail and electronic magazines.

Gross profit for fiscal 2010 declined to $280.3 million from $347.3 million in fiscal 2009.  The $67.1 million decrease in gross profit was primarily attributable to a combined decline in both wholesale and retail sales of 12.5%, along with a shift in sales mix with retail sales representing a lower proportionate share of total sales in the current full year (74.3%) as compared to the prior full year (75.4%). Gross margin decreased partially due to $6.6 million of accelerated depreciation recorded in fiscal 2010 related to restructuring actions, temporary manufacturing disruptions caused by restructuring activities, and the conversion of our domestic case goods to

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custom manufacturing. Because of the consolidation of several wholesale distribution, upholstery and case good plants, we were able to increase absorption of overhead costs despite the sales decline, and to operate at approximately 60% of capacity during fiscal 2010, up from 50% one year prior. The consolidated gross margin decreased to 47.5% for fiscal 2010 from 51.5% in fiscal 2009 as a result, primarily, of the factors set forth above.

Operating expenses decreased $128.1 million, or 30.5%, to $292.0 million, or 49.5% of net sales, in fiscal 2010 from $420.1 million, or 62.3% of net sales, in fiscal 2009. Decreases were experienced due to a non-cash goodwill impairment charge of $48.4 million recorded in the March 2009 quarter that did not recur in the current fiscal year and a $16.2 million year-over-year decrease in restructuring and impairment charges, both discussed earlier.  There was also a $12.2 million reduction in commission charges due to changes in the commission plans occurring in both years. Cost cutting efforts taken by the Company also reduced salaries, benefits and occupancy costs.  Advertising expenses were reduced while still maintaining our national presence, and delivery and warehousing costs were lower due to decreased sales.

Consolidated operating loss for the year ended June 30, 2010 totaled a loss of $11.7 million, or 2.0% of net sales, compared to a loss of $72.8 million, or 10.8% of net sales, in the prior year.  The improvement of $61.1 million was largely attributable to (i) the one-time nature of the March 2009 $48.4 million goodwill impairment charge, (ii) decreased restructuring and impairment charges and (iii) net declines in other operating expenses, all of which were discussed previously and partially offset by the decline in gross profit due in part by the $6.6 million accelerated depreciation recorded in the first quarter of fiscal 2010.

Wholesale operating income for fiscal 2010 totaled $14.2 million, or 3.9% of net sales, as compared to $6.7 million, or 1.7% of net sales, in the prior year. The increase of $7.5 million was primarily attributable to (i) a $17.6 million decrease in restructuring and impairment charges due to the 2009 restructuring actions discussed earlier, partly offset by the $6.6 million in accelerated depreciation taken during the first quarter of fiscal 2010 as a result of those same restructuring activities.

Retail operating loss was $28.7 million, or 6.6% of sales, for fiscal 2010,compared to a loss of $92.1 million, or 18.1% of sales, for fiscal 2009, an improvement of $63.4 million. The primary reasons for the improvement was the $48.4 million goodwill impairment charge in March 2009, net impact of commission changes in both years, and the positive effects of cost cutting efforts taken by the Company.

Interest and other income, net totaled $4.9 million in fiscal 2010 as compared to $3.4 million in fiscal 2009. The $1.5 million increase was mostly due to miscellaneous non-operating fees, partly offset by reduced investment income resulting from with lower rates of interest during the current year.

Interest and other related financing costs remained largely unchanged at $11.9 million from $11.8 million in the prior year. This amount mostly consists of interest expense on our senior unsecured debt issued in September 2005.

Income tax expense was $25.5 million for fiscal 2010 as compared to a benefit of $28.5 million for fiscal 2009.  Our effective tax rate for the current year was a negative (136%) compared to 35.1% in the prior year. The effective tax rate for the current year was impacted by an additional valuation allowance recorded during fiscal 2010 against all of our federal and certain state deferred tax assets.

