Neiman Marcus 10-Q 2008 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 27, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file no. 333-133184-12

Neiman Marcus, Inc.

(Exact name of registrant as specified in its charter)

Delaware	20-3509435
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
1618 Main Street Dallas, Texas	75201
(Address of principal executive offices)	(Zip code)
Registrant’s telephone number, including area code: (214) 743-7600

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. Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

There were 1,012,919 shares of the registrant’s common stock, par value $.01 per share, outstanding at October 27, 2007.

NEIMAN MARCUS, INC.

INDEX

		Page
Part I.	Financial Information
Item 1.	Condensed Consolidated Balance Sheets as of October 27, 2007, July 28, 2007 and October 28, 2006	1
	Condensed Consolidated Statements of Earnings for the Thirteen Weeks Ended October 27, 2007 and Thirteen Weeks Ended October 28, 2006	2
	Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended October 27, 2007 and Thirteen Weeks Ended October 28, 2006	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	46
Part II.	Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 4.	Submission of Matters to a Vote of Security Holders	53
Item 6.	Exhibits	54
Signatures		58

NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except shares)	October 27, 2007		July 28, 2007		October 28, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	80,556	$	141,207	$	159,430
Merchandise inventories	1,085,511		918,269		971,302
Deferred income taxes	39,728		39,728		33,232
Other current assets	125,382		115,765		114,988
Current assets of discontinued operations	—		—		16,354
Total current assets	1,331,177		1,214,969		1,295,306
Property and equipment, net	1,057,994		1,043,711		1,038,138
Goodwill and intangible assets, net	4,131,294		4,140,019		4,205,723
Debt issuance costs	81,290		84,844		94,797
Other assets	9,960		17,456		14,994
Non-current assets of discontinued operations	—		—		79,297
Total assets	$	6,611,715	$	6,500,999	$	6,728,255
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	350,365	$	361,299	$	346,297
Accrued liabilities	442,642		403,162		431,295
Other current liabilities	3,470		3,426		4,179
Current liabilities of discontinued operations	—		—		28,565
Total current liabilities	796,477		767,887		810,336
Long-term liabilities:
Long-term debt	2,945,955		2,945,906		3,195,760
Deferred income taxes	982,492		1,002,982		1,031,959
Deferred real estate credits, net	67,179		54,068		29,326
Other long-term liabilities	193,895		172,144		192,939
Non-current liabilities of discontinued operations	—		—		12,735
Total long-term liabilities	4,189,521		4,175,100		4,462,719
Minority interest in discontinued operations	—		—		5,993
Common stock (par value $0.01 per share, 1,012,919 shares issued at October 27, 2007, 1,012,919 shares issued at July 28, 2007 and 1,012,264 shares issued at October 28, 2006)	10		10		10
Additional paid-in capital	1,413,889		1,412,386		1,406,741
Accumulated other comprehensive income	8,673		21,229		2,772
Retained earnings	203,145		124,387		39,684
Total shareholders’ equity	1,625,717		1,558,012		1,449,207
Total liabilities and shareholders’ equity	$	6,611,715	$	6,500,999	$	6,728,255

See Notes to Condensed Consolidated Financial Statements.

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NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

(in thousands)	Thirteen weeks ended October 27, 2007			Thirteen  weeks ended October 28, 2006
Revenues	$	1,132,243		$	1,039,211
Cost of goods sold including buying and occupancy costs (excluding depreciation)	667,137			606,778
Selling, general and administrative expenses (excluding depreciation)	271,975			247,530
Income from credit card program	(17,294		)	(16,371		)
Depreciation expense	35,135			33,175
Amortization of customer lists	13,611			13,564
Amortization of favorable lease commitments	4,385			4,470
Other income	(32,450		)	(4,210		)
Operating earnings	189,744			154,275
Interest expense, net	61,223			68,818
Earnings from continuing operations before income taxes	128,521			85,457
Income taxes	49,763			34,002
Earnings from continuing operations	78,758			51,455
Loss from discontinued operations, net of taxes	—			(24,226		)
Net earnings	$	78,758		$	27,229

See Notes to Condensed Consolidated Financial Statements.

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NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)	Thirteen weeks ended October 27, 2007			Thirteen weeks ended October 28, 2006
CASH FLOWS - OPERATING ACTIVITIES
Net earnings	$	78,758		$	27,229
Loss from discontinued operations	—			24,226
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation expense	35,135			33,175
Amortization of debt issue costs	3,554			3,498
Amortization of customer lists and favorable lease commitments	17,996			18,034
Gain on curtailment of defined benefit retirement obligations	(32,450		)	—
Deferred income taxes	(9,180		)	(13,801		)
Other, primarily costs related to defined benefit pension plans	8,171			7,133
	101,984			99,494
Changes in operating assets and liabilities:
Increase in merchandise inventories	(167,242		)	(178,076		)
Increase in other current assets	(9,617		)	(19,581		)
Increase in other assets	(1,637		)	(929		)
Increase in accounts payable and accrued liabilities	48,624			75,340
Increase in deferred real estate credits	14,064			2,428
Net cash used for operating activities – continuing operations	(13,824		)	(21,324		)
Net cash provided by operating activities – discontinued operations	—			1,059
Net cash used for operating activities	(13,824		)	(20,265		)
CASH FLOWS – INVESTING ACTIVITIES
Capital expenditures	(46,038		)	(41,419		)
Purchases of short-term investments	(10,000		)	—
Sales of short-term investments	10,000			—
Net cash used for investing activities – continuing operations	(46,038		)	(41,419		)
Net cash used for investing activities – discontinued operations	—			(136		)
Net cash used for investing activities	(46,038		)	(41,555		)
CASH FLOWS – FINANCING ACTIVITIES
Repayment of borrowings	(789		)	(809		)
Debt issuance costs paid	—			(758		)
Net cash used for financing activities – continuing operations	(789		)	(1,567		)
Net cash used for financing activities – discontinued operations	—			(925		)
Net cash used for financing activities	(789		)	(2,492		)
CASH AND CASH EQUIVALENTS
Decrease during the period	(60,651		)	(64,312		)
Beginning balance	141,207			224,763
Ending balance	80,556			160,451
Less cash and cash equivalents of discontinued operations	—			1,021
Ending balance - continuing operations	$	80,556		$	159,430
Supplemental Schedule of Cash Flow Information
Cash paid during the period for:
Interest	$	70,185		$	78,308
Income taxes	$	7,994		$	11,024
Noncash activities:
Additions to property and equipment	$	—		$	822

See Notes to Condensed Consolidated Financial Statements.

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NEIMAN MARCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.Basis of Presentation

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods.

The specialty retail industry is seasonal in nature, with a higher level of sales typically generated in the fall and holiday selling seasons. Due to seasonal and other factors, the results of operations for the first quarter of fiscal year 2008 are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

Neiman Marcus, Inc. (the Company) is a wholly-owned subsidiary of and is controlled by Newton Holding, LLC (Holding). Holding is controlled by investment funds affiliated with TPG Capital and Warburg Pincus (collectively, the Sponsors). The Company was formed by Holding for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG), which acquisition was completed on October 6, 2005 (the Acquisition). Prior to the Acquisition, the Company had no independent assets or operations. After the Acquisition, the Company represents the successor to NMG since the Company’s sole asset is its investment in NMG and its operations consist solely of the operating activities of NMG as well as costs incurred by the Company related to its investment in NMG.

Our fiscal year ends on the Saturday closest to July 31. All references to the first quarter of fiscal year 2008 relate to the thirteen weeks ended October 27, 2007. All references to the first quarter of fiscal year 2007 relate to the thirteen weeks ended October 28, 2006.

A detailed description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

Certain prior period balances have been reclassified to conform to the current period presentation.

Use of Estimates. We are required to make estimates and assumptions about future events in preparing financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the unaudited condensed consolidated financial statements. While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited condensed consolidated financial statements.

We believe the following critical accounting policies, among others, encompass the more significant judgments and estimates used in the preparation of our financial statements:

•Recognition of revenues;

•Valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and vendor allowances, estimation of inventory shrinkage, and determination of cost of goods sold;

•Determination of impairment of long-lived assets;

•Recognition of advertising and catalog costs;

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•Measurement of liabilities related to our loyalty programs;

•Recognition of income taxes; and

•Measurement of accruals for general liability, workers’ compensation and health insurance claims and pension and postretirement health care benefits.

Recent Accounting Pronouncements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure certain assets and liabilities. SFAS 157 will apply whenever another standard requires or permits assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, or our fiscal year ending August 1, 2009. We have not yet evaluated the impact, if any, of adopting SFAS 157 on our consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is effective for fiscal years beginning after November 15, 2007, or our fiscal year ending August 1, 2009. We have not yet evaluated the impact, if any, of adopting SFAS 159 on our consolidated financial statements.

2.Discontinued Operations

In February 1999, NMG acquired a 56% controlling interest in Kate Spade LLC, a designer and marketer of high-end accessories. In April 2005, the minority investor in Kate Spade LLC exercised the put option with respect to the sale of the full amount of its 44% stake in such company to NMG. In October 2006, we entered into an agreement to settle the put option whereby we purchased the interest held by the minority investor for approximately $59.4 million.

In November 2006, we entered into a definitive agreement to sell 100% of the ownership interests in Kate Spade LLC to Liz Claiborne, Inc. (consisting of both our original 56% interest and the 44% minority interest subsequently purchased by NMG) for pretax net cash proceeds of approximately $121.5 million. Both the purchase of the minority interest in Kate Spade LLC and the sale of Kate Spade LLC to Liz Claiborne, Inc. were consummated in December 2006.

The Company’s unaudited condensed consolidated financial statements, accompanying notes and other information provided in this Quarterly Report on Form 10-Q reflect Kate Spade LLC as discontinued operations for all periods presented.

Summarized financial information with respect to the results of operations of Kate Spade LLC is as follows:

(in thousands)	Thirteen weeks ended October 28, 2006
Revenues	$		18,908
Earnings from discontinued operations before income taxes	$		1,150
Income taxes	679
Net earnings from discontinued operations	471
Loss on disposition before income taxes	(15,476			)
Income taxes	(9,221			)
Net loss on disposition	(24,697			)
Loss from discontinued operations, net of taxes	$	(24,226		)

In the first quarter of fiscal year 2007, we impaired the intangible assets of Kate Spade LLC by $12.5 million in order to state the net assets of Kate Spade LLC at their estimated net realizable value to NMG.

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3.Goodwill and Intangible Assets, Net

(in thousands)	October 27, 2007		July 28, 2007		October 28,  2006
Goodwill	$	1,614,273	$	1,605,140	$	1,605,140
Tradenames	1,610,315		1,610,315		1,621,788
Customer lists, net	463,772		477,245		518,068
Favorable lease commitments, net	442,934		447,319		460,727
Goodwill and intangible assets, net	$	4,131,294	$	4,140,019	$	4,205,723

In the first quarter of fiscal year 2008, the cumulative effect of adopting FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) resulted in a net increase to our accruals for uncertain tax positions of $9.1 million for the derecognition of certain tax benefits. This increase to our accruals was offset by a corresponding increase to goodwill as these uncertainties existed at the time of the Acquisition.

Goodwill and indefinite-lived intangible assets, such as tradenames, are not subject to amortization. Rather, recoverability of goodwill and indefinite-lived intangible assets is assessed annually and upon the occurrence of certain events. The recoverability assessment requires us to make judgments and estimates regarding fair values. Fair values are determined using estimated future cash flows, including growth assumptions for future revenues, gross margin rates and other estimates. To the extent that our estimates are not realized, future assessments could result in impairment charges. In the fourth quarter of fiscal year 2007, we recorded a $11.5 million pretax impairment charge related to the writedown to fair value in the net carrying value of the Horchow tradename based upon lower anticipated future revenues associated with the brand.

Customer lists are amortized using the straight-line method over their estimated useful lives, ranging from 5 to 24 years (weighted average life of 13 years). Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from 6 to 49 years (weighted average life of 33 years). Total estimated amortization of all acquisition-related intangible assets is currently estimated as follows (in thousands):

2008	$	72,278
2009	72,278
2010	72,278
2011	61,567
2012	48,922
2013	46,745

4.Long-term Debt

The significant components of our long-term debt are as follows:

(in thousands)	Interest Rate	October 27, 2007		July 28, 2007		October 28, 2006
Senior Secured Term Loan Facility	variable	$	1,625,000	$	1,625,000	$	1,875,000
2028 Debentures	7.125%	120,955		120,906		120,760
Senior Notes	9.0%/9.75%	700,000		700,000		700,000
Senior Subordinated Notes	10.375%	500,000		500,000		500,000
Long-term debt		$	2,945,955	$	2,945,906	$	3,195,760

Senior Secured Asset-Based Revolving Credit Facility. On October 6, 2005, NMG entered into a credit agreement and related security and other agreements for a senior secured Asset-Based Revolving Credit Facility with Deutsche Bank Trust Company Americas as administrative agent and collateral agent. The Asset-Based Revolving Credit Facility provides financing of up to $600.0 million, subject to a borrowing base equal to at any time the lesser of 80% of eligible inventory (valued at the lower of cost or market value) and 85% of net orderly liquidation value of the eligible inventory, less certain reserves. The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice.

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As of October 27, 2007, NMG had $575.7 million of unused borrowing availability under the Asset-Based Revolving Credit Facility based on a borrowing base of over $600.0 million and after giving effect to $24.3 million used for letters of credit. The Asset-Based Revolving Credit Facility provides that NMG has the right at any time to request up to $200.0 million of additional commitments, but the lenders are under no obligation to provide any such additional commitments, and any increase in commitments will be subject to customary conditions precedent. If NMG were to request any such additional commitments and the existing lenders or new lenders were to agree to provide such commitments, the Asset-Based Revolving Credit Facility size could be increased to up to $800.0 million, but NMG’s ability to borrow would still be limited by the amount of the borrowing base.

Borrowings under the Asset-Based Revolving Credit Facility bear interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Deutsche Bank Trust Company Americas and (2) the federal funds effective rate plus ¹/₂ of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. The initial applicable margin is 0% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings. The applicable margin is subject to adjustment based on the historical availability under the Asset-Based Revolving Credit Facility. In addition, NMG is required to pay a commitment fee of 0.375% per annum in respect of the unutilized commitments. If the average revolving loan utilization is 50% or more for any applicable period, the commitment fee will be reduced to 0.250% for such period. NMG must also pay customary letter of credit fees and agency fees.

If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the lesser of (i) the commitment amount and (ii) the borrowing base, NMG will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount. If the amount available under the Asset-Based Revolving Credit Facility is less than $60 million or an event of default has occurred, NMG will be required to repay outstanding loans and cash collateralize letters of credit with the cash NMG would then be required to deposit daily in a collection account maintained with the agent under the Asset-Based Revolving Credit Facility. NMG may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans. There is no scheduled amortization under the Asset-Based Revolving Credit Facility; the principal amount of the loans outstanding is due and payable in full on October 6, 2010.

All obligations under the Asset-Based Revolving Credit Facility are guaranteed by the Company and certain of NMG’s existing and future domestic subsidiaries. As of October 27, 2007, the liabilities of NMG’s non-guarantor subsidiaries totaled approximately $4.4 million, or 0.1% of consolidated liabilities, and the assets of NMG’s non-guarantor subsidiaries aggregated approximately $6.6 million, or 0.1% of consolidated total assets. All obligations under NMG’s Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of the Company, NMG and the subsidiaries that have guaranteed the Asset-Based Revolving Credit Facility (subsidiary guarantors), including:

•a first-priority security interest in personal property consisting of inventory and related accounts, cash, deposit accounts, all payments received by NMG or the subsidiary guarantors from credit card clearinghouses and processors or otherwise in respect of all credit card charges for sales of inventory by NMG and the subsidiary guarantors, certain related assets and proceeds of the foregoing; and

•a second-priority pledge of 100% of NMG’s capital stock and certain of the capital stock held by NMG, the Company or any subsidiary guarantor (which pledge, in the case of any foreign subsidiary is limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary); and

•a second-priority security interest in, and mortgages on, substantially all other tangible and intangible assets of NMG, the Company and each subsidiary guarantor, including a significant portion of NMG’s owned and leased real property (which currently consists of approximately half of NMG’s full-line retail stores) and equipment.

Capital stock and other securities of a subsidiary of NMG that are owned by NMG or any subsidiary guarantor will not constitute collateral under NMG’s Asset-Based Revolving Credit Facility to the extent that such securities cannot secure NMG’s 2028 Debentures or other secured public debt obligations without requiring the preparation and filing of separate financial statements of such subsidiary in accordance with applicable Securities and Exchange Commission’s rules. As a result, the collateral under NMG’s Asset-Based Revolving Credit Facility will include shares of capital stock or other securities of subsidiaries of NMG or any subsidiary guarantor only to the extent that the applicable value of such securities (on a subsidiary-by-subsidiary basis) is less than 20% of the aggregate principal amount of the 2028 Debentures or other secured public debt obligations of NMG.

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The Asset-Based Revolving Credit Facility contains a number of covenants that, among other things and subject to certain significant exceptions, restrict its ability and the ability of its subsidiaries to:

•incur additional indebtedness;

•pay dividends on NMG’s capital stock or redeem, repurchase or retire NMG’s capital stock or indebtedness;

•make investments, loans, advances and acquisitions;

•create restrictions on the payment of dividends or other amounts to NMG from its subsidiaries that are not guarantors;

•engage in transactions with NMG’s affiliates;

•sell assets, including capital stock of NMG’s subsidiaries;

•consolidate or merge;

•create liens; and

•enter into sale and lease back transactions.

The covenants limiting dividends and other restricted payments; investments, loans, advances and acquisitions; and prepayments or redemptions of other indebtedness, each permit the restricted actions in an unlimited amount, subject to the satisfaction of certain payment conditions, principally that NMG must have at least $75.0 million of pro forma excess availability under the Asset-Based Revolving Credit Facility and that NMG must be in pro forma compliance with the fixed charge coverage ratio described below.

