Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws and Private Securities Litigation Reform Act of 1995.  These statements may be found throughout this Form 10-Q particularly under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others.  Forward-looking statements typically are identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend” and similar words, although some forward-looking statements are expressed differently.  You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs concerning future business conditions, our results of operations, financial position, and our business outlook or state other “forward-looking” information based on currently available information.

Readers are referred to the caption “Risk Factors” appearing at the end of Item I of the Company’s Annual Report on Form 10-K for the year ended December 31, 20032004 for additional factors that may affect our forward-looking statements.  In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur.  We undertake no obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise.

The terms “Tuesday Morning,” “we,” “us” and “our” as used in this Quarterly Report on Form 10-Q refer to Tuesday Morning Corporation and its subsidiaries.

PART I - FINANCIAL INFORMATION

Tuesday Morning Corporation

Consolidated Balance Sheets Sheets

(In thousands, except for share data)

The accompanying notes are an integral part of these consolidated financial statements.

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Tuesday Morning Corporation

Consolidated Statements of Income

(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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Tuesday Morning Corporation

Consolidated Statements of Cash Flows

(In thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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Three Months Ended September 30, 2004March 31, 2005

Compared to the Three Months Ended September 30, 2003March 31, 2004

During the thirdfirst quarter of 2004,2005, net sales increased to $186.1$185.6 million from $173.9$168.6 million, an increase of $12.2$17.0 million or 7.0%10.1% compared to the same quarter of 2003.2004. The increase in thirdfirst quarter sales is primarily due to sales from non-comparable new stores, offset by a 4.0%0.3% decrease in comparable store sales.  The impact of severe storms, which affected stores representing  33% of our total sales base, and lower than expected sales in seasonal products were the primary causes of the comparable store sales decrease for the quarter.

In the first quarter of 2004, we refined our methodology for calculating our comparable store sales, in light of changes to the timing of store openings during a quarter.  Stores are now included in the same store calculation at the beginning of the quarter following the anniversary date of the store opening.  Previously, stores were included in the same store calculation at the beginning of the quarter that contained the anniversary date of the store opening, since the majority of our store openings used to be only at the beginning of the respective quarter.  Using our refined methodology, the comparable sales increase for the third quarter of 2003 would have been 3.0% compared to the 2.8% previously reported.  Stores that relocated within the same geographic market are still considered same store for purposes of this computation.  The number of days our stores are open may fluctuate from period to period.

Comparable store sales decreased 4.0% for the quarter. The decrease in comparable sales for the secondfirst quarter of 20042005 was comprised of a 1.2%0.3% decrease in the number of transactions andoffset by a 2.8% decrease in theflat average transaction amount.  Average store sales for the thirdfirst quarter decreased 7.1%3.1% when compared to the same prior year quarter.  The decrease in average store sales was primarily due to the aforementioned impact of severe storms, lower than expected sales of seasonal products and an increasing percentage of new stores in the store base.

Gross profit increased $5.4$6.6 million, or 8.6%10.0%, to $68.6$72.6 million for the three months ending September 30, 2004March 31, 2005 as compared to last year’s thirdfirst quarter of $63.2$66.0 million, primarily as a result of our increased net sales.  Our gross profit percentage as a percentage of net sales, increased 0.6%decreased to 36.9%39.1% from 36.3%39.2% in the prior year’s thirdfirst quarter.  This 0.1% decrease is comprised of a 0.6% increase isdecrease in gross margin due to a 0.3% improvementshift in leveragingproduct mix and a lower initial mark up in the first quarter of 2005 as compared to the first quarter of 2004, offset by a 0.4% reduction in our distribution and freight expenses and a 0.3% reduction0.1% decrease in shrinkdamages and damaged merchandise.shrink.

Selling, general and administrative expenses are comprised of store labor, store occupancy costs, advertising, miscellaneous store operating expenses and corporate office costs. Increases in dollar amounts of these expenses are attributable to increases in the number of stores and increases in variable expenses due to sales growth. Variable expenses include payroll and related benefits, advertising expense and other expenses such as credit card fees.