Net income for fiscal 2010 was a loss of $44.3 million as compared to a loss of $52.7 million in fiscal 2009.  Net loss per diluted share totaled $1.53 in the current year compared to net loss of $1.83 per diluted share in the prior year.

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Fiscal 2009 Compared to Fiscal 2008

Consolidated revenue for the fiscal year ended June 30, 2009 decreased by $305.7 million, or 31.2%, to $674.3 million, from $980 million in fiscal 2008. Net sales for the period largely reflect the delivery of product associated with booked orders and the change in backlog from the beginning to the end of the period.  During fiscal 2009, sales were negatively affected by a weak retail environment for home furnishings which we believe is due to a number of factors including but not limited to continued weakness in the U.S. economy, high unemployment, volatile capital markets, depressed housing prices and tight consumer lending practices as well as the use of highly-promotional pricing strategies by the Company’s competitors.  These factors were partially offset by (i) the positive effects of our continued efforts to reposition the retail network, (ii) the introduction of our new American Artisan product line, (iii) several new marketing initiatives including the launching of our new interactive web site ethanalleninc.com and our rewards program, and in the latter part of the fiscal year, special savings pricing, and (iv) the continued use of national television media, where we emphasize to clients our interior design services and the full line of our quality product offerings.

Wholesale revenue for fiscal 2009 decreased by $212.9 million, or 34.5%, to $403.4 million from $616.2 million in the prior year.  The year-over-year decrease was primarily attributable to a decline in the incoming order rate as a result of the softer retail environment for home furnishings noted throughout the current period and from fewer independent retail design centers, which decreased to 134 from 136 including four locations transferred in to the company’s Retail division during the year.

Retail revenue from Ethan Allen-operated design centers for the twelve months ended June 30, 2009 decreased by $216.0 million, or 29.8%, to $508.6 million from $724.6 million for the twelve months ended June 30, 2008.  The decrease in retail sales by Ethan Allen-operated design centers was attributable to a decrease in comparable design center delivered sales of $211.9 million, or 32.5%, and reduced revenue from sold and closed design centers of $64.4 million. This unfavorable variance was partially offset by higher sales generated by newly opened (including relocated) or acquired design centers of $60.4 million. The number of Ethan Allen-operated design centers remained at 159 at both June 30, 2009 and June 30, 2008.  During that twelve month period, we acquired four design centers from independent retailers, and opened six new design centers (of which three were relocations).

Comparable design centers are those which have been operating for at least 15 months.  Minimal net sales, derived from the delivery of customer ordered product, are generated during the first three months of operations of newly opened (including relocated) design centers.  Design centers acquired by us from independent retailers are included in comparable design center sales in their 13th full month of Ethan Allen-operated operations.

Year-over-year, written business of Ethan Allen-operated design centers decreased 32.6% and comparable design center written business decreased 35.4%.  Over that same period, wholesale orders decreased 35.4%.  Retail written business reflects the softer retail environment for home furnishings noted throughout the current year, likely offset, to some degree, by (i) our continued efforts to reposition the retail network, (ii) recent product introductions, (iii) several new marketing initiatives described previously, and (iv) our continued use of national television as an advertising medium throughout much of the year.

Gross profit for fiscal 2009 declined to $347.3 million from $526.1 million in fiscal 2008.  The $178.7 million decrease in gross profit was primarily attributable to a combined decline in both wholesale and retail sales volume of 31.2%, partially offset by a shift in sales mix with retail sales representing a higher proportionate share of total sales in the current full year (75.4%) as compared to the prior full year (73.9%). As a result of reduced sales, and to reduce inventories, manufacturing plants were operated at approximately 50% of capacity.  This resulted in higher unabsorbed costs in our manufacturing plants which were charged to expense during the period. The consolidated gross margin decreased to 51.5% for fiscal 2009 from 53.7% in fiscal 2008 as a result, primarily, of the factors set forth above.