Although the credit agreement governing the Asset-Based Revolving Credit Facility does not require NMG to comply with any financial ratio maintenance covenants, if less than $60.0 million were available to be borrowed under the Asset-Based Revolving Credit Facility at any time, NMG would not be permitted to borrow any additional amounts unless its pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement) were at least 1.1 to 1.0. The credit agreement also contains customary affirmative covenants and events of default.

Senior Secured Term Loan Facility. On October 6, 2005, NMG entered into a credit agreement and related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility with Credit Suisse as administrative agent and collateral agent. The full amount of the Senior Secured Term Loan Facility was borrowed on October 6, 2005. NMG voluntarily repaid $100.0 million principal amount of the loans under the Senior Secured Term Loan Facility in fiscal year 2006 and $250 million in fiscal year 2007.

At October 27, 2007, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the federal funds effective rate plus ¹/₂ of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. At October 27, 2007, the applicable margin with respect to base rate borrowings was 0.75% and the applicable margin with respect to LIBOR borrowings was 1.75%. The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 7.45% at October 27, 2007.

The credit agreement governing the Senior Secured Term Loan Facility requires NMG to prepay outstanding term loans with 50% (which percentage will be reduced to 25% if NMG’s total leverage ratio is less than a specified ratio and will be reduced to 0% if NMG’s total leverage ratio is less than a specified ratio) of its annual excess cash flow (as defined in the credit agreement). For fiscal year 2007, NMG was not required to prepay any outstanding term loans pursuant to the annual excess cash flow requirements. If a change of control (as defined in the credit agreement) occurs, NMG will be required to offer to prepay all outstanding term loans, at a prepayment price equal to 101% of the principal amount to be prepaid, plus accrued and unpaid interest to the date of prepayment. NMG also must offer to prepay outstanding term loans at 100% of the principal amount to be prepaid, plus accrued and unpaid interest, with the proceeds of certain asset sales under certain circumstances.

NMG may voluntarily prepay outstanding loans under the Senior Secured Term Loan Facility at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans. There is no scheduled amortization under the Senior Secured Term Loan Facility. The principal amount of the loans outstanding is due and payable in full on April 6, 2013.

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All obligations under the Senior Secured Term Loan Facility are unconditionally guaranteed by the Company and each direct and indirect domestic subsidiary of NMG that guarantees the obligations of NMG under its Asset-Based Revolving Credit Facility. All obligations under the Senior Secured Term Loan Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of the Company, NMG and the subsidiary guarantors, including:

•a first-priority pledge of 100% of NMG’s capital stock and certain of the capital stock held by NMG, the Company or any subsidiary guarantor (which pledge, in the case of any foreign subsidiary is limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary); and

•a first-priority security interest in, and mortgages on, substantially all other tangible and intangible assets of NMG, the Company and each subsidiary guarantor, including a significant portion of NMG’s owned and leased real property (which currently consists of approximately half of NMG’s full-line retail stores) and equipment, but excluding, among other things, the collateral described in the following bullet point; and

•a second-priority security interest in personal property consisting of inventory and related accounts, cash, deposit accounts, all payments received by NMG or the subsidiary guarantors from credit card clearinghouses and processors or otherwise in respect of all credit card charges for sales of inventory by NMG and the subsidiary guarantors, certain related assets and proceeds of the foregoing.

Capital stock and other securities of a subsidiary of NMG that are owned by NMG or any subsidiary guarantor will not constitute collateral under NMG’s Senior Secured Term Loan Facility to the extent that such securities cannot secure the 2028 Debentures or other secured public debt obligations without requiring the preparation and filing of separate financial statements of such subsidiary in accordance with applicable SEC rules. As a result, the collateral under NMG’s Senior Secured Term Loan Facility will include shares of capital stock or other securities of subsidiaries of NMG or any subsidiary guarantor only to the extent that the applicable value of such securities (on a subsidiary-by-subsidiary basis) is less than 20% of the aggregate principal amount of the 2028 Debentures or other secured public debt obligations of NMG.

The credit agreement governing the Senior Secured Term Loan Facility contains a number of negative covenants that are substantially similar to those governing the Senior Notes and additional covenants related to the security arrangements for the Senior Secured Term Loan Facility. The credit agreement also contains customary affirmative covenants and events of default.

2028 Debentures. In May 1998, NMG issued $125.0 million aggregate principal amount of its 7.125% 2028 Debentures. NMG equally and ratably secures the 2028 Debentures by a first lien security interest on certain collateral subject to liens granted under NMG’s Senior Secured Credit Facilities constituting (a) (i) 100% of the capital stock of certain of NMG’s existing and future domestic subsidiaries, and (ii) 100% of the non-voting stock and 65% of the voting stock of certain of NMG’s existing and future foreign subsidiaries and (b) certain of NMG’s principal properties that include approximately half of NMG’s full-line stores, in each case, to the extent required by the terms of the indenture governing the 2028 Debentures. The 2028 Debentures contain covenants that restrict NMG’s ability to create liens and enter into sale and lease back transactions. The collateral securing the 2028 Debentures will be released upon the release of liens on such collateral under NMG’s Senior Secured Credit Facilities and any other debt (other than the 2028 Debentures) secured by such collateral. Capital stock and other securities of a subsidiary of NMG that are owned by NMG or any subsidiary will not constitute collateral under the 2028 Debentures to the extent such property does not constitute collateral under NMG’s Senior Secured Credit Facilities as described above. The 2028 Debentures are guaranteed on an unsecured, senior basis by the Company.

The fair value of 2028 Debentures at October 27, 2007 was approximately $131.3 million.

Senior Notes. In connection with the Acquisition, NMG incurred $700.0 million aggregate original principal amount of 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture) with Wells Fargo Bank, National Association, as trustee. The Senior Notes mature on October 15, 2015.

For any interest payment period through October 15, 2010, NMG may, at its option, elect to pay interest on the Senior Notes entirely in cash (Cash Interest) or entirely by increasing the principal amount of the outstanding Senior Notes or by issuing additional Senior Notes (PIK Interest). Cash Interest on the Senior Notes accrues at the rate of 9% per annum. PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum. To date, NMG has paid all interest obligations in cash. After October 15, 2010, NMG will make all interest payments on the Senior Notes entirely in cash. All Senior Notes mature on October 15, 2015. Interest on the Senior Notes is payable quarterly in arrears on each January 15, April 15, July 15 and October 15, commencing on January 15, 2006.

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The Senior Notes are fully and unconditionally guaranteed, on a joint and several unsecured, senior basis, by each of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’s obligations under its Senior Secured Credit Facilities and by the Company. The Senior Notes and the guarantees thereof are NMG’s and the guarantors’ unsecured, senior obligations and rank (i) equal in the right of payment with all of NMG’s and the guarantors’ existing and future senior indebtedness, including any borrowings under NMG’s Senior Secured Credit Facilities and the guarantees thereof and NMG’s 2028 Debentures; and (ii) senior to all of NMG’s and its guarantors’ existing and future subordinated indebtedness, including the Senior Subordinated Notes due 2015 and the guarantees thereof. The Senior Notes also are effectively junior in priority to NMG’s and its guarantors’ obligations under all secured indebtedness, including NMG’s Senior Secured Credit Facilities, the 2028 Debentures, and any other secured obligations of NMG, in each case, to the extent of the value of the assets securing such obligations. In addition, the Senior Notes are structurally subordinated to all existing and future liabilities, including trade payables, of NMG’s subsidiaries that are not providing guarantees.

NMG is not required to make any mandatory redemption or sinking fund payments with respect to the Senior Notes, but under certain circumstances, NMG may be required to offer to purchase Senior Notes as described below. NMG may from time to time acquire Senior Notes by means other than a redemption, whether by tender offer, in open market purchases, through negotiated transactions or otherwise, in accordance with applicable securities laws.

Except as described below, the Senior Notes are not redeemable at NMG’s option prior to October 15, 2010. From and after October 15, 2010, NMG may redeem the Senior Notes, in whole or in part, at a redemption price equal to 104.5% of principal amount, declining annually to 100% of the principal amount on October 15, 2013, plus accrued and unpaid interest, and Additional Interest (as defined in the Senior Indenture), if any, thereon to the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option, subject to certain conditions, redeem up to 35% of the original aggregate principal amount of Senior Notes at a redemption price equal to 109% of the aggregate principal amount thereof, plus accrued and unpaid interest, and Additional Interest, if any, thereon to the redemption date, with the net cash proceeds of one or more equity offerings of NMG or any direct or indirect parent of NMG to the extent such net proceeds are contributed to NMG. At any time prior to October 15, 2010, NMG also may redeem all or a part of the Senior Notes at a redemption price equal to 100% of the principal amount of Senior Notes redeemed plus an applicable premium, as provided in the Senior Indenture, and accrued and unpaid interest and Additional Interest, if any, to the redemption date.

Upon the occurrence of a change of control (as defined in the Senior Indenture), each holder of the Senior Notes has the right to require NMG to repurchase some or all of such holder’s Senior Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, and Additional Interest, if any, to the date of purchase.

The indenture governing the Senior Notes contains covenants that limit NMG’s ability and certain of its subsidiaries’ ability to:

•incur additional indebtedness;

•pay dividends on NMG’s capital stock or redeem, repurchase or retire NMG’s capital stock or subordinated indebtedness;

•make investments;

•create restrictions on the payment of dividends or other amounts to NMG from its restricted subsidiaries that are not guarantors of the notes;

•engage in transactions with NMG’s affiliates;

•sell assets, including capital stock of NMG’s subsidiaries;

•consolidate or merge;

•create liens; and

•enter into sale and lease back transactions.

The Senior Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all outstanding Senior Notes to be due and payable immediately.

The fair value of NMG’s Senior Notes at October 27, 2007 was approximately $745.5 million.

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Senior Subordinated Notes. In connection with the Acquisition, NMG incurred $500.0 million aggregate principal amount of 10.375% Senior Subordinated Notes under a senior subordinated indenture (Senior Subordinated Indenture) with Wells Fargo Bank, National Association, as trustee. The Senior Subordinated Notes mature on October 15, 2015. Interest on the Senior Subordinated Notes is payable in cash semi-annually in arrears on each April 15 and October 15, commencing April 15, 2006.

The Senior Subordinated Notes are fully and unconditionally guaranteed, on a joint and several unsecured, senior subordinated basis, by each of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’s obligations under its Senior Secured Credit Facilities and by the Company. The Senior Subordinated Notes and the guarantees thereof are NMG’s and the guarantors’ unsecured, senior subordinated obligations and rank (i) junior to all of NMG’s and the guarantors’ existing and future senior indebtedness, including the Senior Notes and any borrowings under NMG’s Senior Secured Credit Facilities, and the guarantees thereof and NMG’s 2028 Debentures; (ii) equally with any of NMG’s and the guarantors’ future senior subordinated indebtedness; and (iii) senior to any of NMG’s and the guarantors’ future subordinated indebtedness. In addition, the Senior Subordinated Notes are structurally subordinated to all existing and future liabilities, including trade payables, of NMG’s subsidiaries that are not providing guarantees.

NMG is not required to make any mandatory redemption or sinking fund payments with respect to the Senior Subordinated Notes, but, under certain circumstances, NMG may be required to offer to purchase Senior Subordinated Notes as described below. The Company may from time to time acquire Senior Subordinated Notes by means other than a redemption, whether by tender offer, in open market purchases, through negotiated transactions or otherwise, in accordance with applicable securities laws.

Except as described below, the Senior Subordinated Notes are not redeemable at NMG’s option prior to October 15, 2010. From and after October 15, 2010, NMG may redeem the Senior Subordinated Notes, in whole or in part, at a redemption price equal to 105.188% of principal amount, declining annually to 100% of principal amount on October 15, 2013, plus accrued and unpaid interest, and Additional Interest (as defined in the Senior Subordinated Indenture), if any, thereon to the applicable redemption date.

Prior to October 15, 2008, NMG may, at its option, subject to certain conditions, redeem up to 35% of the original aggregate principal amount of Senior Subordinated Notes at a redemption price equal to 110.375% of the aggregate principal amount thereof, plus accrued and unpaid interest, and Additional Interest, if any, thereon to the redemption date, with the net cash proceeds of one or more equity offerings of NMG or any direct or indirect parent of NMG to the extent such net proceeds are contributed to NMG.

At any time prior to October 15, 2010, NMG also may redeem all or a part of the Senior Subordinated Notes at a redemption price equal to 100% of the principal amount of Senior Subordinated Notes redeemed plus an applicable premium, as provided in the Senior Subordinated Indenture, and accrued and unpaid interest and Additional Interest, if any, to the redemption date.

Upon the occurrence of a change of control (as defined in the Senior Subordinated Indenture), NMG will make an offer to purchase all of the Senior Subordinated Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest, and Additional Interest, if any, to the date of purchase.

The indenture governing the Senior Subordinated Notes contains covenants substantially similar to those applicable to NMG’s Senior Notes described above. The Senior Subordinated Indenture also provides for events of default, which, if any of them occurs, would permit or require the principal, premium, if any, interest and any other monetary obligations on all outstanding Senior Notes to be due and payable immediately, subject to certain exceptions.

The fair value of NMG’s Senior Subordinated Notes at October 27, 2007 was approximately $545.0 million.

Maturities of Long-Term Debt. At October 27, 2007, annual maturities of long-term debt during the next five fiscal years and thereafter are as follows (in millions):

2009	$	—
2010	—
2011	—
2012	—
2013	—
Thereafter	2,946.0

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The above table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.

Interest Rate Swaps. The Company uses derivative financial instruments to help manage its interest rate risk. Effective December 6, 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit its exposure to interest rate increases related to a portion of its floating rate indebtedness. The interest rate swap agreements terminate after five years. At October 27, 2007, the fair value of NMG’s interest rate swap agreements was a loss of approximately $10.6 million, which amount is included in other long-term liabilities.

As of the effective date, NMG designated the interest rate swaps as cash flow hedges. As a result, changes in the fair value of NMG’s swaps are recorded as a component of other comprehensive income. At October 27, 2007, we have $7.5 million of unrecognized losses, net of tax, on our interest rate swap agreements included in other comprehensive income.

As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.489% to 6.733% per quarter through 2010 and result in an average fixed rate of 6.584%.

Interest expense. The significant components of interest expense are as follows:

(in thousands)	Thirteen weeks ended October 27, 2007		Thirteen weeks ended October 28, 2006
Senior Secured Term Loan Facility	$	27,976	$	35,703
2028 Debentures	2,185		2,226
Senior Notes	15,453		15,750
Senior Subordinated Notes	12,724		12,968
Amortization of debt issue costs	3,554		3,498
Other	832		1,040
Total interest expense	62,724		71,185
Less:
Interest income	855		1,642
Capitalized interest	646		725
Interest expense, net	$	61,223	$	68,818

5.Employee Benefit Plans

Description of Benefit Plans. We sponsor a defined benefit pension plan (Pension Plan) covering substantially all full-time employees. We also sponsor an unfunded supplemental executive retirement plan (SERP Plan) which provides certain employees additional pension benefits. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment.

Retirees and active employees hired prior to March 1, 1989 are eligible for certain limited postretirement health care benefits (Postretirement Plan) if they meet certain service and minimum age requirements. The cost of these benefits is accrued during the years in which an employee provides services.

Plan Redesign. On September 7, 2007, our Board of Directors approved certain changes to our long-term benefits program. Effective January 1, 2008, we will offer a new, enhanced retirement savings plan (RSP) subject to participants’ elections to participate (as more fully described below). For associates participating in the RSP:

•Participants’ balances in our current 401(k) Plan will be automatically transferred to the RSP.

•Our matching contributions to the RSP will increase to a potential maximum 75% of the employee contribution (up to a 6% deferral) from the potential maximum 50% to the current 401(k) Plan (subject to IRS limit of $15,500 in 2008 for employee contributions).

•Our matching contributions will vest to employees in two years as compared to the three year vesting under the current 401(k) Plan.

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•All current employees, who do not participate in the current 401(k) Plan, and future employees will be automatically enrolled in the RSP at a salary deferral rate of 3% once eligibly requirements have been met.

Effective January 1, 2008, we will also offer a new defined contribution supplemental executive retirement plan.

Concurrent with the implementation of the RSP and the new supplemental executive retirement plan, we will freeze benefits offered under our Pension Plan and SERP Plan for most employees. An employee with a minimum of ten years of service and whose age plus years of service equals at least 65 (“Rule of 65”) as of December 31, 2007 will be allowed either 1) to continue participation in our current 401(k) Plan and Pension Plan (and SERP Plan, if eligible) or 2) to freeze the benefit earned under the Pension Plan (and SERP Plan, if eligible) and participate in the RSP. No employee who has met vesting requirements will forfeit benefits earned prior to January 1, 2008.

In connection with the redesign of our long-term benefit program, we recorded a one-time pension curtailment gain of $32.5 million (recorded as other income in our condensed consolidated statements of earnings) in the first quarter of fiscal year 2008 to reflect the impact of freezing benefits to be provided under the Pension and SERP Plans as of December 31, 2007.