Selling, general and administrative expenses increased $5.2$9.6 million, or 10.3%18.3%, to $55.7$62.1 million from $50.5$52.5 million in the thirdfirst quarter of 2003.2004.  The increase was attributable to the opening of new stores, to the $3.9 million lease accounting adjustment and to increases in variable expenses.  As a percentage of net sales these expenses increased 1.0%2.3% to 30.0%33.5% in thirdthe first quarter of 20042005 from 29.0%31.2% in the thirdfirst quarter of 2003.2004.  The increased percentage is primarily due to the 2.1% increase in rent expense due to the lease accounting adjustment and includes a 0.6% increase in store repair, remodeling and pre-opening expenses, a 1.0%0.8% increase related to rent, occupancy and depreciation expense associated with the increase in our store base, and a 0.5% increase in wages and benefits expense due to less sales leveraging, all offset by a 1.1%0.7% decrease in advertising.advertising expense.

Net interest and other expenseincome (expense) decreased $1.6$0.2 million compared to the thirdfirst quarter of 2003.2004.   This reduction is a result of lower debt levels with the repayment of the $69 million senior subordinated debtlimited borrowings under our revolving credit line in the fourthfirst quarter of 2003.2005 as compared to the first quarter 2004.

The income tax provision for the three month periods ended September 30,March 31, 2005 and 2004 and 2003 was $4.7$3.8 million and $4.1$5.1 million, respectively, reflecting an effective tax rate of 38.6%36.3% and 39.0%38.5%, respectively.

Nine Months Ended September 30, 2004

Compared to the Nine Months Ended September 30, 2003

During  The effective tax rate is lower in the first nine monthsquarter of 2004, net sales increased to $565.4 million from $501.7 million, an increase of $63.8 million or 12.7% compared to the same period of 2003. The increase in sales for the first nine months is primarily due to sales from non-comparable new stores and a 1.5% increase in comparable store sales.  Year to date comparable store sales for the period ended September 30, 2004 decreased due to the impact of severe storms, which affected stores representing 33% of our total sales base, and lower than expected sales in seasonal products in the third quarter.

Nine month comparable store sales are the summation of the individual quarterly results within the year. The 1.5% increase in comparable sales for the first nine months of the year was comprised primarily of a 0.1% increase in the number of transactions and a 1.4% increase in the average transaction amount.  Using our refined methodology, the comparable sales increase for the nine month period of 2003 would have been 3.2% compared to the 2.8% previously reported.  Average store sales for the nine months decreased 0.9% compared to the same prior year period.  The decrease in average store sales was primarily due to the aforementioned impact of severe storms, lower than expected sales of seasonal products and an increasing percentage of new stores in the store base.

Gross profit increased $28.6 million or 15.7% to $211.0 million for the nine months ending September 30, 20042005 as compared to the nine month period last yearfirst quarter of $182.4 million, primarily as a result of our increased net sales.  Our gross profit percentage, as a percentage of net sales, increased 0.9% to 37.3% from 36.4% in the prior year’s nine month period.  This 0.9% increase is primarily2004 due to a 0.6%

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improvement in our leveraginglower estimated annual effective tax for 2005 and an adjustment of our distribution and freight expenses and 0.3% reduction in shrink and damaged merchandise and markdowns.

Selling, general and administrative expenses increased $22.7 million, or 15.6%, to $168.1 million from $145.4 million in the first nine months of 2003.  The increase was attributable to new stores, and increases in variable expenses.  As a percentage of net sales these expenses increased 0.7% to 29.7% in the first nine months of 2004 from 29.0% in the first nine months of 2003.  The increased percentage includes a 0.7% increasetax reserves related to rent, occupancy and depreciation expense associateda favorable settlement with the increase in our store base, and a 0.4% increase related to general and administrative expenses and store repair expense, all offset by a 0.4% decrease in advertising expense.

Net interest and other expense decreased $5.3 million compared to the first nine months of 2003.  This reduction is a result of lower debt levels with the repayment of the $69 million senior subordinated debt in the fourth quarter of 2003.

The income tax provision for the nine month periods ended September 30, 2004 and 2003 was $16.1 million and $11.8 million, respectively, reflecting an effective tax rate of 38.5% and 38.7%, respectively.taxing authority.

Liquidity and Capital Resources

We have financed our operations with funds generated from operating activities and borrowings under our revolving credit facility. Our cash flow strategy during the last three years has been focused on funding our store growth and distribution improvements and reducing our debt and financing costs associated with our recapitalization in 1997. Our cash flows will continue to be utilized for the expansion of our business, but we are exploring the alternative uses of excess cash for the future. Other than the letters of credit described below, weWe have no off-balance sheet arrangements or transactions with unconsolidated, limited purpose or variable interest entities, nor do we have material transactions or commitments involving related persons or entities.