Operating profit, the elements of which are discussed in greater detail below, was impacted by the following items during the twelve months ended June 30, 2009 and 2008:

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Operating expenses decreased $10.0 million, or 2.3%, to $420.1 million, or 62.3% of net sales, in fiscal 2009 from $430.1 million, or 43.9% of net sales, in fiscal 2008. Decreases in salary related costs were experienced due to the reduced number of employees and other cost cutting efforts taken by the Company that impacted bonuses and benefits.  Advertising expenses decreased, while still maintaining our national TV and shelter magazine presence. Delivery and warehousing costs were lower due to decreased sales. Partially offsetting these decreases were (i) a non-cash goodwill impairment charge of $48.4 million recorded in the March 2009 quarter and (ii) an $11.8 million period-over-period increase in restructuring and impairment charges, both discussed earlier, and (iii) added costs of $7 million due to the implementation of the team concept which caused a temporary overlap of expenses.

Consolidated operating income for the year ended June 30, 2009 totaled a loss of $72.8 million, or 10.8% of net sales, compared to income of $96.0 million, or 9.8% of net sales, in the prior year.  The decrease of $168.8 million was largely attributable to (i) a 31.2% reduction in net sales, resulting in a $178.7 million reduction in gross profit, (ii) a goodwill impairment charge, (iii) increased restructuring and impairment charges and (iv) net declines in other operating expenses, all of which were discussed previously.

Wholesale operating income for fiscal 2009 totaled $6.7 million, or 1.7% of net sales, as compared to $100.3 million, or 16.3% of net sales, in the prior year. The decrease of $93.7 million was primarily attributable to (i) the $212.9 reduction in net sales, and (ii) a $17.4 million increase in restructuring and impairment charges due to the 2009 actions discussed earlier.

Retail operating income decreased $89.3 million to a $92.1 million loss, or 18.1% of sales, for fiscal 2009, from a loss of $2.8 million, or 0.4% of sales, for fiscal 2008. The decrease in retail operating income generated by Ethan Allen-operated design centers was primarily attributable to reduced sales caused by the weak retail environment for home furnishings, as well as the $48.4 million goodwill impairment charge.

Interest and other miscellaneous income, net totaled $3.4 million in fiscal 2009 as compared to $7.9 million in fiscal 2008. The $4.5 million decrease was mostly due to lower investment income resulting from reduced cash and cash equivalent balances maintained along with lower rates of interest during the current period and by gains recorded in connection with the sale of selected real estate assets in the prior year.

Interest and other related financing costs remained largely unchanged at $11.8 million from $11.7 million in the prior year. This amount mostly consists of interest expense on our senior unsecured debt issued in September 2005.

Income tax totaled a benefit of $28.5 million for fiscal 2009 as compared to an expense of $34.1 million for fiscal 2008.  Our effective tax rate for the current year was 35.1%, compared to 37.0% in fiscal 2008. The effective tax rate was a result, primarily, of the total current year loss before tax and the resulting valuation allowance taken against certain deferred tax assets and the inability to apply the manufacturers’ deduction provided for under The Jobs Creation Act of 2004.

Net income for fiscal 2009 was a loss of $52.7 million as compared to income of $58.1 million in fiscal 2008.  Net loss per diluted share totaled $1.83 in the current year compared to net income of $1.97 per diluted share in the prior year.

Liquidity and Capital Resources

As of June 30, 2010, we held cash and cash equivalents of $73.9 million, marketable securities of $11.1 million, and restricted cash and investments of $17.3 million.  Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, and borrowing capacity under our revolving credit facility.

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In October 2009, the Company expanded to $60 million the three-year senior secured asset-based revolving credit facility (the “Facility”) established on May 29, 2009.  The Facility provides revolving credit financing of up to $60 million, subject to borrowing base availability that at June 30, 2010 was $59.5 million. At the Company’s option, revolving loans under the Facility bear interest at an annual rate of either:

(a)   London interbank offered rate (“LIBOR”) plus 3.25% to 4.25%, based on the average availability, or

(b)   The higher of (i) a prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) a LIBOR plus 1.00% plus, in each case, an additional 2.25% to 3.25%, based on average availability.