Costs of Benefits. The components of the expenses incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:

(in thousands)	Thirteen weeks ended October 27, 2007			Thirteen weeks ended October 28, 2006
Pension Plan:
Service cost	$	4,394		$	3,922
Interest cost	5,842			5,863
Expected return on plan assets	(6,160		)	(5,876			)
Net amortization of gains	(188		)	—
Pension Plan expense	$	3,888		$	3,909
Curtailment gain	$	26,113		$		—
SERP Plan:
Service cost	$	468		$	469
Interest cost	1,270			1,232
SERP Plan expense	$	1,738		$	1,701
Curtailment gain	$	6,337		$		—
Postretirement Plan:
Service cost	$	31		$	14
Interest cost	339			227
Net amortization of losses	137			—
Postretirement Plan expense	$	507		$	241

Benefit Obligations. Obligations for our employee benefit plans, included in other long-term liabilities, are as follows:

(in thousands)	October 27, 2007			July 28, 2007			October 28, 2006
Pension Plan	$	37,100		$	55,603		$	82,728
SERP Plan	79,965			86,146			81,693
Postretirement Plan	22,435			22,091			15,068
	139,500			163,840			179,489
Less: current portion	(4,019		)	(4,019		)	—
Long-term portion of benefit obligations	$	135,481		$	159,821		$	179,489

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We adopted the provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans” (SFAS 158), in the fourth quarter of fiscal year 2007. In connection with the adoption of SFAS 158, we adjusted the carrying values of our previously recorded obligations to equal their unfunded status at July 28, 2007. These aggregate adjustments resulted in a net decrease in the carrying values of our obligations by approximately $28.7 million, which amount was recorded (net of taxes of $11.3 million) as an increase in accumulated other comprehensive income in our statement of shareholders’ equity for fiscal year 2007.

In the first quarter of fiscal year 2008, we reduced our recorded liability for projected benefit obligations payable by the Pension Plan by $26.1 million and by the SERP Plan by $6.4 million to reflect the impact of freezing benefits to be provided under these plans as of December 31, 2007.

Funding Policy and Plan Assets. Our policy is to fund the Pension Plan at or above the minimum required by law. Based upon currently available information, we will not be required to make contributions to the Pension Plan during fiscal year 2008. In fiscal year 2007, we made no contributions to our Pension Plan.

6.Income Taxes

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year 2008. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The cumulative effect of adopting FIN 48 resulted in a net increase to our accruals for uncertain tax positions of $9.1 million for the derecognition of certain tax benefits. This increase to our accruals was offset by a corresponding increase to goodwill as these uncertainties existed at the time of the Acquisition. At adoption, the gross amount of unrecognized tax benefits was $26.7 million, of which $3.5 million of unrecognized tax benefits would impact our effective tax rate, if recognized. We classify interest and penalties as a component of income tax expense and our liability for accrued interest and penalties was $8.5 million upon adoption of FIN48.

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. We closed the Internal Revenue Service (IRS) examinations of federal tax returns for fiscal years 2004 and 2003 during the first quarter of fiscal year 2007 and paid the related tax liability during the second quarter of fiscal year 2007. The IRS is now examining our federal tax returns for fiscal years 2005 and 2006. We believe our recorded tax liabilities as of October 27, 2007 are sufficient to cover any potential assessments to be made by the IRS upon the completion of their examinations. We will continue to monitor the progress of the IRS examinations and review our recorded tax liabilities for potential audit assessments. With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2003. Based upon the current status of in-progress examinations of our federal and state tax returns and other factors, we do not anticipate significant increases or decreases in the amounts of our unrecognized tax benefits within the next 12 months. However, adjustments to increase or decrease the recorded tax liabilities may be required in the future as additional facts become known.

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7.Stock-Based Compensation

The Company has approved equity-based management arrangements which authorize equity awards to be granted to certain management employees for up to 87,992.0 shares of the common stock of the Company. Options generally vest over four to five years and expire 10 years from the date of grant.

A summary of the status of our stock option plan as of October 27, 2007, July 28, 2007 and October 28, 2006 and changes during the periods ended on these dates is as follows:

	October 27, 2007			July 28, 2007				October 28, 2006
	Shares	Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
Outstanding at beginning of period	83,634.3	$	1,430	81,716.3		$	1,416	81,716.3	$	1,416
Granted	—	—		2,496.0		1,942		—	—
Exercised	—	—		(578.0	)	1,590		—	—
Outstanding at end of period	83,634.3	$	1,430	83,634.3		$	1,430	81,716.3	$	1,416
Options exercisable at end of period	37,208.1	$	1,290	29,764.1		$	1,233	21,629.5	$	1,085

The exercise price of approximately 50% of such options escalate at a 10% compound rate per year until the earlier to occur of (i) exercise, (ii) the fifth anniversary of the date of grant or (iii) the occurrence of a change in control. However, in the event the Sponsors cause the sale of shares of the Company to an unaffiliated entity, the exercise price will cease to accrete at the time of the sale with respect to a pro rata portion of the accreting options.

All grants of stock options have an exercise price equal to the fair market value of our common stock on the date of grant. Because we are privately held and there is no public market for our common stock, the fair market value of our common stock is determined by our Compensation Committee at the time option grants are awarded. In determining the fair value of our common stock, the Compensation Committee considers such factors as the Company’s actual and projected financial results, the principal amount of the Company’s indebtedness, valuations of the Company performed by third parties and other factors it believes are material to the valuation process.

We use the Black-Scholes option-pricing model to determine the fair value of our options as of the date of grant in accordance with the provisions of SFAS 123(R). As of October 27, 2007, we have not granted any stock options for fiscal year 2008. A summary of the fiscal year 2007 and fiscal year 2006 grants and fair value assumptions is as follows:

	Fiscal Year 2007 Grants						Fiscal Year 2006 Grants
	Fair Value Options			Accreting Exercise Price Options			Fair Value Options			Accreting Exercise Price Options
Options outstanding at October 27, 2007	1,248.0			1,248.0			43,594.6			37,543.7
Exercise Price at October 27, 2007	$	1,942		$	1,942		$	1,445		$	1,749
Term	5			5			5			5
Volatility	29.96		%	29.96		%	29.72		%	29.72		%
Risk-Free Rate	4.53		%	4.53		%	4.23		%	4.23		%
Dividend Yield	—			—			—			—
Fair Value	$	676		$	341		$	494		$	247

Expected volatility is based on a combination of NMG’s historical volatility adjusted for our new leverage and estimates of implied volatility of our peer group.

We recognized non-cash stock compensation expense of $1.5 million for the thirteen weeks ended October 27, 2007 and $1.4 million for the thirteen weeks ended October 28, 2006, which is included in selling, general and administrative expenses. At October 27, 2007, unearned non-cash stock-based compensation that we expect to recognize as expense over the next 5 years aggregates approximately $17.3 million.

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8.Transactions with Sponsors

Pursuant to a management services agreement with affiliates of the Sponsors, and in exchange for on-going consulting and management advisory services that are provided to us by the Sponsors and their affiliates, affiliates of the Sponsors receive an aggregate annual management fee equal to the lesser of (i) 0.25% of our consolidated annual revenues or (ii) $10 million. Affiliates of the Sponsors also receive reimbursement for out-of-pocket expenses incurred by them or their affiliates in connection with services provided pursuant to the agreement. These management fees are payable quarterly in arrears. We recorded management fees of $2.8 million during the thirteen weeks ended October 27, 2007 and $2.6 million during the thirteen weeks ended October 28, 2006, which are included in selling, general and administrative expenses in the condensed consolidated statements of earnings.

The management services agreement also provides that affiliates of the Sponsors may receive future fees in connection with certain subsequent financing and acquisition or disposition transactions. The management services agreement includes customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates.

9.Income from Credit Card Program

Pursuant to a long-term marketing and servicing alliance with HSBC, HSBC offers credit card and non-card payment plans bearing our brands and we receive ongoing payments from HSBC based on credit card sales and compensation for marketing and servicing activities (HSBC Program Income). We recognize HSBC Program Income when earned.

10.Other Income

In the first quarter of fiscal year 2008, we recorded a one-time pension curtailment gain of $32.5 million as a result of our decision to freeze Pension and SERP benefits as of December 31, 2007. See Note 5 for more information.

In the first quarter of fiscal year 2007, we received consideration aggregating $4.2 million, or 0.4% of revenues, in connection with the merger of Wedding Channel.com, in which we held a minority interest, and The Knot. We accounted for our investment in Wedding Channel.com under the cost method. In prior years, we had previously reduced our carrying value of this investment to zero.

11.Commitments and Contingencies

Long-term Incentive Plan. The Company has a long-term incentive plan (Long-term Incentive Plan) that provides for a cash incentive payable upon a change of control, as defined, subject to the attainment of certain performance objectives to employees who had historically been eligible for stock-based compensation programs of the Predecessor. Performance objectives and targets are based on cumulative EBITDA percentages for three year periods beginning in fiscal year 2006. Earned awards for each completed performance period will be credited to a book account and will earn interest at a contractually defined annual rate until the award is paid. Awards will be paid within 30 days of a change of control or the first day there is a public market of at least 20% of total outstanding common stock.

Cash Incentive Plan. The Company also has a cash incentive plan (Cash Incentive Plan) to aid in the retention of certain key executives. The Cash Incentive Plan provides for the creation of a $14 million cash bonus pool. Each participant in the Cash Incentive Plan will be entitled to a cash bonus upon the earlier to occur of a change of control or an initial public offering, as defined in the Cash Incentive Plan, provided that the internal rate of return to the Sponsors is positive.

Litigation. We are currently involved in various legal actions and proceedings that arose in the ordinary course of business. We believe that any liability arising as a result of these actions and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

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12.Accumulated Other Comprehensive Income (Loss)

The following table shows the components of accumulated other comprehensive income (loss):

(in thousands)	October 27, 2007			July 28, 2007			October 28, 2006
Unrealized (loss) gain on financial instruments	$	(7,542	)	$	3,733		$	2,894
Unfunded benefit obligations	15,709			17,365			—
Other	506			131			(122		)
Total accumulated other comprehensive income	$	8,673		$	21,229		$	2,772
Total comprehensive income (loss) for the period	$	66,202		$	(13,291	)	$	44,872

13.Segment Reporting

We have identified two reportable segments: Specialty Retail stores and Direct Marketing. The Specialty Retail stores segment includes all Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcus clearance stores. The Direct Marketing segment conducts both online and print catalog operations under the Neiman Marcus, Bergdorf Goodman and Horchow brand names. Both the Specialty Retail stores and Direct Marketing segments derive their revenues from the sales of high-end fashion apparel, accessories, cosmetics and fragrances from leading designers, precious and fashion jewelry and decorative home accessories.

Operating earnings for the segments include 1) revenues, 2) cost of sales, 3) direct selling, general, and administrative expenses, 4) other direct operating expenses, 5) income from credit card program and 6) depreciation expense for the respective segment. Items not allocated to our operating segments include those items not considered by management in measuring the assets and profitability of our segments. These amounts include 1) corporate expenses including, but not limited to, treasury, investor relations, legal and finance support services, and general corporate management, 2) charges related to the application of purchase accounting adjustments made in connection with the Acquisition including amortization of customer lists and favorable lease commitments and other non-cash items and 3) interest expense. These items, while often times related to the operations of a segment, are not considered by segment operating management, corporate operating management and the chief operating decision maker in assessing segment operating performance. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (except with respect to purchase accounting adjustments not allocated to the operating segments).

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The following tables set forth the information for our reportable segments:

(in thousands)	Thirteen weeks ended October 27, 2007			Thirteen weeks ended October 28, 2006
REVENUES
Specialty Retail stores	$	961,598		$	879,932
Direct Marketing	170,645			159,279
Total	$	1,132,243		$	1,039,211
OPERATING EARNINGS
Specialty Retail stores	$	165,582		$	156,577
Direct Marketing	23,262			20,798
Subtotal	188,844			177,375
Corporate	(13,554		)	(9,276		)
Amortization of customer lists and favorable lease commitments	(17,996		)	(18,034		)
Other income (1)	32,450			4,210
Total	$	189,744		$	154,275
CAPITAL EXPENDITURES
Specialty Retail stores	$	40,189		$	38,217
Direct Marketing	5,849			3,202
Total	$	46,038		$	41,419
DEPRECIATION EXPENSE
Specialty Retail stores	$	29,931		$	28,941
Direct Marketing	4,045			3,070
Subtotal	33,976			32,011
Depreciation expense on step-up of fixed assets made in connection with the Acquisition	1,159			1,164
Total	$	35,135		$	33,175

	October 27, 2007		October 28,  2006
ASSETS
Tangible assets of Specialty Retail stores	$	2,090,210	$	1,963,974
Tangible assets of Direct Marketing	195,953		181,928
Corporate assets:
Intangible assets related to Specialty Retail stores	3,565,382		3,614,812
Intangible assets related to Direct Marketing	565,912		590,911
Other	194,258		280,979
Assets of discontinued operations	—		95,651
Total	$	6,611,715	$	6,728,255

(1) For the first quarter of fiscal year 2008, other income represents a one-time pension curtailment gain of $32.5 million as a result of our decision to freeze Pension and SERP benefits as of December 31, 2007. For the first quarter of fiscal year 2007, other income represents the proceeds we received in connection with the merger of Wedding Channel.com, in which we held a minority interest, and The Knot. We had previously reduced our carrying value in this investment to zero.

18

14.Condensed Consolidating Financial Information (with respect to NMG’s obligations under the Senior Notes and the Senior Subordinated Notes)

All of NMG’s obligations under the Senior Notes and the Senior Subordinated Notes, as well as its obligations under the Asset-Based Revolving Credit Facility and the Senior Secured Term Loan Facility, are guaranteed by the Company and certain of NMG’s existing and future domestic subsidiaries (principally, Bergdorf Goodman, Inc. through which NMG conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust which holds legal title to certain real property and intangible assets used by the Company in conducting its operations). The guarantees by the Company and each subsidiary guarantor are full and unconditional and joint and several. Currently, the Company’s non-guarantor subsidiaries consist principally of an operating subsidiary domiciled in Canada providing support services to our Direct Marketing operations. Previously, our non-guarantor subsidiaries also included Kate Spade LLC (prior to its sale in December 2006), which is reflected in the tables below as discontinued operations.

The following condensed consolidating financial information represents the financial information of Neiman Marcus, Inc. and its wholly-owned subsidiary guarantors, prepared on the equity basis of accounting. The information is presented in accordance with the requirements of Rule 3-10 under the Securities and Exchange Commission’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiary guarantors operated as independent entities.

	October 27, 2007
(in thousands)	Company		NMG		Guarantor Subsidiaries			Non- Guarantor  Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	79,514	$	397		$	645	$	—		$	80,556
Merchandise inventories	—		966,974		118,530			7		—			1,085,511
Other current assets	—		149,630		11,255			3,681		544			165,110
Total current assets	—		1,196,118		130,182			4,333		544			1,331,177
Property and equipment, net	—		917,353		138,377			2,264		—			1,057,994
Goodwill and intangible assets, net	—		1,937,964		2,193,330			—		—			4,131,294
Other assets	—		91,119		131			—		—			91,250
Investments in subsidiaries	1,625,717		2,352,217		—			—		(3,977,934		)	—
Total assets	$	1,625,717	$	6,494,771	$	2,462,020		$	6,597	$	(3,977,390	)	$	6,611,715
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	306,524	$	38,988		$	4,309	$	544		$	350,365
Accrued liabilities	—		368,817		73,709			116		—			442,642
Other current liabilities	—		3,470		—			—		—			3,470
Total current liabilities	—		678,811		112,697			4,425		544			796,477
Long-term liabilities:
Long-term debt	—		2,945,955		—			—		—			2,945,955
Deferred income taxes	—		982,492		—			—		—			982,492
Other long-term liabilities	—		261,796		(722		)	—		—			261,074
Total long-term liabilities	—		4,190,243		(722		)	—		—			4,189,521
Total shareholders’ equity	1,625,717		1,625,717		2,350,045			2,172		(3,977,934		)	1,625,717
Total liabilities and shareholders’ equity	$	1,625,717	$	6,494,771	$	2,462,020		$	6,597	$	(3,977,390	)	$	6,611,715

19

	July 28, 2007
(in thousands)	Company		NMG		Guarantor Subsidiaries			Non- Guarantor  Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	139,333	$	1,196		$	678	$	—		$	141,207
Merchandise inventories	—		821,749		96,513			7		—			918,269
Other current assets	—		142,632		8,636			3,681		544			155,493
Total current assets	—		1,103,714		106,345			4,366		544			1,214,969
Property and equipment, net	—		901,072		140,473			2,166		—			1,043,711
Goodwill and intangible assets, net	—		1,945,040		2,194,979			—		—			4,140,019
Other assets	—		102,108		192			—		—			102,300
Investments in subsidiaries	1,558,012		2,333,438		—			—		(3,891,450		)	—
Total assets	$	1,558,012	$	6,385,372	$	2,441,989		$	6,532	$	(3,890,906	)	$	6,500,999
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	318,439	$	38,080		$	4,236	$	544		$	361,299
Accrued liabilities	—		329,625		73,479			58		—			403,162
Other current liabilities	—		3,426		—			—		—			3,426
Total current liabilities	—		651,490		111,559			4,294		544			767,887
Long-term liabilities:
Long-term debt	—		2,945,906		—			—		—			2,945,906
Deferred income taxes	—		1,002,982		—			—		—			1,002,982
Other long-term liabilities	—		226,982		(770		)	—		—			226,212
Total long-term liabilities	—		4,175,870		(770		)	—		—			4,175,100
Total shareholders’ equity	1,558,012		1,558,012		2,331,200			2,238		(3,891,450		)	1,558,012
Total liabilities and shareholders’ equity	$	1,558,012	$	6,385,372	$	2,441,989		$	6,532	$	(3,890,906	)	$	6,500,999