Net cash used in operating activities for the ninethree months ended September 30,March 31, 2005 and 2004 and 2003 was $77.7$26.8 million and $43.4$37.5 million, respectively, representing a $34.3$10.7 million increase.decrease. This increasedecrease is predominantly due to the growth of our store base and the increaseddecrease in inventory purchases of inventory in the first nine monthsquarter of 20042005 as compared to the first nine monthsquarter of 2003.  2004, offset by the increase in estimated income tax payments and in advertising prepayments.

At September 30, 2004,March 31, 2005, our inventory increased $119.3$23.5 million to $262.3$212.6 million from $143.0$189.1 million at December 31, 20032004 primarily due to the normal seasonal build-up of inventory for the holiday season, the increase in the number of stores and to a lesser extent lower than anticipated sales in the third quarternormal seasonal build-up of 2004 compared to planned performance.inventory.  Accounts payable balances have increased $20.0 million to $86.1$76.6 million as of September 30, 2004March 31, 2005 from $66.1$72.7 million at December 31, 2003.2004.

Capital expenditures principally associated with new store opening and warehouse equipment were $18.4$4.0 million and $13.1$6.3 million for the ninethree months ending September 30,March 31, 2005 and 2004, and 2003, respectively.  We expect to spend approximately $2.0$14.0 million for additional capital expenditures for the remainder of 2004,2005, which will include the opening of new

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stores, enhancements of selected stores, and purchases of equipment for our distribution center.center and corporate office.

We have a $160$210 million revolving credit facility that expires in March 2006.  On June 30, 2004 we amended ourDecember 2009.  Any borrowing under the revolving credit facility to increasewill incur interest at LIBOR or the prime rate, depending on the term of the borrowing, capacity from $135 millionplus an applicable margin. We incur commitment fees of up to $215 million, which includes a $55 million overadvance facility that0.25% on the unused portion of the revolving credit facility. This rate is only available to us from June 30, 2004 to March 31, 2005.reduced or increased as our average total leverage ratio changes. Our indebtedness under the credit facility is secured by a lien on our inventory tangible personal property and our owned real property,cash accounts, as well as a pledge of our ownership interests in all of our subsidiaries.  For 15 consecutive days between November 1 and December

At March 31, of each calendar year, the aggregate principal amount of loans2005, we had no debt outstanding under the revolving credit facility and any swing loans may not exceed $20 million.  Any borrowings under the revolver incur interest at LIBOR or the prime rate, depending on the type of borrowing, plus an applicable margin. We incur commitment fees of up to 0.50% on the unused portion of the $160 revolving credit facility. These rates are increased or reduced as our leverage ratio changes or overadvance declines.

At September 30, 2004, we had $80.7 million outstanding under our revolving credit facility, of which $20 million was considered long-term, with total availability of $126.4 million based on eligible inventory and the $55 million overadvance facility.$202.1 million.  As of September 30,March 31, 2005 and 2004, and 2003, we had outstanding letters of credit of $7.9 million and $6.3$6.2 million, respectively, primarily for self-insurance.

The revolving credit facility contains certain restrictive covenants, which among other things, require us to comply with certain financial ratios covering maximum leverage, minimum fixed charge coverage and minimum interest coverage and minimum tangible net worth.coverage. Other restrictions affect our ability to incur liens or make certain other restricted payments, sell assets or merge or consolidate with any other person. As of September 30, 2004,March 31, 2005, we were in compliance with all covenants contained in our revolving credit facility.covenants.

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control system were met.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.1.  Legal Proceedings

During 2001 and 2002, we were named as a defendant in three separate complaints filed in the Superior Court of California in and for the County of Los Angeles. The plaintiffs are seeking to certify a statewide class made up of some of our current and former employees, which they claim are owed compensation for overtime wages, penalties and interest. The plaintiffs are also seeking attorney’s fees and costs. In October 2003, we entered into a settlement agreement with a sub-class of these plaintiffs consisting of manager-in-training and management trainees.  ThisThe settlement agreement was approved by the court on April 2, 2004, but is currently under appeal.appeal by one of the plaintiffs.

In December 2003, we were named as a defendant in a complaintnew lawsuit filed in the Superior Court of California, in and for the

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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