The Company pays a commitment fee of 0.50% per annum on the unused portion of the Facility and participation fees on issued letters of credit at an annual rate of 1.625% to 4.25%, based on the average availability and the letter of credit type, and a fronting fee of 0.125% per annum.

The borrowing base at any time equals the sum of: (i) up to 90% of eligible credit card receivables; (ii) plus up to 85% of eligible accounts receivable; and (iii) plus up to 85% of the net orderly liquidation value of eligible inventory. The Facility is secured by all property owned, leased or operated by the Company in the United States excluding all real property owned by the Company.  The Facility contains customary covenants which may limit the Company’s ability to incur debt, engage in mergers and consolidations, make restricted payments (including dividends), sell certain assets, and make investments. The Company may make restricted payments (including dividends) as long as availability equals or exceeds the greater of 25% of the aggregate commitment or $12 million.  If the average monthly availability is less than the greater of 15% of the aggregate commitment and $9 million, the Company is also required to meet a fixed charge coverage ratio financial covenant which may not be less than 1 to 1 for any period of four consecutive fiscal quarters. The Facility also contains customary borrowing conditions and events of default, the occurrence of which would entitle the lenders to accelerate the maturity of any outstanding borrowings and terminate their commitment to make future loans. The Company has not drawn any cash advances against the facility, and has no plans to do so.  At June 30, 2010, we had $1.0 million in letters of credit outstanding, and $58.5 million remaining available credit under the revolver subject to limitations set forth in the agreement noted above.  As of June 30, 2010, we are in compliance with the terms and conditions and all covenants of the Facility and as a result, the coverage charge ratio, or other restricted payment limitations did not apply.

In September 2005 we completed a private offering of $200.0 million in ten-year senior unsecured notes due 2015 (the “Senior Notes”).  The Senior Notes were offered by Ethan Allen Global, Inc, a wholly owned subsidiary of the Company, and have an annual coupon rate of 5.375%.  We have used the net proceeds of $198.4 million to expand our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes.  As of June 30, 2010, we are in compliance with the terms and conditions and all covenants of the Senior Notes.

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A summary of net cash provided by (used in) operating, investing, and financing activities for each of the last three fiscal years is provided below (in millions):

Operating Activities

In fiscal 2010, $29.4 million more cash was generated by operating activities than in fiscal 2009.  The change in cash arising from customer deposits due to increased written orders and backlogs especially toward the end of each fiscal year accounted for $37.0 million of this change.  This was partially offset by an $8.6 million lower reduction in inventory that while significant in fiscal 2010, was a lower reduction than achieved in fiscal 2009.

Investing Activities

In fiscal 2010, $7.6 million more cash was used in investing activities than in fiscal 2009.  This was due primarily to the $17.3 million increase in restricted cash and investments and $11.2 million purchase of marketable securities.  This was partly offset by a decrease in capital expenditures and acquisitions of $13.9 million, and an increase in proceeds from sale of property, plant and equipment (primarily retail real estate) of $6.8 million.  The current level of capital spending is principally attributable to continued design center development and renovation, but at a reduced level from the prior two years, and expansion of our upholstery operations in Mexico.  We anticipate that cash from operations will be sufficient to fund future capital expenditures, business conditions permitting.

Financing Activities

In fiscal 2010, $19.0 million less cash was used in financing activities than in fiscal 2009 primarily the result of a decrease in dividend payouts.  On July 20, 2010, we declared a dividend of $0.05 per common share, payable on October 25, 2010, to shareholders of record as of October 11, 2010.  We expect to continue to declare quarterly dividends for the foreseeable future.