20

	October 28, 2006
(in thousands)	Company		NMG		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	157,589	$	981	$	860	$	—		$	159,430
Merchandise inventories	—		870,900		100,892		7		(497		)	971,302
Other current assets	—		131,075		12,920		3,681		544			148,220
Current assets of discontinued operations	—		—		—		16,354		—			16,354
Total current assets	—		1,159,564		114,793		20,902		47			1,295,306
Property and equipment, net	—		884,142		151,609		2,387		—			1,038,138
Goodwill and intangible assets, net	—		1,990,447		2,215,276		—		—			4,205,723
Other assets	—		109,592		195		4		—			109,791
Investments in subsidiaries	1,449,207		2,421,126		—		—		(3,870,333		)	—
Non-current assets of discontinued operations	—		—		—		79,297		—			79,297
Total assets	$	1,449,207	$	6,564,871	$	2,481,873	$	102,590	$	(3,870,286	)	$	6,728,255
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	309,678	$	31,773	$	4,302	$	544		$	346,297
Accrued liabilities	—		358,791		70,751		445		1,308			431,295
Other current liabilities	—		4,179		—		—		—			4,179
Current liabilities of discontinued operations	—		—		—		28,565		—			28,565
Total current liabilities	—		672,648		102,524		33,312		1,852			810,336
Long-term liabilities:
Long-term debt	—		3,195,760		—		—		—			3,195,760
Deferred income taxes	—		1,031,959		—		—		—			1,031,959
Other long-term liabilities	—		215,297		6,964		4		—			222,265
Non-current liabilities of discontinued operations	—		—		—		12,735		—			12,735
Total long-term liabilities	—		4,443,016		6,964		12,739		—			4,462,719
Minority interest	—		—		—		—		5,993			5,993
Total shareholders’ equity	1,449,207		1,449,207		2,372,385		56,539		(3,878,131		)	1,449,207
Total liabilities and shareholders’ equity	$	1,449,207	$	6,564,871	$	2,481,873	$	102,590	$	(3,870,286	)	$	6,728,255

21

	Thirteen weeks ended October 27, 2007
(in thousands)	Company			NMG			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	941,458		$	190,785		$	—		$	—		$	1,132,243
Cost of goods sold including buying and occupancy costs (excluding depreciation)	—			557,697			109,247			193			—			667,137
Selling, general and administrative expenses (excluding depreciation)	—			237,023			35,465			(513		)	—			271,975
Income from credit card program	—			(15,435		)	(1,859		)	—			—			(17,294		)
Depreciation expense	—			30,282			4,750			103			—			35,135
Amortization of customer lists and favorable lease commitments	—			15,059			2,937			—			—			17,996
Other income	—			(32,450		)	—			—			—			(32,450		)
Operating earnings	—			149,282			40,245			217			—			189,744
Interest expense, net	—			61,220			3			—			—			61,223
Intercompany royalty charges (income)	—			56,995			(56,995		)	—			—			—
Equity in earnings of subsidiaries	(78,758		)	(97,454		)	—			—			176,212			—
Earnings (loss) from continuing operations before income taxes	78,758			128,521			97,237			217			(176,212		)	128,521
Income taxes	—			49,763			—			—			—			49,763
Net earnings (loss)	$	78,758		$	78,758		$	97,237		$	217		$	(176,212	)	$	78,758

	Thirteen weeks ended October 28, 2006
(in thousands)	Company			NMG			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	864,453		$	174,758		$	—		$	—		$	1,039,211
Cost of goods sold including buying and occupancy costs (excluding depreciation)	—			509,506			97,080			192			—			606,778
Selling, general and administrative expenses (excluding depreciation)	—			215,901			31,029			600			—			247,530
Income from credit card program	—			(14,630		)	(1,741		)	—			—			(16,371		)
Depreciation expense	—			28,425			4,654			96			—			33,175
Amortization of customer lists and favorable lease commitments	—			15,093			2,941			—			—			18,034
Other income	—			(4,210		)	—			—			—			(4,210		)
Operating earnings	—			114,368			40,795			(888		)	—			154,275
Interest expense, net	—			68,818			—			—			—			68,818
Intercompany royalty charges (income)	—			66,078			(66,078		)	—			—			—
Equity in earnings of subsidiaries	(27,229		)	(81,759		)	—			—			108,988			—
Earnings (loss) from continuing operations before income taxes	27,229			61,231			106,873			(888		)	(108,988		)	85,457
Income taxes	—			34,002			—			—			—			34,002
Earnings (loss) from continuing operations	27,229			27,229			106,873			(888		)	(108,988		)	51,455
Loss from discontinued operations, net of taxes	—			—			—			(23,657		)	(569		)	(24,226		)
Net earnings (loss)	$	27,229		$	27,229		$	106,873		$	(24,545	)	$	(109,557	)	$	27,229

22

	Thirteen weeks ended October 27, 2007
(in thousands)	Company			NMG			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net earnings (loss)	$	78,758		$	78,758		$	97,237		$	217		$	(176,212	)	$	78,758
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	—			30,282			4,750			103			—			35,135
Amortization of debt issue costs	—			3,554			—			—			—			3,554
Amortization of customer lists and favorable lease commitments	—			15,059			2,937			—			—			17,996
Deferred income taxes	—			(9,180		)	—			—			—			(9,180		)
Gain on curtailment of defined benefit retirement obligations	—			(32,450		)	—			—			—			(32,450		)
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			7,612			559			—			—			8,171
Intercompany royalty income payable (receivable)	—			56,995			(56,995		)	—			—			—
Equity in earnings of subsidiaries	(78,758		)	(97,454		)	—			—			176,212			—
Changes in operating assets and liabilities, net	—			(68,554		)	(46,729		)	(525		)	—			(115,808		)
Net cash (used for) provided by operating activities	—			(15,378		)	1,759			(205		)	—			(13,824		)
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(43,652		)	(2,558		)	172			—			(46,038		)
Purchases of short-term investments	—			(10,000		)	—			—			—			(10,000		)
Sales of short-term investments	—			10,000			—			—			—			10,000
Net cash (used for) provided by investing activities	—			(43,652		)	(2,558		)	172			—			(46,038		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(789		)	—			—			—			(789		)
Net cash used for financing activities	—			(789		)	—			—			—			(789		)
CASH AND CASH EQUIVALENTS
Decrease during the period	—			(59,819		)	(799		)	(33		)	—			(60,651		)
Beginning balance	—			139,333			1,196			678			—			141,207
Ending balance	$	—		$	79,514		$	397		$	645		$	—		$	80,556

23

	Thirteen weeks ended October 28, 2006
(in thousands)	Company			NMG			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net earnings (loss)	$	27,229		$	27,229		$	106,873		$	(24,545	)	$	(109,557	)	$	27,229
Loss from discontinued operations	—			—			—			23,657			569			24,226
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	—			28,425			4,654			96			—			33,175
Amortization of debt issue costs	—			3,498			—			—			—			3,498
Amortization of customer lists and favorable lease commitments	—			15,093			2,941			—			—			18,034
Deferred income taxes	—			(13,801		)	—			—			—			(13,801		)
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			6,572			561			—			—			7,133
Intercompany royalty income payable (receivable)	—			66,078			(66,078		)	—			—			—
Equity in earnings of subsidiaries	(27,229		)	(81,759		)	—			—			108,988			—
Changes in operating assets and liabilities, net	—			(77,608		)	(44,415		)	1,205			—			(120,818		)
Net cash (used for) provided by continuing operating activities	—			(26,273		)	4,536			413			—			(21,324		)
Net cash provided by discontinued operations	—			—			—			1,059			—			1,059
Net cash (used for) provided by operating activities	—			(26,273		)	4,536			1,472			—			(20,265		)
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(36,879		)	(4,541		)	1			—			(41,419		)
Net cash used for continuing investing activities	—			(36,879		)	(4,541		)	1			—			(41,419		)
Net cash used for discontinued operations	—			—			—			(136		)	—			(136		)
Net cash used for investing activities	—			(36,879		)	(4,541		)	(135		)	—			(41,555		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(809		)	—			—			—			(809		)
Debt issuance costs paid	—			(758		)	—			—			—			(758		)
Net cash used for continuing financing activities	—			(1,567		)	—			—			—			(1,567		)
Net cash used for discontinued operations	—			—			—			(925		)	—			(925		)
Net cash used for financing activities	—			(1,567		)	—			(925		)	—			(2,492		)
CASH AND CASH EQUIVALENTS
(Decrease) increase during the period	—			(64,719		)	(5		)	412			—			(64,312		)
Beginning balance	—			222,308			986			1,469			—			224,763
Ending balance	—			157,589			981			1,881			—			160,451
Less cash of discontinued operations	—			—			—			1,021			—			1,021
Ending balance	$	—		$	157,589		$	981		$	860		$	—		$	159,430

24

15.Condensed Consolidating Financial Information (with respect to NMG’s obligations under the 2028 Debentures)

All of NMG’s obligations under the 2028 Debentures are guaranteed by the Company. The guarantee by the Company is full and unconditional and joint and several. Currently, the Company’s non-guarantor subsidiaries consist principally of Bergdorf Goodman, Inc. through which NMG conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust which holds legal title to certain real property and intangible assets used by NMG in conducting its operations. Previously, our non-guarantor subsidiaries also included Kate Spade LLC (prior to its sale in December 2006), which is reflected in the tables below as discontinued operations.

The following condensed consolidating financial information represents the financial information of Neiman Marcus, Inc. and its non-guarantor subsidiaries, prepared on the equity basis of accounting. The information is presented in accordance with the requirements of Rule 3-10 under the Securities and Exchange Commission’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities.

	October 27, 2007
(in thousands)	Company		NMG		Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	79,514	$	1,042		$	—		$	80,556
Merchandise inventories	—		966,974		118,537			—			1,085,511
Other current assets	—		149,630		14,936			544			165,110
Total current assets	—		1,196,118		134,515			544			1,331,177
Property and equipment, net	—		917,353		140,641			—			1,057,994
Goodwill and intangible assets, net	—		1,937,964		2,193,330			—			4,131,294
Other assets	—		91,119		131			—			91,250
Investments in subsidiaries	1,625,717		2,352,217		—			(3,977,934		)	—
Total assets	$	1,625,717	$	6,494,771	$	2,468,617		$	(3,977,390	)	$	6,611,715
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	306,524	$	43,297		$	544		$	350,365
Accrued liabilities	—		368,817		73,825			—			442,642
Other current liabilities	—		3,470		—			—			3,470
Total current liabilities	—		678,811		117,122			544			796,477
Long-term liabilities:
Long-term debt	—		2,945,955		—			—			2,945,955
Deferred income taxes	—		982,492		—			—			982,492
Other long-term liabilities	—		261,796		(722		)	—			261,074
Total long-term liabilities	—		4,190,243		(722		)	—			4,189,521
Total shareholders’ equity	1,625,717		1,625,717		2,352,217			(3,977,934		)	1,625,717
Total liabilities and shareholders’ equity	$	1,625,717	$	6,494,771	$	2,468,617		$	(3,977,390	)	$	6,611,715

25

	July 28, 2007
(in thousands)	Company		NMG		Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	139,333	$	1,874		$	—		$	141,207
Merchandise inventories	—		821,749		96,520			—			918,269
Other current assets	—		142,632		12,317			544			155,493
Total current assets	—		1,103,714		110,711			544			1,214,969
Property and equipment, net	—		901,072		142,639			—			1,043,711
Goodwill and intangible assets, net	—		1,945,040		2,194,979			—			4,140,019
Other assets	—		102,108		192			—			102,300
Investments in subsidiaries	1,558,012		2,333,438		—			(3,891,450		)	—
Total assets	$	1,558,012	$	6,385,372	$	2,448,521		$	(3,890,906	)	$	6,500,999
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	318,439	$	42,316		$	544		$	361,299
Accrued liabilities	—		329,625		73,537			—			403,162
Other current liabilities	—		3,426		—			—			3,426
Total current liabilities	—		651,490		115,853			544			767,887
Long-term liabilities:
Long-term debt	—		2,945,906		—			—			2,945,906
Deferred income taxes	—		1,002,982		—			—			1,002,982
Other long-term liabilities	—		226,982		(770		)	—			226,212
Total long-term liabilities	—		4,175,870		(770		)	—			4,175,100
Total shareholders’ equity	1,558,012		1,558,012		2,333,438			(3,891,450		)	1,558,012
Total liabilities and shareholders’ equity	$	1,558,012	$	6,385,372	$	2,448,521		$	(3,890,906	)	$	6,500,999

26

	October 28, 2006
(in thousands)	Company		NMG		Non- Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	—	$	157,589	$	1,841	$	—		$	159,430
Merchandise inventories	—		870,900		100,899		(497		)	971,302
Other current assets	—		131,075		16,601		544			148,220
Current assets of discontinued operations	—		—		16,354		—			16,354
Total current assets	—		1,159,564		135,695		47			1,295,306
Property and equipment, net	—		884,142		153,996		—			1,038,138
Goodwill and intangible assets, net	—		1,990,447		2,215,276		—			4,205,723
Other assets	—		109,592		199		—			109,791
Investments in subsidiaries	1,449,207		2,421,126		—		(3,870,333		)	—
Non-current assets of discontinued operations	—		—		79,297		—			79,297
Total assets	$	1,449,207	$	6,564,871	$	2,584,463	$	(3,870,286	)	$	6,728,255
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	—	$	309,678	$	36,075	$	544		$	346,297
Accrued liabilities	—		358,791		71,196		1,308			431,295
Other current liabilities	—		4,179		—		—			4,179
Current liabilities of discontinued operations	—		—		28,565		—			28,565
Total current liabilities	—		672,648		135,836		1,852			810,336
Long-term liabilities:
Long-term debt	—		3,195,760		—		—			3,195,760
Deferred income taxes	—		1,031,959		—		—			1,031,959
Other long-term liabilities	—		215,297		6,968		—			222,265
Non-current liabilities of discontinued operations	—		—		12,735		—			12,735
Total long-term liabilities	—		4,443,016		19,703		—			4,462,719
Minority interest	—		—		—		5,993			5,993
Total shareholders’ equity	1,449,207		1,449,207		2,428,924		(3,878,131		)	1,449,207
Total liabilities and shareholders’ equity	$	1,449,207	$	6,564,871	$	2,584,463	$	(3,870,286	)	$	6,728,255

27

	Thirteen weeks ended October 27, 2007
(in thousands)	Company			NMG			Non- Guarantor  Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	941,458		$	190,785		$	—		$	1,132,243
Cost of goods sold including buying and occupancy costs (excluding depreciation)	—			557,697			109,440			—			667,137
Selling, general and administrative expenses (excluding depreciation)	—			237,023			34,952			—			271,975
Income from credit card program	—			(15,435		)	(1,859		)	—			(17,294		)
Depreciation expense	—			30,282			4,853			—			35,135
Amortization of customer lists and favorable lease commitments	—			15,059			2,937			—			17,996
Other income	—			(32,450		)	—			—			(32,450		)
Operating earnings	—			149,282			40,462			—			189,744
Interest expense, net	—			61,220			3			—			61,223
Intercompany royalty charges (income)	—			56,995			(56,995		)	—			—
Equity in earnings of subsidiaries	(78,758		)	(97,454		)	—			176,212			—
Earnings (loss) from continuing operations before income taxes	78,758			128,521			97,454			(176,212		)	128,521
Income taxes	—			49,763			—			—			49,763
Net earnings (loss)	$	78,758		$	78,758		$	97,454		$	(176,212	)	$	78,758

	Thirteen weeks ended October 28, 2006
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	—		$	864,453		$	174,758		$	—		$	1,039,211
Cost of goods sold including buying and occupancy costs (excluding depreciation)	—			509,506			97,272			—			606,778
Selling, general and administrative expenses (excluding depreciation)	—			215,901			31,629			—			247,530
Income from credit card program	—			(14,630		)	(1,741		)	—			(16,371		)
Depreciation expense	—			28,425			4,750			—			33,175
Amortization of customer lists and favorable lease commitments	—			15,093			2,941			—			18,034
Other income	—			(4,210		)	—			—			(4,210		)
Operating earnings	—			114,368			39,907			—			154,275
Interest expense, net	—			68,818			—			—			68,818
Intercompany royalty charges (income)	—			66,078			(66,078		)	—			—
Equity in earnings of subsidiaries	(27,229		)	(81,759		)	—			108,988			—
Earnings (loss) from continuing operations before income taxes	27,229			61,231			105,985			(108,988		)	85,457
Income taxes	—			34,002			—			—			34,002
Earnings (loss) from continuing operations	27,229			27,229			105,985			(108,988		)	51,455
Loss from discontinued operations, net of taxes	—			—			(23,657		)	(569		)	(24,226		)
Net earnings (loss)	$	27,229		$	27,229		$	82,328		$	(109,557	)	$	27,229

28

	Thirteen weeks ended October 27, 2007
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net earnings (loss)	$	78,758		$	78,758		$	97,454		$	(176,212	)	$	78,758
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	—			30,282			4,853			—			35,135
Amortization of debt issue costs	—			3,554			—			—			3,554
Amortization of customer lists and favorable lease commitments	—			15,059			2,937			—			17,996
Deferred income taxes	—			(9,180		)	—			—			(9,180		)
Gain on curtailment of defined benefit retirement obligations	—			(32,450		)				—			(32,450		)
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			7,612			559			—			8,171
Intercompany royalty income payable (receivable)	—			56,995			(56,995		)	—			—
Equity in earnings of subsidiaries	(78,758		)	(97,454		)	—			176,212			—
Changes in operating assets and liabilities, net	—			(68,554		)	(47,254		)	—			(115,808		)
Net cash (used for) provided by operating activities	—			(15,378		)	1,554			—			(13,824		)
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(43,652		)	(2,386		)	—			(46,038		)
Purchases of short-term investments	—			(10,000		)	—			—			(10,000		)
Sales of short-term investments	—			10,000			—			—			10,000
Net cash used for investing activities	—			(43,652		)	(2,386		)	—			(46,038		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(789		)	—			—			(789		)
Net cash used for financing activities	—			(789		)	—			—			(789		)
CASH AND CASH EQUIVALENTS
Decrease during the period	—			(59,819		)	(832		)	—			(60,651		)
Beginning balance	—			139,333			1,874			—			141,207
Ending balance	$	—		$	79,514		$	1,042		$	—		$	80,556

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	Thirteen weeks ended October 28, 2006
(in thousands)	Company			NMG			Non- Guarantor Subsidiaries			Eliminations			Consolidated
CASH FLOWS—OPERATING ACTIVITIES
Net earnings (loss)	$	27,229		$	27,229		$	82,328		$	(109,557	)	$	27,229
Loss from discontinued operations	—			—			23,657			569			24,226
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation	—			28,425			4,750			—			33,175
Amortization of debt issue costs	—			3,498			—			—			3,498
Amortization of customer lists and favorable lease commitments	—			15,093			2,941			—			18,034
Deferred income taxes	—			(13,801		)	—			—			(13,801		)
Other, primarily costs related to defined benefit pension and other long-term benefit plans	—			6,572			561			—			7,133
Intercompany royalty income payable (receivable)	—			66,078			(66,078		)	—			—
Equity in earnings of subsidiaries	(27,229		)	(81,759		)	—			108,988			—
Changes in operating assets and liabilities, net	—			(77,608		)	(43,210		)	—			(120,818		)
Net cash (used for) provided by continuing operating activities	—			(26,273		)	4,949			—			(21,324		)
Net cash provided by discontinued operations	—			—			1,059			—			1,059
Net cash (used for) provided by operating activities	—			(26,273		)	6,008			—			(20,265		)
CASH FLOWS—INVESTING ACTIVITIES
Capital expenditures	—			(36,879		)	(4,540		)	—			(41,419		)
Net cash used for continuing investing activities	—			(36,879		)	(4,540		)	—			(41,419		)
Net cash used for discontinued operations	—			—			(136		)	—			(136		)
Net cash used for investing activities	—			(36,879		)	(4,676		)	—			(41,555		)
CASH FLOWS—FINANCING ACTIVITIES
Repayment of borrowings	—			(809		)	—			—			(809		)
Debt issuance costs paid	—			(758		)	—			—			(758		)
Net cash used for continuing financing activities	—			(1,567		)	—			—			(1,567		)
Net cash used for discontinued operations	—			—			(925		)	—			(925		)
Net cash used for financing activities	—			(1,567		)	(925		)	—			(2,492		)
CASH AND CASH EQUIVALENTS
(Decrease) increase during the period	—			(64,719		)	407			—			(64,312		)
Beginning balance	—			222,308			2,455			—			224,763
Ending balance	—			157,589			2,862			—			160,451
Less cash of discontinued operations	—			—			1,021			—			1,021
Ending balance	$	—		$	157,589		$	1,841		$	—		$	159,430

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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 28, 2007. Unless otherwise specified, the meanings of all defined terms in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) are consistent with the meanings of such terms as defined in the Notes to the Condensed Consolidated Financial Statements. This discussion contains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the risks, uncertainties and assumptions relating to our forward-looking statements.