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As of June 30, 2010, our outstanding debt totaled $203.3 million, the current and long-term portions of which amounted to $3.9 million and $199.4 million, respectively.  The aggregate scheduled maturities of long-term debt for each of the next five fiscal years are: $3.9 million in fiscal 2011; and less than $0.1 million in each of fiscal 2012, 2013, 2014 and 2015.  The balance of our long-term debt ($199.3 million) matures in fiscal 2016.

The following table summarizes, as of June 30, 2010, the timing of cash payments related to our outstanding contractual obligations (in thousands):

(1)  For purposes of this table, purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. While we are not a party to any significant long-term supply contracts or purchase commitments, we do, in the normal course of business, regularly initiate purchase orders for the procurement of (i) selected finished goods sourced from third-party suppliers, (ii) lumber, fabric, leather and other raw materials used in production, and (iii) certain outsourced services.  All purchase orders are based on current needs and are fulfilled by suppliers within short time periods. At June 30, 2010, our open purchase orders with respect to such goods and services totaled approximately $28 million.

Further discussion of our contractual obligations associated with outstanding debt and lease arrangements can be found in Notes 7 and 8, respectively, to the Consolidated Financial Statements included under Item 8 of this Annual Report.

We believe that our cash flow from operations, together with our other available sources of liquidity, will be adequate to make all required payments of principal and interest on our debt, to permit anticipated capital expenditures, and to fund working capital and other cash requirements.  As of June 30, 2010, we had working capital of $114.0 million and a current ratio of 1.78 to 1.

In addition to using available cash to fund changes in working capital, necessary capital expenditures, acquisition activity, the repayment of debt, and the payment of dividends, the Company has been authorized by our Board of Directors to repurchase our common stock, from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to us.

Off-Balance Sheet Arrangements and Other Commitments, Contingencies and Contractual Obligations

Except as indicated below, we do not utilize or employ any off-balance sheet arrangements, including special-purpose entities, in operating our business.  As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments, or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations.

We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided. Details of those arrangements for which we act as guarantor or obligor are provided below.

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Retailer-Related Guarantees

Independent Retailer Credit Facility

In June 2009, we obligated ourselves, on behalf of one of our independent retailers, with respect to a $0.5 million credit facility (the “Amended Credit Facility”).  This obligation requires us, in the event of the retailer’s default under the Amended Credit Facility, to repurchase the retailer’s inventory, applying such purchase price to the retailer’s outstanding indebtedness under the Amended Credit Facility. Our obligation remains in effect for the life of the term loan.  The agreement expires in April 2011. We believe this obligation will expire without requiring funding by us.

Ethan Allen Consumer Credit Program

The terms and conditions of our consumer credit program, which is financed and administered by a third-party financial institution on a non-recourse basis to Ethan Allen, are set forth in an agreement between the Company and that financial service provider (the “Program Agreement”).  In February and June 2010, the Company modified the Program Agreement to comply with recent changes in laws and made certain other changes to fees payable to the service provider. Any independent retailer choosing to participate in the consumer credit program is required to enter into a separate agreement with that same third-party financial institution which sets forth the terms and conditions under which the retailer is to perform in connection with its offering of consumer credit to its customers (the “Retailer Agreement”). We have obligated ourselves on behalf of any independent retailer choosing to participate in our consumer credit program by agreeing, in the event of default, breach, or failure of the independent retailer to perform under such Retailer Agreement, to take on certain responsibilities of the independent retailer, including, but not limited to, delivery of goods and reimbursement of customer deposits. Customer receivables originated by independent retailers remain non-recourse to Ethan Allen. Our obligation remains in effect for the term of the Program Agreement that expires in July 2014. While the maximum potential amount of future payments (undiscounted) that we could be required to make under this obligation is indeterminable, recourse provisions exist that would enable us to recover, from the independent retailer, any amount paid or incurred by us related to our performance. Based on the underlying creditworthiness of our independent retailers, including their historical ability to satisfactorily perform in connection with the terms of our consumer credit program, we believe this obligation will expire without requiring funding by us. To ensure funding for delivery of products sold, the terms of this agreement also contain a right for the credit card issuer to demand from the Company collateral of up to $12 million if the Company does not meet certain covenants.  As of June 30, 2010, the Company had established a restricted cash and investment collateral account of $6 million to satisfy the current requirement under this demand.

Product Warranties

Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties that extend from three to seven years and are provided based on terms that are generally accepted in the industry.  All of our domestic independent retailers are required to enter into, and perform in accordance with the terms and conditions of, a warranty service agreement. We record provisions for estimated warranty and other related costs at time of sale based on historical warranty loss experience and make periodic adjustments to those provisions to reflect actual experience. On rare occasion, certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation.  In certain cases, a material warranty issue may arise which is beyond the scope of our historical experience. We provide for such warranty issues as they become known and are deemed to be both probable and estimable. It is reasonably possible that, from time to time, additional warranty and other related claims could arise from disputes or other matters beyond the scope of our historical experience. As of June 30, 2010, the Company’s product warranty liability totaled $0.8 million.

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Impact of Inflation

We believe inflation had an impact on our business the last three fiscal years but we have generally been able to create operational efficiencies, seek lower cost alternatives, or raise selling prices in order to offset increases in product and operating costs. It is possible in the future that we will not be successful in our efforts to offset the impacts from inflation.

Business Outlook

While we cannot forecast, with any degree of certainty, changes in the various macro-economic factors that influence the incoming order rate, we believe that we are well-positioned to respond to both market weakness and economic growth based upon our existing business model which includes: (i) an established brand; (ii) a comprehensive complement of home decorating solutions; and (iii) a vertically-integrated operating structure.

As macro-economic factors change, however, it is possible that our costs associated with production (including raw materials and labor), distribution (including freight and fuel charges), and retail operations (including compensation and benefits, delivery and warehousing, occupancy, and advertising expenses) may increase.  We cannot reasonably predict when, or to what extent, such events may occur or what effect, if any, such events may have on our consolidated financial condition or results of operations.

The home furnishings industry remains extremely competitive with respect to both the sourcing of products and the retail sale of those products. Domestic manufacturers continue to face pricing pressures because of the manufacturing capabilities of other countries, specifically within Asia. In response to these pressures, a large number of U.S. furniture manufacturers have increased their overseas sourcing activities in an attempt to maintain a competitive advantage and retain market share. While we have also turned to overseas sourcing to remain competitive, we choose to differentiate ourselves by maintaining a substantial domestic manufacturing base.  Consequently, we make and/or assemble approximately 70% of our products domestically. We continue to believe that a balanced approach to product sourcing, which includes the domestic manufacture of certain product offerings coupled with the import of other selected products, provides the greatest degree of responsiveness and is the most effective approach to ensuring that acceptable levels of quality, service and value are attained.

Our retail strategy involves (i) a continued focus on providing a wide array of product solutions and superior customer service, (ii) the opening of new or relocated design centers in more prominent locations, while encouraging independent retailers to do the same, (iii) leveraging the use of technology with personal service within our retail network, and (iv) further expansion internationally. We believe this strategy provides an opportunity to grow our business.

Further discussion of the home furnishings industry has been included under Item 1 of this Annual Report.

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified as FASB Accounting Standards Codification (“ASC”) Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP.  ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the ASC will be considered non-authoritative. These provisions of ASC Topic 105 became effective for the Company in the first quarter of fiscal 2010. The adoption of this pronouncement did not have an impact on the Company’s financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards. On the effective

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date of this Statement, the ASC superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. References to the pre-codification pronouncements are noted in parenthesis.