Overview

Neiman Marcus, Inc. (the Company), together with our operating segments and subsidiaries, is a high-end specialty retailer. Our operations include the Specialty Retail stores segment and the Direct Marketing segment. The Specialty Retail stores segment consists primarily of Neiman Marcus and Bergdorf Goodman stores. The Direct Marketing segment conducts both online and print catalog operations under the brand names of Neiman Marcus, Bergdorf Goodman and Horchow.

Our fiscal year ends on the Saturday closest to July 31. All references to the first quarter of fiscal year 2008 relate to the thirteen weeks ended October 27, 2007. All references to the first quarter of fiscal year 2007 relate to the thirteen weeks ended October 28, 2006.

Factors Affecting Our Results

Revenues. We generate our revenues from the sale of high-end merchandise through our Specialty Retail stores and Direct Marketing operation. Components of our revenues include:

•Sales of merchandise—Revenues from our Specialty Retail stores are recognized at the later of the point of sale or the delivery of goods to the customer. Revenues from our Direct Marketing operation are recognized when the merchandise is delivered to the customer. We maintain reserves for anticipated sales returns primarily based on our historical trends related to returns by both our retail and direct marketing customers. Revenues exclude sales taxes collected from our customers.

•Delivery and processing—We generate revenues from delivery and processing charges related to merchandise delivered to our customers from both our retail and direct marketing operations.

Our revenues can be affected by the following factors:

•changes in the level of consumer spending generally and, specifically, on luxury goods;

•changes in the level of full-price sales;

•changes in the level of promotional events conducted by our Specialty Retail stores and Direct Marketing operation;

•our ability to successfully implement our store expansion and remodeling strategies;

•the rate of growth in internet revenues by our Direct Marketing operation; and

•general economic conditions.

In addition, our revenues are seasonal. For a description of the seasonality of our business, see “Seasonality.”

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Cost of goods sold including buying and occupancy costs (excluding depreciation) (COGS). COGS consists of the following components:

•Inventory costs—We utilize the retail method of accounting. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for various groupings of similar items, to the retail value of our inventories. Merchandise inventories are stated at the lower of cost or market. The cost of the inventory reflected on the consolidated balance sheet is decreased by charges to cost of goods sold at the time the retail value of the inventory is lowered through the use of markdowns. Hence, earnings are negatively impacted when merchandise is marked down. With the introduction of new fashions in the first and third fiscal quarters and our emphasis on full-price selling in these quarters, a lower level of markdowns and higher margins are characteristic of these quarters.

•Buying costs—Buying costs consist primarily of salaries and expenses incurred by our merchandising and buying operations.

•Occupancy costs—Occupancy costs consist primarily of rent, property taxes and operating costs of our retail, distribution and support facilities. A significant portion of our buying and occupancy costs are fixed.

•Delivery and processing costs—Delivery and processing costs consist primarily of delivery charges we pay to third-party carriers and other costs related to the fulfillment of customer orders not delivered at the point-of-sale.

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale. Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise. These allowances result in an increase to gross margin when we earn the allowances and they are approved by the vendor. Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise. These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold. We received vendor allowances of $12.5 million, or 1.1% of revenues, in the thirteen weeks ended October 27, 2007 and $10.9 million, or 1.1% of revenues, in the thirteen weeks ended October 28, 2006.

Changes in our COGS as a percentage of revenues are affected primarily by the following factors:

•customer acceptance of and demand for the merchandise we offer in a given season and the related impact of such factors on the level of full-price sales;

•our ability to order an appropriate amount of merchandise to match customer demand and the related impact on the level of net markdowns incurred;

•factors affecting revenues generally;

•changes in occupancy costs primarily associated with the opening of new stores or distribution facilities; and

•the amount of vendor reimbursements we receive during the fiscal year.

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Selling, general and administrative expenses (excluding depreciation) (SG&A). SG&A principally consists of costs related to employee compensation and benefits in the selling and administrative support areas, advertising and catalog costs and insurance expense. A significant portion of our selling, general and administrative expenses are variable in nature and are dependent on the sales we generate.

Advertising costs incurred by our Specialty Retail segment consist primarily of print media costs related to promotional materials mailed to our customers, while advertising costs incurred by our Direct Marketing operation relate to the production, printing and distribution of our print catalogs and the production of the photographic content on our websites, as well as online marketing costs. We receive advertising allowances from certain of our merchandise vendors. Substantially all the advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the vendor’s merchandise in connection with our various advertising programs, primarily catalogs and other print media. As a result, these allowances are recorded as a reduction of our advertising costs when earned. Vendor allowances earned and recorded as a reduction to selling, general and administrative expenses aggregated approximately $27.6 million, or 2.4% of revenues, for the thirteen weeks ended October 27, 2007 and $20.6 million, or 2.0% of revenues, for the thirteen weeks ended October 28, 2006.

We also receive allowances from certain merchandise vendors in conjunction with compensation programs for employees who sell the vendor’s merchandise. These allowances are netted against the related compensation expense that we incur. Amounts received from vendors related to compensation programs were $17.9 million, or 1.6% of revenues, for the thirteen weeks ended October 27, 2007 and $16.2 million, or 1.6% of revenues, for the thirteen weeks ended October 28, 2006.

Changes in our selling, general and administrative expenses are affected primarily by the following factors:

•changes in the number of sales associates primarily due to new store openings and expansion of existing stores, including increased health care and related benefits expenses;

•changes in expenses incurred in connection with our advertising and marketing programs; and

•changes in expenses related to insurance and long-term benefits due to general economic conditions such as rising health care costs.

Income from credit card program. Pursuant to a long-term marketing and servicing alliance with HSBC, HSBC offers credit card and non-card payment plans bearing our brands and we receive ongoing payments from HSBC based on net credit card sales and compensation for marketing and servicing activities (HSBC Program Income). We recognize HSBC Program Income when earned.In the future, the HSBC Program Income may be:

•increased or decreased based upon future changes to our historical credit card program related to, among other things, the interest rates applied to unpaid balances and the assessment of late fees; and

•decreased based upon the level of future services we provide to HSBC.

33

Seasonality

We conduct our selling activities in two primary selling seasons—Fall and Spring. The Fall season is comprised of our first and second fiscal quarters and the Spring season is comprised of our third and fourth fiscal quarters.

Our first fiscal quarter is generally characterized by a higher level of full-price selling with a focus on the initial introduction of Fall season fashions. Aggressive in-store marketing activities designed to stimulate customer buying, a lower level of markdowns and higher margins are characteristic of this quarter. The second fiscal quarter is more focused on promotional activities related to the December holiday season, the early introduction of resort season collections from certain designers and the sale of Fall season goods on a marked down basis. As a result, margins are typically lower in the second fiscal quarter. However, due to the seasonal increase in sales that occurs during the holiday season, the second fiscal quarter is typically the quarter in which our revenues are the highest and in which expenses as a percentage of revenues are the lowest. Our working capital requirements are also the greatest in the first and second fiscal quarters as a result of higher seasonal requirements.

Similarly, the third fiscal quarter is generally characterized by a higher level of full-price selling with a focus on the initial introduction of Spring season fashions. Aggressive in-store marketing activities designed to stimulate customer buying, a lower level of markdowns and higher margins are again characteristic of this quarter. Revenues are generally the lowest in the fourth fiscal quarter with a focus on promotional activities offering Spring season goods to the customer on a marked down basis, resulting in lower margins during the quarter. Our working capital requirements are typically lower in the third and fourth fiscal quarters than in the other quarters.

A large percentage of our merchandise assortment, particularly in the apparel, fashion accessories and shoe categories, is ordered months in advance of the introduction of such goods. For example, women’s apparel, men’s apparel and shoes are typically ordered six to nine months in advance of the products being offered for sale while handbags, jewelry and other categories are typically ordered three to six months in advance. As a result, inherent in the successful execution of our business plans is our ability both to predict the fashion trends that will be of interest to our customers and to anticipate future spending patterns of our customer base.

We monitor the sales performance of our inventories throughout each season. We seek to order additional goods to supplement our original purchasing decisions when the level of customer demand is higher than originally anticipated. However, in certain merchandise categories, particularly fashion apparel, our ability to purchase additional goods can be limited. This can result in lost sales in the event of higher than anticipated demand of the fashion goods we offer or a higher than anticipated level of consumer spending. Conversely, in the event we buy fashion goods that are not accepted by the customer or the level of consumer spending is less than we anticipated, we typically incur a higher than anticipated level of markdowns, net of vendor allowances, to sell the goods that remain at the end of the season, resulting in lower operating profits. We believe that the experience of our merchandising and selling organizations helps to minimize the inherent risk in predicting fashion trends.

34

OPERATING RESULTS

Performance Summary

The following table sets forth certain items expressed as percentages of net revenues for the periods indicated.

	Thirteen weeks ended October 27, 2007		Thirteen weeks ended October 28, 2006
Revenues	100.0	%	100.0	%
Cost of goods sold including buying and occupancy costs (excluding depreciation)	58.9		58.4
Selling, general and administrative expenses (excluding depreciation)	24.0		23.8
Income from credit card program	(1.5	)	(1.6	)
Depreciation expense	3.1		3.2
Amortization of customer lists	1.2		1.3
Amortization of favorable lease commitments	0.4		0.4
Other income	(2.9	)	(0.4	)
Operating earnings	16.8		14.8
Interest expense, net	5.4		6.6
Earnings from continuing operations before income taxes	11.4		8.2
Income taxes	4.4		3.3
Earnings from continuing operations	7.0		5.0
Loss from discontinued operations, net of taxes	—		(2.3	)
Net earnings	7.0	%	2.6	%

35

Set forth in the following table is certain summary information with respect to our operations for the periods indicated.

(dollars in millions, except sales per square foot)	Thirteen weeks ended October 27, 2007			Thirteen weeks ended October 28, 2006
REVENUES
Specialty Retail stores	$	961.6		$	879.9
Direct Marketing	170.6			159.3
Total	$	1,132.2		$	1,039.2
OPERATING EARNINGS
Specialty Retail stores	$	165.6		$	156.6
Direct Marketing	23.2			20.8
Subtotal	188.8			177.4
Corporate	(13.6		)	(9.3		)
Amortization of customer lists and favorable lease commitments	(18.0		)	(18.0		)
Other income (1)	32.5			4.2
Total	$	189.7		$	154.3
OPERATING PROFIT MARGIN
Specialty Retail stores	17.2		%	17.8		%
Direct Marketing	13.6		%	13.1		%
Total	16.8		%	14.8		%
CHANGE IN COMPARABLE REVENUES (2)
Specialty Retail stores	6.4		%	5.4		%
Direct Marketing	7.1		%	14.7		%
Total	6.5		%	6.8		%
SALES PER SQUARE FOOT
Specialty Retail stores	$	163		$	155
STORE COUNT
Neiman Marcus and Bergdorf Goodman stores:
Open at beginning of period	40			38
Opened during the period	1			1
Open at end of period	41			39
Clearance centers:
Open at beginning of period	20			18
Opened during the period	1			—
Open at end of period	21			18
NON-GAAP FINANCIAL DATA EBITDA (3)	$	242.9		$	205.5
Adjusted EBITDA (3)	$	210.4		$	205.5

(1) For the first quarter of fiscal year 2008, other income represents a one-time pension curtailment gain of $32.5 million as a result of our decision to freeze Pension and SERP benefits as of December 31, 2007. For the first quarter of fiscal year 2007, other income represents the proceeds we received in connection with the merger of Wedding Channel.com, in which we held a minority interest, and The Knot. We had previously reduced our carrying value in this investment to zero.

(2)  Comparable revenues include 1) revenues derived from our retail stores open for more than 52 weeks, including stores that have been relocated or expanded and 2) revenues from our Direct Marketing operation. Comparable revenues exclude revenues from our discontinued operations (Kate Spade LLC).

(3)For an explanation of EBITDA and Adjusted EBITDA, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measure-EBITDA and Adjusted EBITDA.”

36

First Quarter Fiscal Year 2008 Highlights

Highlights from the first quarter of fiscal year 2008 include:

•Revenues—Our revenues for the first quarter of fiscal year 2008 were $1,132.2 million, an increase of 9.0% as compared to the first quarter of fiscal year 2007. This increase was attributable to 1) increases in comparable revenues, 2) revenues from new stores and 3) higher internet revenues.

Comparable revenues increased 6.5% in the first quarter of fiscal year 2008. This increase in comparable revenues was achieved on top of an increase in comparable revenues of 6.8% in the first quarter of fiscal year 2007.

For Specialty Retail stores, our sales per square foot for the last twelve trailing months increased by 5.5% to $647 as of October 2007 compared to $613 as of October 2006.

•Cost of goods sold including buying and occupancy costs (excluding depreciation)—COGS represented 58.9% of revenues in the first quarter of fiscal year 2008 and 58.4% of revenues in the first quarter of fiscal year 2007. This increase was due primarily to a higher level of markdowns incurred by our Specialty Retail stores.

•Selling, general and administrative expenses (excluding depreciation)—SG&A increased in the first quarter of fiscal year 2008 to 24.0% of revenues from 23.8% of revenues in the first quarter of fiscal year 2007. The increase in SG&A as a percentage of revenues is primarily due to 1) higher advertising and promotion costs incurred by our Specialty Retail stores, partially offset by 2) a lower level of marketing and advertising costs in our Direct Marketing operation due to higher internet revenues and 3) expense leveraging.

•Operating earnings—For the first quarter of fiscal year 2008, our operating earnings were $189.7 million, or 16.8% of revenues, compared to $154.3 million, or 14.8% of revenues, in the prior year fiscal quarter. The increase in operating earnings in the first quarter of fiscal year 2008 was primarily due to a one-time non-cash pension curtailment gain of $32.5 million, or 2.9% of revenues, as a result of our decision to freeze Pension and SERP benefits, offset by the increases in both COGS and SG&A described above.

37

Thirteen Weeks Ended October 27, 2007 Compared to Thirteen Weeks Ended October 28, 2006

Revenues. Our revenues for the first quarter of fiscal year 2008 of $1,132.2 million increased $93.0 million, or 9.0%, from $1,039.2 million in the first quarter of fiscal year 2007. The increase in revenues was due to increases in comparable revenues, revenues from new stores and higher internet revenues. Revenues increased in the first quarter of fiscal year 2008 compared to the prior year period at all our operating companies.

Comparable revenues for the first quarter of fiscal year 2008 were $1,106.5 million compared to $1,039.2 million in the prior year fiscal quarter, representing an increase of 6.5%. Comparable revenues increased in the first quarter of fiscal year 2008 by 6.4% for Specialty Retail stores and 7.1% for Direct Marketing compared to the first quarter of fiscal year 2007.

New stores generated sales of $25.7 million in the first quarter of fiscal year 2008. In the first quarter of fiscal year 2008, internet revenues by Direct Marketing were $124.1 million, an increase of 22.8% compared to the first quarter of fiscal year 2007. The increase in internet revenues was partially offset by decreases in catalog revenues as well as a decrease in revenues from the home décor category, primarily offered by our Horchow brand.

Cost of goods sold including buying and occupancy costs (excluding depreciation). COGS for the first quarter of fiscal year 2008 were 58.9% of revenues compared to 58.4% of revenues in the first quarter of fiscal year 2007.

The net increase in COGS as a percentage of revenues in the first quarter of fiscal year 2008 was primarily due to:

•decreased margins generated by our Specialty Retail stores due primarily to higher markdowns and a lower level of full-price sales in the first quarter of fiscal year 2008, partially offset by the leveraging of buying and occupancy costs; and

•decreased margins generated by our Direct Marketing segment due primarily to lower margins realized on delivery and processing revenues.

The higher level of markdowns incurred by our Specialty Retail stores in the first quarter of fiscal year 2008 is due to a lower than anticipated level of demand we experienced during the first quarter. As a result, we conducted various promotions in the first quarter to begin the liquidation of inventories held in excess of current and anticipated future sales trends. We expect to incur a higher level of markdowns in the second quarter of fiscal year 2008 as we continue promotional efforts to complete the sell-through of Fall season inventories.

Our Direct Marketing operation continues to increase the use of discounted and/or free shipping promotions to customers consistent with promotional activities by other direct marketing retailers. We believe such offers will continue through the second quarter of fiscal year 2008.

Selling, general and administrative expenses (excluding depreciation). SG&A expenses were 24.0% of revenues in the first quarter of fiscal year 2008 compared to 23.8% of revenues in the prior year fiscal period.

The net increase in SG&A expenses as a percentage of revenues in the first quarter of fiscal year 2008 was primarily due to:

•a higher level of advertising and promotions costs of approximately 0.5% of revenues incurred by our Specialty Retail stores during the first quarter of fiscal year 2008 in connection with 1) the celebration of the 100^th anniversary of Neiman Marcus in October 2007 and 2) promotional events and activities conducted to bolster demand and facilitate the sell-through of inventories held in excess of current and anticipated future sales trends, partially offset by;

•a decrease in marketing and advertising costs of approximately 0.2% of revenues incurred by Direct Marketing primarily due to higher internet revenues, which have a lower expense to revenue ratio than catalog revenues; and

•the leveraging of the fixed component of our SG&A expenses over a higher revenue base.

Income from credit card program. We received HSBC Program Income of $17.3 million, or 1.5% of revenues, in the first quarter of fiscal year 2008 compared to $16.4 million, or 1.6% of revenues, in the first quarter of fiscal year 2007.

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Depreciation expense. Depreciation expense was $35.1 million, or 3.1% of revenues, in the first quarter of fiscal year 2008 compared to $33.2 million, or 3.2% of revenues, in the prior year fiscal period. The $1.9 million increase in depreciation expense was primarily due to a higher level of capital spending in recent years.

Amortization expense. Amortization of intangible assets (customer lists and favorable lease commitments) aggregated $18.0 million, or 1.6% of revenues, in the first quarter of fiscal year 2008 compared to $18.0 million, or 1.7% of revenues, in the first quarter of fiscal year 2007.

Other income. In the first quarter of fiscal year 2008, we recorded a one-time pension curtailment gain of $32.5 million, or 2.9% of revenues, as a result of our decision to freeze Pension and SERP benefits as of December 31, 2007.

In the first quarter of fiscal year 2007, we received consideration aggregating $4.2 million, or 0.4% of revenues, in connection with the merger of Wedding Channel.com, in which we held a minority interest, and The Knot. We accounted for our investment in Wedding Channel.com under the cost method. In prior years, we had previously reduced our carrying value of this investment to zero.

Segment operating earnings. Segment operating earnings for our Specialty Retail stores and Direct Marketing segments do not reflect the impact of adjustments to revalue our assets and liabilities to estimated fair value at the Acquisition date. See Note 13 to our unaudited condensed consolidated financial statements.

Operating earnings for our Specialty Retail stores segment were $165.6 million, or 17.2% of Specialty Retail stores revenues, for the first quarter of fiscal year 2008 compared to $156.6 million, or 17.8% of Specialty Retail stores revenues, for the prior year fiscal period. The decrease in operating margin as a percentage of revenues was primarily due to 1) higher markdowns and a lower level of full-price sales as a result of lower than anticipated demand and 2) net increases in advertising and promotion costs.

Operating earnings for Direct Marketing increased to $23.2 million, or 13.6% of Direct Marketing revenues, in the first quarter of fiscal year 2008 from $20.8 million, or 13.1% of Direct Marketing revenues, for the prior year period. The increases in operating earnings and operating margin for Direct Marketing were primarily the result of 1) a decrease in advertising and marketing costs, as a percentage of revenues, due to the continued growth in internet revenues, partially offset by 2) a decrease in margins realized on delivery and processing revenues.

Total operating earnings in the first quarter of fiscal year 2008 were $189.7 million, or 16.8% of revenues, which included a curtailment gain of $32.5 million, or 2.9% of revenues. Total operating earnings in the first quarter of fiscal year 2007 were $154.3 million, or 14.8% of revenues. Excluding the curtailment gain, operating earnings margin decreased in the first quarter of fiscal year 2008 by 0.9% of revenue as a result of increases in COGS by 0.5% of revenue and SG&A expenses by 0.2% of revenue.

Interest expense, net. Net interest expense was $61.2 million, or 5.4% of revenues, in the first quarter of fiscal year 2008 and $68.8 million, or 6.6% of revenues, for the prior year period. The decrease in interest expense is primarily due to the repricing of our term loan as well as the paydown of $250 million of debt during fiscal year 2007. The significant components of interest expense are as follows:

(in thousands)	Thirteen weeks ended October 27, 2007		Thirteen weeks ended October 28, 2006
Senior Secured Term Loan Facility	$	27,976	$	35,703
2028 Debentures	2,185		2,226
Senior Notes	15,453		15,750
Senior Subordinated Notes	12,724		12,968
Amortization of debt issue costs	3,554		3,498
Other	832		1,040
Total interest expense	62,724		71,185
Less:
Interest income	855		1,642
Capitalized interest	646		725
Interest expense, net	$	61,223	$	68,818

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Income taxes. Our effective income tax rate for the thirteen weeks ended October 27, 2007 was 38.7% compared to 39.8% for the thirteen weeks ended October 28, 2006. Our effective income tax rate for the first quarter of fiscal year 2007 was unfavorably impacted by increases in tax liabilities.

We closed the Internal Revenue Service (IRS) examinations of federal tax returns for fiscal years 2004 and 2003 during the first quarter of fiscal year 2007 and paid the related tax liability during the second quarter of fiscal year 2007. The IRS is now examining our federal tax returns for fiscal years 2005 and 2006. We believe our recorded tax liabilities as of October 27, 2007 are sufficient to cover any potential assessments to be made by the IRS upon the completion of their examinations. We will continue to monitor the progress of the IRS examinations, as well as examinations by various state jurisdictions, and review our recorded tax liabilities for potential audit assessments. Adjustments to increase or decrease the recorded tax liabilities may be required in the future as additional facts become known.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year 2008. The cumulative effect of adopting FIN 48 resulted in a net increase to our accruals for uncertain tax positions of $9.1 million for the derecognition of certain tax benefits. This increase to our accruals was offset by a corresponding increase to goodwill as these uncertainties existed at the time of the Acquisition.

Non-GAAP Financial Measure – EBITDA and Adjusted EBITDA

We present the non-GAAP financial measure EBITDA and adjusted EBITDA because we use these measures to monitor and evaluate the performance of our business and believe the presentation of these measures will enhance investors’ ability to analyze trends in our business, evaluate our performance relative to other companies in our industry and evaluate our ability to service our debt. In addition, we use EBITDA and Adjusted EBITDA as components of the measurement of incentive compensation.

EBITDA and Adjusted EBITDA are not presentations made in accordance with GAAP and our computation of EBITDA and Adjusted EBITDA may vary from others in our industry. In addition, EBITDA and Adjusted EBITDA contain some, but not all, adjustments that are taken into account in the calculation of the components of various covenants in the indentures governing NMG’s senior secured Asset-Based Revolving Credit Facility, Senior Secured Term Loan Facility, Senior Notes and Senior Subordinated Notes. EBITDA and Adjusted EBITDA should not be considered as alternatives to operating earnings or net earnings as measures of operating performance or cash flows as measures of liquidity. EBITDA and Adjusted EBITDA have important limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. For example, EBITDA and Adjusted EBITDA:

•do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

•do not reflect changes in, or cash requirements for, our working capital needs;

•do not reflect our considerable interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

•exclude tax payments that represent a reduction in cash available; and

•do not reflect any cash requirements for assets being depreciated and amortized that may have to be replaced in the future.

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The following table reconciles earnings from continuing operations as reflected in our consolidated statements of earnings prepared in accordance with GAAP to EBITDA and Adjusted EBITDA:

(dollars in millions)	Thirteen weeks ended October 27, 2007			Thirteen weeks ended October 28, 2006
Earnings from continuing operations	$	78.8		$	51.5
Income taxes	49.8			34.0
Interest expense, net	61.2			68.8
Depreciation	35.1			33.2
Amortization of customer lists and favorable lease commitments	18.0			18.0
EBITDA (1)	242.9			205.5
Non-cash gain on curtailment of defined benefit retirement obligations (1)	(32.5		)	—
Adjusted EBITDA	$	210.4		$	205.5

(1)For the first quarter of fiscal year 2008, operating earnings and EBITDA include a one-time pension curtailment gain of $32.5 million as a result of our decision to freeze Pension and SERP benefits.

Inflation and Deflation

We believe changes in revenues and net earnings that have resulted from inflation or deflation have not been material during the periods presented. In recent years, we have experienced certain inflationary conditions related to 1) increases in product costs due primarily to changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and 2) increases in SG&A. We purchase a substantial portion of our inventory from foreign suppliers whose costs are affected by the fluctuation of their local currency against the dollar or who price their merchandise in currencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us most significantly; however, we source goods from numerous countries and thus are affected by changes in numerous currencies and, generally, by fluctuations in the U.S. dollar relative to such currencies. Accordingly, changes in the value of the dollar relative to foreign currencies may increase our cost of goods sold and if we are unable to pass such cost increases to our customers, our gross margins, and ultimately our earnings, would decrease. Foreign currency fluctuations could have a material adverse effect on our business, financial condition and results of operations in the future. We attempt to offset the effects of inflation through price increases and control of expenses, although our ability to increase prices may be limited by competitive factors. We attempt to offset the effects of merchandise deflation, which has occurred on a limited basis in recent years, through control of expenses. There is no assurance, however, that inflation or deflation will not materially affect our operations in the future.

LIQUIDITY AND CAPITAL RESOURCES

Our cash requirements consist principally of:

•the funding of our merchandise purchases;

•capital expenditures for new store construction, store renovations and upgrades of our management information systems;

•debt service requirements;

•income tax payments; and

•obligations related to our Pension Plan.

Our primary sources of short-term liquidity are comprised of cash on hand and availability under our Asset-Based Revolving Credit Facility. The amounts of cash on hand and borrowings under the Asset-Based Revolving Credit Facility are influenced by a number of factors, including revenues, working capital levels, vendor terms, the level of capital expenditures, cash requirements

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related to financing instruments and debt service obligations, Pension Plan funding obligations and our tax payment obligations, among others.

Our working capital requirements fluctuate during the fiscal year, increasing substantially during the first and second quarters of each fiscal year as a result of higher seasonal levels of inventories. We have typically financed the increases in working capital needs during the first and second fiscal quarters with cash flows from operations and, to a lesser extent, with cash provided from borrowings under our credit facilities. In the first quarter of both fiscal year 2008 and 2007, we have made no borrowings under our Asset-Based Revolving Credit Facility.

We believe that operating cash flows, available vendor financing and amounts available pursuant to our senior secured Asset-Based Revolving Credit Facility will be sufficient to fund our operations, anticipated capital expenditure requirements, debt service obligations, contractual obligations and commitments and Pension Plan funding requirements through the end of fiscal year 2008.

At October 27, 2007, cash and cash equivalents were $80.6 million compared to $159.4 million at October 28, 2006. Net cash used for operating activities was $13.8 million in the first quarter of fiscal 2008 compared to net cash used for operating activities of $20.3 million in the first quarter of fiscal 2007. Cash flows used for operating activities were lower in the first quarter of fiscal year 2008 than in the prior fiscal year period primarily due to 1) an $8.1 million decrease in cash interest requirements on indebtedness incurred in connection with the Acquisition and 2) a $3.0 million decrease in cash requirements for income taxes.

Net cash used for investing activities, representing capital expenditures, was $46.0 million in the first quarter of fiscal 2008 and $41.6 million in the first quarter of fiscal 2007. We incurred capital expenditures in the first quarter of fiscal year 2008 related to the construction of new stores in Natick and Topanga (the greater Los Angeles area) and the remodel of our Atlanta store. We incurred capital expenditures in the first quarter of fiscal year 2007 related to the construction of new stores in Charlotte, Austin and Natick and the remodels of our Houston, San Francisco and Atlanta stores. We opened our Charlotte store in September 2006, our Austin store in March 2007 and our Natick store in September 2007. We expect to open the Topanga store in Fall 2008. We currently project capital expenditures for fiscal year 2008 to be approximately $200 to $210 million.

Net cash used for financing activities was $0.8 million in the first quarter of fiscal year 2008 as compared to net cash used for financing activities of $2.5 million in the first quarter of fiscal year 2007.

Financing Structure at October 27, 2007

Our major sources of funds are comprised of vendor financing, a $600.0 million Asset-Based Revolving Credit Facility, $1,625.0 million Senior Secured Term Loan Facility, $700.0 million Senior Notes, $500.0 million Senior Subordinated Notes, $125.0 million 2028 Debentures and operating leases.

Senior Secured Asset-Based Revolving Credit Facility. On October 6, 2005, NMG entered into a credit agreement and related security and other agreements for a senior secured Asset-Based Revolving Credit Facility with Deutsche Bank Trust Company Americas as administrative agent and collateral agent. The Asset-Based Revolving Credit Facility provides financing of up to $600.0 million, subject to a borrowing base equal to at any time the lesser of 80% of eligible inventory (valued at the lower of cost or market value) and 85% of net orderly liquidation value of the eligible inventory, less certain reserves. The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice.

As of October 27, 2007, NMG had $575.7 million of unused borrowing availability under the Asset-Based Revolving Credit Facility based on a borrowing base of over $600.0 million and after giving effect to $24.3 million used for letters of credit.

See Note 4 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the Asset-Based Revolving Credit Facility.

Senior Secured Term Loan Facility. On October 6, 2005, NMG entered into a credit agreement and related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility with Credit Suisse as administrative agent and collateral agent. The full amount of the Senior Secured Term Loan Facility was borrowed on October 6, 2005. NMG voluntarily repaid $100.0 million principal amount of the loans under the Senior Secured Term Loan Facility in fiscal year 2006 and $250 million in fiscal year 2007.

At October 27, 2007, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the

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federal funds effective rate plus ¹/₂ of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. At October 27, 2007, the applicable margin with respect to base rate borrowings was 0.75% and the applicable margin with respect to LIBOR borrowings was 1.75%. The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 7.45% at October 27, 2007.

See Note 4 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the Senior Secured Term Loan Facility.

2028 Debentures. In May 1998, NMG issued $125.0 million aggregate principal amount of its 7.125% 2028 Debentures.

See Note 4 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the 2028 Debentures.

Senior Notes. In connection with the Acquisition, NMG incurred $700.0 million aggregate original principal amount of 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture) with Wells Fargo Bank, National Association, as trustee. The Senior Notes mature on October 15, 2015.

See Note 4 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the Senior Notes.

Senior Subordinated Notes. In connection with the Acquisition, NMG incurred $500.0 million aggregate principal amount of 10.375% Senior Subordinated Notes under a senior subordinated indenture (Senior Subordinated Indenture) with Wells Fargo Bank, National Association, as trustee. The Senior Subordinated Notes mature on October 15, 2015. Interest on the Senior Subordinated Notes is payable in cash semi-annually in arrears on each April 15 and October 15, commencing April 15, 2006.

See Note 4 of our Notes to Condensed Consolidated Financial Statements in Item 1 for a further description of the terms of the Senior Subordinated Notes.

Interest Rate Swaps. NMG uses derivative financial instruments to help manage its interest rate risk. Effective December 6, 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit its exposure to interest rate increases related to a portion of its floating rate indebtedness. The interest rate swap agreements terminate after five years. At October 27, 2007, the fair value of NMG’s interest rate swap agreements was a loss of approximately $10.6 million, which amount is included in other long-term liabilities.

As of the effective date, NMG designated the interest rate swaps as cash flow hedges. As a result, changes in the fair value of NMG’s swaps are recorded subsequent to the effective date as a component of other comprehensive income.

As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.489% to 6.733% per quarter through 2010 and result in an average fixed rate of 6.584%.

OTHER MATTERS

Factors That May Affect Future Results

Matters discussed in MD&A include forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “could,” “should,” “anticipate,” “believe,” “project” or “continue.” We make these forward-looking statements based on our expectations and beliefs concerning future events, as well as currently available data. These forward-looking statements involve a number of risks and uncertainties and, therefore, are not guarantees of future performance. A variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in our forward-looking statements. Factors that could affect future performance include, but are not limited, to:

Political and General Economic Conditions

•current political and general economic conditions or changes in such conditions including relationships between the United States and the countries from which we source our merchandise;

•terrorist activities in the United States and elsewhere;

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•political, social, economic, or other events resulting in the short- or long-term disruption in business at our stores, distribution centers or offices;

Customer Demographic Issues

•changes in the demographic or retail environment;

•changes in consumer confidence resulting in a reduction of discretionary spending on goods;

•changes in consumer preferences or fashion trends;

•changes in our relationships with key customers;

•changes in our proprietary credit card arrangement that adversely impact the ability to provide credit to our customers;

Merchandise Procurement and Supply Chain Considerations

•changes in our relationships with designers, vendors and other sources of merchandise, including adverse changes in their financial viability;

•delays in receipt of merchandise ordered due to work stoppages or other causes of delay in connection with either the manufacture or shipment of such merchandise;

•changes in foreign currency exchange or inflation rates;

•significant increases in paper, printing and postage costs;

Industry and Competitive Factors

•competitive responses to our loyalty programs, marketing, merchandising and promotional efforts or inventory liquidations by vendors or other retailers;

•seasonality of the retail business;

•adverse weather conditions or natural disasters, particularly during peak selling seasons;

•delays in anticipated store openings and renovations;

•our success in enforcing our intellectual property rights;

Employee Considerations

•changes in key management personnel and our ability to retain key management personnel;

•changes in our relationships with certain of our key sales associates and our ability to retain our key sales associates;

Legal and Regulatory Issues

•changes in government or regulatory requirements increasing our costs of operations;

•litigation that may have an adverse effect on our financial results or reputation;

Leverage Considerations

•the effects of incurring a substantial amount of indebtedness under our senior secured credit facilities and our senior notes and senior subordinated notes;

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•the effects upon us of complying with the covenants contained in our senior secured credit facilities and the indentures governing our senior notes and senior subordinated notes; and

•restrictions the terms and conditions of the indebtedness under our senior secured credit facilities may place on our ability to respond to changes in our business or to take certain actions.