In September 2006, FASB issued guidance now codified as ASC Topic 820, “Fair Value Measurements and Disclosures,” (SFAS No. 157) which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements and does not require any new fair value measurements.   In February 2008, the FASB released additional ASC Topic 820 guidance (FSP No. 157-2), which delayed the effective date of the application of certain guidance related to non-financial assets and non-financial liabilities until July 1, 2009 for the Company, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company adopted certain provisions of ASC Topic 820 effective July 1, 2008, except as it relates to those non-financial assets and non-financial liabilities excluded as noted above.  The Company adopted the provisions of ASC Topic 820 with respect to our non-financial assets and non-financial liabilities effective July 1, 2009. The implementation of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued guidance now codified as ASC Topic 805, “Business Combinations” (SFAS No. 141(R), which replaced SFAS No. 141).  ASC Topic 805 establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC Topic 805 is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008 (July 1, 2009 for the Company). The implementation of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2008, the FASB issued guidance now codified as ASC Topic 260, “Earnings Per Share” (EITF 03-6). Under ASC Topic 260, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing earnings per share. The implementation of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2009, the FASB released additional guidance on ASC Topic 810, “Consolidation” (SFAS No. 167) which will revise previous guidance applicable to variable interest entities (“VIEs”). The new guidance will require ongoing assessments of whether an enterprise is the primary beneficiary of a VIE, as opposed to reconsideration only when specific events occurred, as under present rules. The new guidance will also replace the quantitative approach previously required for determining the primary beneficiary of a VIE with a qualitative approach, and changes some disclosure requirements. This revised guidance is effective for fiscal years beginning after November 15, 2009 (July 1, 2010 for the Company).  The Company is currently evaluating the impact, if any, on our financial statements and results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates.

Interest rate risk exists primarily through our borrowing activities. We utilize United States dollar denominated borrowings to fund substantially all our working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements and long-term debt is generally used to finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market

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rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements.

For floating-rate obligations, interest rate changes do not affect the fair value of the underlying financial instrument but would impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed-rate obligations, interest rate changes affect the fair value of the underlying financial instrument but would not impact earnings or cash flows. At June 30, 2010, we had no floating-rate debt obligations outstanding.  As of that same date, our fixed-rate debt obligations consist, primarily, of the Senior Notes issued on September 27, 2005. The estimated fair value of the Senior Notes as of June 30, 2010, which is based on changes, if any, in interest rates and our creditworthiness subsequent to the date on which the debt was issued, and which has been determined using quoted market prices, was $191 million as compared to a carrying value of $199 million.

Foreign currency exchange risk is primarily limited to our operation of five Ethan Allen-operated retail design centers located in Canada and our plant in Mexico, as substantially all purchases of imported parts and finished goods are denominated in United States dollars.  As such, gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our consolidated results of operations. A decrease in the value of foreign currencies (in particular Asian) relative to the United States dollar may affect the profitability of our vendors but as we employ a balanced sourcing strategy, we believe any impact would be moderated relative to peers in the industry.

Item 8. Financial Statements and Supplementary Data

Our Consolidated Financial Statements and Supplementary Data are listed under Item 15 of this Annual Report.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Ethan Allen Interiors Inc.:

We have audited the accompanying consolidated balance sheets of Ethan Allen Interiors Inc. and subsidiaries (the “Company”) as of June 30, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the years in the three-year period ended June 30, 2010. We also have audited the Company’s internal control over financial reporting as of June 30, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ethan Allen Interiors Inc. and subsidiaries as of June 30, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Ethan Allen Interiors, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30,

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2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Effective July 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income Taxes (included in FASB Accounting Standards Codification Topic 740, Income Taxes).

/s/ KPMG LLP

Stamford, Connecticut

August 19, 2010

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Balance Sheets

June 30, 2010 and 2009

(In thousands, except share data)

See accompanying notes to consolidated financial statements.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Operations

For Years Ended June 30, 2010, 2009 and 2008

(In thousands, except per share data)