Other Factors

•impact of funding requirements related to our noncontributory defined benefit pension plan;

•the design and implementation of new information systems as well as enhancements of existing systems; and

•other risks, uncertainties and factors set forth in this Quarterly Report on Form 10-Q, including those set forth in Item 1A, “Risk Factors”.

The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. Except to the extent required by law, we undertake no obligation to update or revise (publicly or otherwise) any forward-looking statements to reflect subsequent events, new information or future circumstances.

Critical Accounting Policies

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions about future events. These estimates and assumptions affect amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the Condensed Consolidated Financial Statements. Our current estimates are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. We make adjustments to our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates we used in preparing the accompanying Condensed Consolidated Financial Statements.

See Note 1 of the Notes to Condensed Consolidated Financial Statements in Item 1 for a summary of our critical accounting policies. A complete description of our critical accounting policies is included in our Annual Report to Shareholders on Form 10-K for the fiscal year ended July 28, 2007.

Recent Accounting Pronouncements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure certain assets and liabilities. SFAS 157 will apply whenever another standard requires or permits assets or liabilities to be measured at fair value. The standard does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, or our fiscal year ending August 1, 2009. We have not yet evaluated the impact, if any, of adopting SFAS 157 on our consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 expands opportunities to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. This Statement is effective for fiscal years beginning after November 15, 2007, or our fiscal year ending August 1, 2009. We have not yet evaluated the impact, if any, of adopting SFAS 159 on our consolidated financial statements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The market risk inherent in the Company’s financial instruments represents the potential loss arising from adverse changes in interest rates. The Company does not enter into derivative financial instruments for trading purposes. The Company seeks to manage exposure to adverse interest rate changes through its normal operating and financing activities. The Company is exposed to interest rate risk through its borrowing activities, which are described in Note 4 to the condensed consolidated financial statements.

As of October 27, 2007, NMG had no borrowings outstanding under its Asset-Based Revolving Credit Facility that bears interest at floating rates. Future borrowings under NMG’s Asset-Based Revolving Facility, to the extent of outstanding borrowings, would be affected by interest rate changes.

At October 27, 2007, NMG had $1,625.0 million of debt under its Senior Secured Term Loan Facility issued in connection with the Acquisition that bears interest at floating rates.

NMG uses derivative financial instruments to help manage its interest rate risk. Effective December 6, 2005, NMG  entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit its exposure to interest rate increases related to a portion of its floating rate indebtedness. The interest rate swap agreements terminate after five years. As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.489% to 6.733% per quarter through 2010 and result in an average fixed rate of 6.584%. With respect to outstanding borrowings in excess of $1,000.0 million on the Senior Secured Term Loan Facility, such borrowings are at floating rates. A 1% increase in these floating rates would increase annual interest expense by approximately $6.3 million.

The effects of changes in the U.S. equity and bond markets serve to increase or decrease the value of pension plan assets, resulting in increased or decreased cash funding by the Company. The Company seeks to manage exposure to adverse equity and bond returns by maintaining diversified investment portfolios and utilizing professional investment managers.

ITEM 4. CONTROLS AND PROCEDURES

a.Disclosure Controls and Procedures.

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of October 27, 2007, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely basis within the time periods specified in the Securities and Exchange Commission’s rules and forms.

b.Changes in Internal Control over Financial Reporting.

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems. No change occurred in our internal controls over financial reporting during the quarter ended October 27, 2007 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

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NEIMAN MARCUS, INC.

PART II

ITEM 1.        LEGAL PROCEEDINGS

Note 11 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 is incorporated herein by reference as if fully restated herein. Note 11 contains forward-looking statements that are subject to the risks and uncertainties discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Factors That May Affect Future Results.”

ITEM 1A.     RISK FACTORS

Risks Related to Our Structure and NMG’s Indebtedness

Because our ownership of NMG accounts for substantially all of our assets and operations, we are subject to all risks applicable to NMG.

We are a holding company. NMG and its subsidiaries conduct substantially all of our consolidated operations and own substantially all of our consolidated assets. As a result, we are subject to all risks applicable to NMG. In addition, NMG’s Asset-Based Revolving Credit Facility, NMG’s Senior Secured Term Loan Facility and the indentures governing NMG’s senior notes and senior subordinated notes contain provisions limiting NMG’s ability to distribute earnings to us, in the form of dividends or otherwise.

NMG has a substantial amount of indebtedness, which may adversely affect NMG’s cash flow and its ability to operate the business, to comply with debt covenants and make payments on its indebtedness.

We are highly leveraged. As of October 27, 2007, the principal amount of NMG’s total indebtedness was approximately $2,954.7 million and the unused borrowing availability under the $600 million Asset-Based Revolving Credit Facility was approximately $575.7 million after giving effect to $24.3 million of letters of credit outstanding thereunder. NMG’s substantial indebtedness, combined with its lease and other financial obligations and contractual commitments, could have other important consequences. For example, it could:

•make it more difficult for NMG to satisfy its obligations with respect to its indebtedness and any failure to comply with the obligations of any of its debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing NMG’s indebtedness;

•make NMG more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation;

•require NMG to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, thereby reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes;

•limit NMG’s flexibility in planning for, or reacting to, changes in NMG’s business and the industry in which it operates;

•place NMG at a competitive disadvantage compared to its competitors that are less highly leveraged and therefore may be able to take advantage of opportunities that its leverage prevents it from exploiting; and

•limit NMG’s ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution of its business strategy or other purposes.

Any of the above listed factors could materially adversely affect NMG’s business, financial condition and results of operations.

In addition, NMG’s interest expense could increase if interest rates increase because the entire amount of the indebtedness under the senior secured credit facilities bears interest at floating rates. As of October 27, 2007, NMG had approximately $1,625.0 million principal amount of floating rate debt, consisting of outstanding borrowings under Senior Secured Term Loan Facility. NMG also had at that date approximately $575.7 million of unused floating rate debt borrowing capacity available under

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the Asset-Based Revolving Credit Facility based on a borrowing base of over $600.0 million at that date and after giving effect to $24.3 million used for letters of credit. Effective December 6, 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit its exposure to interest rate increases related to a portion of its floating rate indebtedness.

To service NMG’s indebtedness, it will require a significant amount of cash. NMG’s ability to generate cash depends on many factors beyond its control, and any failure to meet the its debt service obligations could harm its business, financial condition and results of operations.

NMG’s ability to pay interest on and principal of the debt obligations will primarily depend upon NMG’s future operating performance. As a result, prevailing economic conditions and financial, business and other factors, many of which are beyond our control, will affect its ability to make these payments.

If NMG does not generate sufficient cash flow from operations to satisfy the debt service obligations, NMG may have to undertake alternative financing plans, such as refinancing or restructuring its indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. Our ability to restructure or refinance its debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of NMG’s debt could be at higher interest rates and may require it to comply with more onerous covenants, which could further restrict its business operations. The terms of existing or future debt instruments may restrict NMG from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on NMG’s outstanding indebtedness on a timely basis would likely result in a reduction of NMG’s credit rating, which could harm its ability to incur additional indebtedness on acceptable terms.

Contractual limitations on NMG’s ability to execute any necessary alternative financing plans could exacerbate the effects of any failure to generate sufficient cash flow to satisfy its debt service obligations. The Asset-Based Revolving Credit Facility permits NMG to borrow up to $600.0 million; however, NMG’s ability to borrow thereunder is limited by a borrowing base, which at any time will equal the lesser of 80% of eligible inventory valued at the lower of cost or market value and 85% of the net orderly liquidation value of the eligible inventory, less certain reserves. In addition, our ability to borrow under this facility is limited by a minimum liquidity condition, providing that, if less than $60.0 million is available at any time, NMG is not permitted to borrow any additional amounts under the Asset-Based Revolving Credit Facility unless NMG’s pro forma ratio of consolidated EBITDA to consolidated Fixed Charges (as such terms are defined in the credit agreement for the senior secured asset-based revolving credit facility) is at least 1.1 to 1.0. Our ability to meet this financial ratio may be affected by events beyond our control which may prevent us from meeting this ratio.

NMG’s inability to generate sufficient cash flow to satisfy its debt service obligations, or to refinance its obligations at all or on commercially reasonable terms, would have an adverse effect, which could be material, on NMG’s business, financial condition and results of operations.

The terms of NMG’s Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facility and the indentures governing the Senior Notes, the Senior Subordinated Notes and the 2028 Debentures may restrict NMG’s current and future operations, particularly its ability to respond to changes in its business or to take certain actions.

The credit agreements governing NMG’s Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facility credit facilities and the indentures governing the Senior Notes, the Senior Subordinated Notes and the 2028 Debentures contain, and any future indebtedness of NMG would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on NMG’s ability to engage in acts that may be in its best long-term interests. The indentures governing the Senior Notes, the Senior Subordinated Notes and the 2028 Debentures and the credit agreements governing the senior secured credit facilities include covenants that, among other things, restrict NMG’s ability to:

•incur additional indebtedness;

•pay dividends on NMG’s capital stock or redeem, repurchase or retire its capital stock or indebtedness;

•make investments;

•create restrictions on the payment of dividends or other amounts to NMG from NMG’s restricted subsidiaries;

•engage in transactions with its affiliates;

•sell assets, including capital stock of NMG’s subsidiaries;

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•consolidate or merge;

•create liens; and

•enter into sale and lease back transactions.

In addition, NMG’s ability to borrow under the Asset-Based Revolving Credit Facility is limited by a borrowing base and a minimum liquidity condition, as described above.

Moreover, NMG’s Asset-Based Revolving Credit Facility provides discretion to the agent bank acting on behalf of the lenders to impose additional availability and other reserves, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the agent bank will not impose such reserves or, were it to do so, that the resulting impact of this action would not materially and adversely impair NMG’s liquidity.

A breach of any of the restrictive covenants would result in a default under the Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facility. If any such default occurs, the lenders under the Asset-Based Revolving Credit Facility and Senior Secured Term Loan Facility may elect to declare all outstanding borrowings under such facilities, together with accrued interest and other fees, to be immediately due and payable, or enforce their security interest, any of which would result in an event of default under NMG’s Senior Notes and Senior Subordinated Notes and 2028 Debentures. The lenders would also have the right in these circumstances to terminate any commitments they have to provide further borrowings.

The operating and financial restrictions and covenants in these debt agreements and any future financing agreements may adversely affect NMG’s ability to finance future operations or capital needs or to engage in other business activities.

Risks Related to Our Business and Industry

The specialty retail industry is highly competitive.

The specialty retail industry is highly competitive and fragmented. Competition is strong both to attract and sell to customers and to establish relationships with, and obtain merchandise from, key vendors.

We compete for customers with specialty retailers, traditional and high-end department stores, national apparel chains, vendor-owned proprietary boutiques, individual specialty apparel stores and direct marketing firms. We compete for customers principally on the basis of quality and fashion, customer service, value, assortment and presentation of merchandise, marketing and customer loyalty programs and, in the case of Neiman Marcus and Bergdorf Goodman, store ambiance. In our Specialty Retail business, merchandise assortment is a critical competitive factor, and retail stores compete for exclusive, preferred and limited distribution arrangements with key designers. Many of our competitors are larger than we are and have greater financial resources than we do. In addition, certain designers from whom we source merchandise have established competing free-standing retail stores in the same vicinity as our stores. If we fail to successfully compete for customers or merchandise, our business will suffer.

We are dependent on our relationships with certain designers, vendors and other sources of merchandise.

Our relationships with established and emerging designers are a key factor in our position as a retailer of high-fashion merchandise, and a substantial portion of our revenues is attributable to our sales of designer merchandise. Many of our key vendors limit the number of retail channels they use to sell their merchandise and competition among luxury retailers to obtain and sell these goods is intense. Our relationships with our designers have been a significant contributor to our past success. We have no guaranteed supply arrangements with our principal merchandising sources. Accordingly, there can be no assurance that such sources will continue to meet our quality, style and volume requirements. Moreover, nearly all of the brands of our top designers are sold by competing retailers, and many of our top designers also have their own dedicated retail stores. If one or more of our top designers were to cease providing us with adequate supplies of merchandise or, conversely, were to increase sales of merchandise through its own stores or to the stores of our competitors, our business could be adversely affected. In addition, any decline in the popularity or quality of any of our designer brands could adversely affect our business.

If we significantly overestimate our future sales, our profitability may be adversely affected.

We make decisions regarding the purchase of our merchandise well in advance of the season in which it will be sold. For example, women’s apparel, men’s apparel and shoes are typically ordered six to nine months in advance of the products being

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offered for sale while handbags, jewelry and other categories are typically ordered three to six months in advance. If our sales during any season, particularly a peak season, are significantly lower than we expect for any reason, we may not be able to adjust our expenditures for inventory and other expenses in a timely fashion and may be left with a substantial amount of unsold inventory. If that occurs, we may be forced to rely on markdowns or promotional sales to dispose of excess inventory. This could have an adverse effect on our margins and operating income. At the same time, if we fail to purchase a sufficient quantity of merchandise, we may not have an adequate supply of products to meet consumer demand. This may cause us to lose sales or harm our customer relationships.

Our failure to identify changes in consumer preferences or fashion trends may adversely affect our performance.

Our success depends in large part on our ability to identify fashion trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner. If we fail to adequately match our product mix to prevailing customer tastes, we may be required to sell our merchandise at higher average markdown levels and lower average margins. Furthermore, the products we sell often require long lead times to order and must appeal to consumers whose preferences cannot be predicted with certainty and often change rapidly. Consequently, we must stay abreast of emerging lifestyle and consumer trends and anticipate trends and fashions that will appeal to our consumer base. Any failure on our part to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect our business.

Our business and performance may be affected by our ability to implement our store expansion and remodeling strategies.

Based upon our expansion strategy, we expect that planned new stores will add over 565,000 square feet of new store space over approximately the next three fiscal years, representing an increase of approximately 10% above the current aggregate square footage of our full-line Neiman Marcus and Bergdorf Goodman stores, and that our store remodeling program will add additional new store space from remodels that are already underway. New store openings involve certain risks, including constructing, furnishing and supplying a store in a timely and cost effective manner, accurately assessing the demographic or retail environment at a given location, hiring and training quality staff, obtaining necessary permits and zoning approvals, obtaining commitments from a core group of vendors to supply the new store, integrating the new store into our distribution network and building customer awareness and loyalty. In undertaking store remodels, we must complete the remodel in a timely, cost effective manner, minimize disruptions to our existing operations, and succeed in creating an improved shopping environment. If we fail to execute on these or other aspects of our store expansion and remodeling strategy, we could suffer harm to our sales, an increase in costs and expenses and an adverse effect on our business.

Acts of terrorism could adversely affect our business.

The economic downturn that followed the terrorist attacks of September 11, 2001 had a material adverse effect on our business. Any further acts of terrorism or other future conflicts may disrupt commerce and undermine consumer confidence, cause a downturn in the economy generally, cause consumer spending or shopping center traffic to decline or reduce the desire of our customers to make discretionary purchases. Any of the foregoing factors could negatively impact our sales revenue, particularly in the case of any terrorist attack targeting retail space, such as a shopping center. Furthermore, an act of terrorism or war, or the threat thereof, could negatively impact our business by interfering with our ability to obtain merchandise from foreign manufacturers. Any future inability to obtain merchandise from our foreign manufacturers or to substitute other manufacturers, at similar costs and in a timely manner, could adversely affect our business.

Deterioration in economic conditions could adversely affect our business.

The merchandise we sell consists in large part of luxury retail goods. The purchase of these goods by customers is discretionary, and therefore highly dependent upon the level of consumer spending, particularly among affluent customers. Accordingly, sales of these products may be adversely affected by an economic downturn, increases in consumer debt levels, uncertainties regarding future economic prospects or a decline in consumer confidence. An economic downturn in the United States generally or in any of the geographic areas in which we have stores, particularly in Texas, California, Florida and the New York City metropolitan area, from which we derive a significant portion of our revenues, could have a material adverse effect on our business and results of operations.

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The loss of any of our senior management team or attrition among our buyers or key sales associates could adversely affect our business.

Our success in the specialty retail industry will continue to depend to a significant extent on our senior management team, buyers and key sales associates. We rely on the experience of our senior management, who have specific knowledge relating to us and our industry that would be difficult to replace. If we were to lose a portion of our buyers or key sales associates, our ability to benefit from long-standing relationships with key vendors or to provide relationship-based customer service may suffer. We may not be able to retain our current senior management team, buyers or key sales associates and the loss of any of these individuals could adversely affect our business.

Inflation may adversely affect our business operations in the future.

In recent years, we have experienced certain inflationary conditions in our cost base due primarily to (1) changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and (2) increases in selling, general and administrative expenses, particularly with regard to employee benefits. Inflation can harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base. If inflation in these or other costs worsens, we may not be able to offset the effects of inflation and cost increases through control of expenses, passing cost increases on to customers or any other method. Any future inflation could adversely affect our profitability and our business.

Failure to maintain competitive terms under our loyalty programs could adversely affect our business.

We maintain loyalty programs that are designed to cultivate long-term relationships with our customers and enhance the quality of service we provide to our customers. We must constantly monitor and update the terms of our loyalty programs so that they continue to meet the demands and needs of our customers and remain competitive with loyalty programs offered by other high-end specialty retailers. Given that approximately 50% of our revenues at Neiman Marcus stores during each of the last three calendar years were generated by our InCircle loyalty program members, our failure to continue to provide quality service and competitive loyalty programs to our customers through the InCircle loyalty program could adversely affect our business.

Changes in our credit card arrangements, applicable regulations and consumer credit patterns could adversely impact our ability to facilitate the provision of consumer credit to our customers and adversely affect our business.

We maintain a proprietary credit card program through which credit is extended to customers under the “Neiman Marcus” and “Bergdorf Goodman” names. Because a majority of our revenues were transacted through our proprietary credit cards, changes in our proprietary credit card arrangement that adversely impact our ability to facilitate the provision of consumer credit may adversely affect our performance.

In July 2005, we sold our approximately three million private label credit card accounts and related assets, as well as the outstanding balances associated with such accounts and we entered into a long-term marketing and servicing alliance with HSBC that expires in June 2010. Under the terms of this alliance, HSBC offers credit cards and non-card payment plans and bears all credit risk with respect to sales transacted on the cards bearing our brands. We receive on-going payments from HSBC related to credit card sales. In addition, we continue to handle key customer service functions, including new account processing, most transaction authorization, billing adjustments, collection services and customer inquiries for which we receive additional compensation from HSBC. As part of this transaction, we have changed, and will continue to change, the terms of credit offered to our customers following the Credit Card Sale.

The purchaser of our credit card business has discretion over certain policies and arrangements with our credit card customers and may change these policies and arrangements in ways that affect our relationship with these customers. In addition, there can be no assurance that, upon expiration of the current alliance with HSBC, that we will be able to enter into a replacement arrangement on terms comparable to the current arrangement. Any changes in our credit card arrangements may adversely affect our credit card program and ultimately, our business.

Credit card operations are subject to numerous federal and state laws that impose disclosure and other requirements upon the origination, servicing and enforcement of credit accounts and limitations on the maximum amount of finance charges that may be charged by a credit provider. The purchaser of our credit card business is subject to regulations to which we were not subject prior to the Credit Card Sale. Any effect of these regulations or change in the regulation of credit arrangements that would materially limit the availability of credit to our customer base could adversely affect our business. In addition, changes in credit card use, payment patterns, and default rates may result from a variety of economic, legal, social, and other factors that we cannot control or predict with certainty.

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Our business can be affected by extreme or unseasonable weather conditions.

Extreme weather conditions in the areas in which our stores are located could adversely affect our business. For example, heavy snowfall, rainfall or other extreme weather conditions over a prolonged period might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. Our business is also susceptible to unseasonable weather conditions. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with those unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions would adversely affect our business.

We are subject to numerous regulations that could affect our operations.

We are subject to customs, truth-in-advertising and other laws, including consumer protection regulations and zoning and occupancy ordinances that regulate retailers generally and/or govern the importation, promotion and sale of merchandise and the operation of retail stores and warehouse facilities. Although we undertake to monitor changes in these laws, if these laws change without our knowledge, or are violated by importers, designers, manufacturers or distributors, we could experience delays in shipments and receipt of goods or be subject to fines or other penalties under the controlling regulations, any of which could adversely affect our business.

Our revenues and cash requirements are affected by the seasonal nature of our business.

The specialty retail industry is seasonal in nature, with a higher level of sales typically generated in the fall and holiday selling seasons. We have in the past experienced significant fluctuation in our revenues from quarter to quarter with a disproportionate amount of our revenues falling in our second fiscal quarter, which coincides with the holiday season. In addition, we have significant additional cash requirements in the period leading up to the months of November and December in anticipation of higher sales volume in those periods, including payments relating to additional inventory, advertising and employees.

Our business is affected by foreign currency fluctuations.

We purchase a substantial portion of our inventory from foreign suppliers whose cost to us is affected by the fluctuation of their local currency against the dollar or who price their merchandise in currencies other than the dollar. Fluctuations in the Euro-U.S. dollar exchange rate affect us most significantly; however, we source goods from numerous countries and thus are affected by changes in numerous currencies and, generally, by fluctuations in the U.S. dollar relative to such currencies. Accordingly, changes in the value of the dollar relative to foreign currencies may increase our cost of goods sold and if we are unable to pass such cost increases on to our customers, our gross margins, and ultimately our earnings, would decrease. Foreign currency fluctuations could have a material adverse effect on our business, financial condition and results of operations in the future.

Conditions in, and the United States’ relationship with, the countries where we source our merchandise could affect our sales.

A substantial majority of our merchandise is manufactured overseas, mostly in Europe. As a result, political instability or other events resulting in the disruption of trade from other countries or the imposition of additional regulations relating to or duties upon imports could cause significant delays or interruptions in the supply of our merchandise or increase our costs, either of which could have a material adverse effect on our business. If we are forced to source merchandise from other countries, those goods may be more expensive or of a different or inferior quality from the ones we now sell. The importance to us of our existing designer relationships could present additional difficulties, as it may not be possible to source merchandise from a given designer from alternative jurisdictions. If we were unable to adequately replace the merchandise we currently source with merchandise produced elsewhere, our business could be adversely affected.

Significant increases in costs associated with the production of catalogs and other promotional materials may adversely affect our operating income.

We advertise and promote in-store events, new merchandise and fashion trends through print catalogs and other promotional materials mailed on a targeted basis to our customers. Significant increases in paper, printing and postage costs could affect the cost of producing these materials and as a result, may adversely affect our operating income.

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We are indirectly owned and controlled by the Sponsors, and their interests as equity holders may conflict with those of our creditors.

We are indirectly owned and controlled by the Sponsors and certain other equity investors, and the Sponsors have the ability to control our policies and operations. The interests of the Sponsors may not in all cases be aligned with those of our creditors. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of our equity holders might conflict with our creditors’ interests. In addition, our equity holders may have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in their judgment, could enhance their equity investments, even though such transactions might involve risks to holders of our indebtedness. Furthermore, the Sponsors may in the future own businesses that directly or indirectly compete with us. One or more of the Sponsors also may pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

If we are unable to enforce our intellectual property rights, or if we are accused of infringing on a third party’s intellectual property rights, our net income may decline.

We and our subsidiaries currently own our tradenames and service marks, including the “Neiman Marcus” and “Bergdorf Goodman” marks. Our tradenames and service marks are registered in the United States and in various foreign countries, primarily in Europe. The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States. Moreover, we are unable to predict the effect that any future foreign or domestic intellectual property legislation or regulation may have on our existing or future business. The loss or reduction of any of our significant proprietary rights could have an adverse effect on our business.

Additionally, third parties may assert claims against us alleging infringement, misappropriation or other violations of their tradename or other proprietary rights, whether or not the claims have merit. Claims like these may be time consuming and expensive to defend and could result in our being required to cease using the tradename or other rights and selling the allegedly infringing products. This might have an adverse affect on our sales and cause us to incur significant litigation costs and expenses.

Failure to successfully maintain and update information technology systems and enhance existing systems may adversely affect our business.

To keep pace with changing technology, we must continuously provide for the design and implementation of new information technology systems as well as enhancements of our existing systems. Any failure to adequately maintain and update the information technology systems supporting our online operations, sales operations or inventory control could prevent our customers from purchasing merchandise on our websites or prevent us from processing and delivering merchandise, which could adversely affect our business.

Delays in receipt of merchandise in connection with either the manufacturing or shipment of such merchandise can affect our performance.

Substantially all of our merchandise is delivered to us by our vendors as finished goods and is manufactured in numerous locations, including Europe and the United States and, to a lesser extent, China, Mexico and South America. Our vendors rely on third party carriers to deliver merchandise to our distribution facilities. In addition, our success depends on our ability to source and distribute merchandise efficiently to our Specialty Retail stores and Direct Marketing customers. Events such as U.S. or foreign labor strikes, natural disasters, work stoppages or boycotts affecting the manufacturing or transportation sectors could increase the cost or reduce the supply of merchandise available to us and could adversely affect our results of operations.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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ITEM 6.EXHIBITS

2.1	Agreement and Plan of Merger, dated May 1, 2005, among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and Newton Merger Sub, Inc., incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.
2.2	Purchase, Sale and Servicing Transfer Agreement dated as of June 8, 2005, among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A. and HSBC Finance Corporation, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated June 8, 2005.
3.1	Amended and Restated Certificate of Incorporation of Neiman Marcus, Inc., incorporated herein by reference to The Neiman Marcus Group, Inc.’s Registration Statement on Form S-1 (Registration No. 333-133184) dated April 10, 2006.
3.2	Amended and Restated Bylaws of Neiman Marcus, Inc., incorporated herein by reference to The Neiman Marcus Group, Inc.’s Registration Statement on Form S-1 (Registration No. 333-133184) dated April 10, 2006.
4.1	Indenture, dated as of May 27, 1998, between The Neiman Marcus Group, Inc. and The Bank of New York, as trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.
4.2	Form of 7.125% Senior Notes Due 2028, dated May 27, 1998, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.
4.3	Senior Indenture dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.4	Senior Subordinated Indenture dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, and Wells Fargo Bank, National Association, trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.5	Form of 9%/9 3/4% Senior Notes due 2015, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.6	Form of 10 3/8% Senior Subordinated Notes due 2015, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.7	Registration Rights Agreement dated October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, The Neiman Marcus Group, Inc., and the Initial Purchasers, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
4.8	First Supplemental Indenture, dated as of July 11, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor trustee, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated July 11, 2006.
4.9	Second Supplemental Indenture, dated as of August 14, 2006, to the Indenture, dated as of May 27, 1998, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., and The Bank of New York Trust Company, N.A., as successor trustee, incorporated herein by reference to the Company’s Current Report on Form 8-K dated August 15, 2006.
10.1*	Employment Agreement dated as of October 6, 2005 by and among The Neiman Marcus Group, Inc., Newton Acquisition Merger Sub, Inc., Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.

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10.2*	Rollover Agreement dated as of October 4, 2005 by and among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and Burton M. Tansky, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.3*	Form of Rollover Agreement by and among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., and certain members of management, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.4	Credit Agreement dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company Americas, as administrative agent and collateral agent, Credit Suisse and Deutsche Bank Securities Inc., as joint lead arrangers, Banc of America Securities LLC and Goldman Sachs Credit Partners L.P., as co-arrangers, Credit Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit Partners L.P., as joint bookrunners, and Credit Suisse, Banc of America Securities LLC and Goldman Sachs Credit Partners L.P., as co-syndication agents, General Electric Capital Corporation as documentation agent and the lenders thereunder, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.5	Credit Agreement dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., the Subsidiary Guarantors, Credit Suisse, as administrative agent and collateral agent, Credit Suisse and Deutsche Bank Securities Inc. as joint lead arrangers, Banc of America Securities LLC and Goldman Sachs Credit Partners L.P. as co-arrangers, Credit Suisse, Deutsche Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit Partners L.P. as joint bookrunners, Deutsche Bank Securities Inc., Banc of America Securities LLC and Goldman Sachs Credit Partners L.P. as co-syndication agents and the lenders thereunder, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.6	Pledge and Security Agreement dated as of October 6, 2005 among Newton Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., Newton Acquisition, Inc., the Subsidiary Guarantors and Deutsche Bank Trust Company Americas, as administrative agent and collateral agent, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.7	Pledge and Security and Intercreditor Agreement dated as of October 6, 2005, among Newton Acquisition Merger Sub, Inc., The Neiman Marcus Group, Inc., Newton Acquisition, Inc., the Subsidiary Guarantors and Credit Suisse, as administrative agent and collateral agent, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.8	Lien Subordination and Intercreditor Agreement dated as of October 6, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc., the Subsidiary Guarantors, Deutsche Bank Trust Company Americas, as revolving facility agent, and Credit Suisse, as term loan agent, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.9	Form of First Priority Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement from The Neiman Marcus Group, Inc. to Credit Suisse, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.10	Form of First Priority Leasehold Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement from The Neiman Marcus Group, Inc. to Credit Suisse, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.11	Form of Second Priority Mortgage, Assignment of Leases and Rents, Security Agreement and Financing Statement from The Neiman Marcus Group, Inc. to Deutsche Bank Trust Company Americas, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.12	Form of Second Priority Leasehold Mortgage, Assignment of Lease and Rents, Security Agreement and Financing Statement from The Neiman Marcus Group, Inc. to Deutsche Bank Trust Company Americas, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.

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10.13	Amendment No. 1 dated as of October 6, 2005 to the Credit Agreement dated as of October 6, 2005 among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., each subsidiary of The Neiman Marcus Group, Inc. from time to time party thereto, the Lenders thereunder, and Credit Suisse, as administrative agent and as collateral agent for the Lenders, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated October 12, 2005.
10.14*	Newton Acquisition, Inc. Management Equity Incentive Plan, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated December 5, 2005.
10.15*	Stock Option Grant Agreement made as of November 29, 2005 between Newton Acquisition, Inc. and Burton M. Tansky, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated December 5, 2005.
10.16*	Form of Stock Option Grant Agreement made as of November 29, 2005 between Newton Acquisition, Inc. and certain eligible key employees, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated December 5, 2005.
10.17	Amendment No. 2 dated as of January 26, 2006 to the Credit Agreement dated as of October 6, 2005, as amended, among The Neiman Marcus Group, Inc., Newton Acquisition, Inc., each subsidiary of The Neiman Marcus Group, Inc. from time to time party thereto, the Lenders thereunder and Credit Suisse, as administrative agent and collateral agent for the Lenders, incorporated by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated January 30, 2006.
10.18*	Employment Agreement between The Neiman Marcus Group, Inc. and Karen Katz, dated February 1, 2006, effective as of October 6, 2005, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated February 1, 2006.
10.19	Management Services Agreement, dated as of October 6, 2005 among Newton Acquisition Merger Sub, Inc., Newton Acquisition, Inc., TPG GenPar IV, L.P., TPG GenPar III, L.P. and Warburg Pincus LLC incorporated herein by reference to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 28, 2006.
10.20	Registration Rights Agreement, dated as of October 6, 2005, among Newton Acquisition Merger Sub, Inc., Newton Acquisition, Inc., Newton Holding, LLC and the “Holders” identified therein as parties thereto incorporated herein by reference to The Neiman Marcus Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended January 28, 2006.
10.21	Amendment No. 1, dated as of March 28, 2006, to the Pledge and Security Intercreditor Agreement dated as of October 6, 2005, among Neiman Marcus, Inc., The Neiman Marcus Group, Inc., the Subsidiaries party thereto and Credit Suisse, as administrative agent and collateral agent, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated March 29, 2006.
10.22	Credit Card Program Agreement, dated as of June 8, 2005, by and among The Neiman Marcus Group, Inc., Bergdorf Goodman, Inc., HSBC Bank Nevada, N.A. and Household Corporation, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated June 8, 2005.
10.23	Form of Servicing Agreement, by and between The Neiman Marcus Group, Inc. and HSBC Bank Nevada, N.A., incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated June 8, 2005.
10.24*	Confidentiality, Non-Competition and Termination Benefits Agreement between Bergdorf Goodman, Inc. and James J. Gold dated May 3, 2004, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Annual Report on Form 10-K for the fiscal year ended July 31, 2004.
10.25	Stockholder Agreement, dated as of May 1, 2005, among Newton Acquisition, Inc., Newton Acquisition Merger Sub, Inc. and the other parties signatory thereto, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated May 4, 2005.

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10.26*	Confidentiality, Non-Competition and Termination Benefits Agreement between The Neiman Marcus Group, Inc. and Steven P. Dennis dated September 9, 2004, incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated September 9, 2004.
10.27*	Newton Acquisition, Inc. Cash Incentive Plan effective as of November 29, 2005, incorporated herein by reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended July 29, 2006.
10.28	Management Stockholders’ Agreement dated as of October 6, 2005 between Newton Acquisition, Inc., Newton Holding, LLC, TPG Newton III, LLC, TPG Partners IV, L.P., TPG Newton Co-Invest I, LLC, Warburg Pincus Private Equity VIII, L.P., Warburg Pincus Netherlands Private Equity VIII C.V. I, Warburg Pincus Germany Private Equity VIII K.G , Warburg Pincus Private Equity IX, L.P., and the other parties signatory thereto, incorporated herein by reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended July 29, 2006.
10.29*	The Neiman Marcus Group, Inc. Key Employee Deferred Compensation Plan effective as of January 1, 2006, incorporated herein by reference to the Neiman Marcus, Inc. Annual Report on Form 10-K for the fiscal year ended July 29, 2006.
10.30	Amendment No. 3 dated as of October 12, 2006 to the Credit Agreement dated as of October 6, 2005 among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from time to time party thereto, the Lenders thereunder and Credit Suisse, as administrative agent and collateral agent for the Lenders, incorporated by reference to Neiman Marcus, Inc.’s Current Report on Form 8-K dated October 17, 2006.
10.31	Amendment No. 4 dated as of February 8, 2007 to the Credit Agreement dated as of October 6, 2005, among The Neiman Marcus Group, Inc., Neiman Marcus, Inc., each subsidiary of The Neiman Marcus Group, Inc. from time to time party thereto, the lenders thereunder, and Credit Suisse, as administrative agent and collateral agent for the lenders incorporated herein by reference to The Neiman Marcus Group, Inc.’s Current Report on Form 8-K dated February 14, 2007.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (1)
32	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

(1)	Filed herewith
*	Current management contract or compensatory plan or arrangement.

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SIGNATURES

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

NEIMAN MARCUS, INC.

(Registrant)

Signature	Title	Date
/s/ T. Dale Stapleton	Vice President and Controller	December 4, 2007
T. Dale Stapleton	and Duly Authorized Officer
	(principal accounting officer)

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