UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K/A

(Mark One)

[x] Annual Report  Pursuant to Section 13 or 15(d) of the  Securities  Exchange
    Act of 1934

For the fiscal year ended                 June 30, 1998                       
                         -----------------------------------------------------

                                                        or
[ ]  Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

For the transition period from_________________________to______________________

Commission file Number                    1-11806
                      ---------------------------------------------------------

 Ethan Allen Interiors Inc.; Ethan Allen Inc.; Ethan Allen Finance Corporation;
                      Ethan Allen Manufacturing Corporation
             (Exact name of registrant as specified in its charter)
         Delaware                                        06-1275288
- --------------------------------------------------------------------------------
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                       Identification No.)

      Ethan Allen Drive, Danbury, CT                       06811
- --------------------------------------------------------------------------------
(Address of principal executive offices)                 (Zip Code)

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

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

                                                  Name of Each Exchange
           Title of Each Class                     On Which Registered
      ----------------------------            -----------------------------
      Common Stock, $.01 par value            New York Stock Exchange, Inc.


           Securities registered pursuant to Section 12(g) of the Act:
                                      None
- --------------------------------------------------------------------------------
                                (Title of class)

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

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation  S-K (229.405 of this chapter) is not  contained  herein,  and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.    [ ]


     The aggregate  market value of Common Stock,  par value $.01 per share held
by  non-affiliates  (based  upon the  closing  sale  price on the New York Stock
Exchange) on August 28, 1998 was approximately $1,039,610,901.  As of August 28,
1998, there were 28,192,838 shares of Common Stock, par value $.01 outstanding.










                       DOCUMENTS INCORPORATED BY REFERENCE

     The definitive Proxy Statement for the 1998 Annual Shareholders  Meeting is
incorporated by reference into Part III hereof.





Item 8 to the Form 10-K,  filed on September 18, 1998, is hereby amended to read
in its entirety as follows:

Item 8. Financial Statements and Supplementary Data


                          INDEPENDENT AUDITORS' REPORT




The Board of Directors and Shareholders
Ethan Allen Interiors Inc.:


We have  audited the  accompanying  consolidated  balance  sheets of Ethan Allen
Interiors Inc. and Subsidiary  (the "Company") as of June 30, 1998 and 1997, and
the related  consolidated  statements of operations,  shareholders'  equity, and
cash flows for each of the years in the  three-year  period ended June 30, 1998.
In connection with our audits of the consolidated financial statements,  we also
have  audited  the  financial  statement  schedule  listed in the  index.  These
consolidated  financial  statements  and  financial  statement  schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  and  financial  statement
schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position  of  Ethan  Allen
Interiors  Inc. and  Subsidiary as of June 30, 1998 and 1997, and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended June 30, 1998, in conformity  with  generally  accepted  accounting
principles.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.







                                                           KPMG PEAT MARWICK LLP

Stamford, Connecticut
August 5, 1998









                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                             June 30, 1998 and 1997
                             (Dollars in thousands)

         ASSETS                                         1998        1997  
         ------                                         ----        ----  

Current assets:
  Cash and cash equivalents                          $ 19,380   $ 21,866

  Short term investments                                 --       17,975

  Accounts receivable, less allowance of
    $2,022 and $1,903 at June 30, 1998 and
    1997, respectively                                 35,640     32,232

  Notes receivable, current portion, less
    allowance of  $27 and $74 at
    June 30, 1998 and 1997, respectively                  686      1,056


  Inventories (note 2)                                114,364    107,525


  Prepaid expenses and
    other current assets                               10,735      6,724


  Deferred income taxes (note 9)                        7,094      7,353
                                                     --------   --------


     Total current assets                            $187,899   $194,731
                                                     --------   --------


  Property, plant and equipment, net (note 3)         188,171    171,406

  Property held for sale                                1,129      1,135

  Notes receivable,  net of current portion,
     less allowance of $259 and $145 at
     June 30, 1998 and 1997,
     respectively                                       1,790      2,725

  Intangibles, net (note 4)                            50,773     52,419

  Deferred financing costs, net of amortization of
  $2,280 and $1,916 at June 30, 1998 and 1997,
  respectively                                            632      1,560

  Other assets                                          2,729      3,808
                                                     --------   --------


     Total assets                                    $433,123   $427,784
                                                     ========   ========


          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------

Current liabilities:
  Current maturities of  long-term debt and
   capital lease obligations (notes 5 and 6)          $   879   $ 1,119

  Accounts payable                                     51,135    41,172

  Accrued expenses                                      5,863     8,036

  Accrued compensation and benefits                    15,735    12,983
                                                      -------   -------
     Total current liabilities                         73,612    63,310
                                                      -------   -------


  Long-term debt, less current maturities (note 5)     11,480    64,066


  Obligations under capital leases, less current
    maturities (note 6)                                 1,016     2,700










  Other long-term liabilities, principally long-term
  compensation, environmental and legal reserves          812          815

Deferred income taxes (note 9)                         31,883       31,459
                                                    ---------    ---------

   Total liabilities                                $ 118,803    $ 162,350
                                                    ---------    ---------

Commitments and contingencies (notes 5 and 13)           --           --

Shareholders' equity (notes 7 and 8):
Class A common stock, par value $.01, 70,000,000
  shares authorized, 29,669,470 shares issued
  at June 30, 1998, 29,465,400 shares issued
  at June 30, 1997                                        296          294


Preferred stock, par value $.01, 1,055,000 shares
  authorized, no shares issued and outstanding
  at June 30, 1998 and 1997                              --           --
Additional paid-in capital                            262,462      257,684
                                                    ---------    ---------
                                                    $ 262,758      257,978

Less:
      Treasury stock (at cost) 1,216,096 shares
          at June 30, 1998 and 700,032 shares at
          June 30, 1997                               (33,750)     (10,440)
                                                    ---------    ---------

                                                      229,008      247,538

Retained earnings                                      85,312       17,896
                                                    ---------    ---------
   Total shareholders' equity                         314,320      265,434

   Total liabilities and shareholders' equity       $ 433,123    $ 427,784
                                                    =========    =========


See accompanying notes to consolidated financial statements.









                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
                      Consolidated Statements of Operations
                    Years ended June 30, 1998, 1997, and 1996
                  (Dollars in thousands, except per share data)




                                         1998        1997         1996 
                                         ----        ----         ---- 


Net sales                             $ 679,321    $ 571,838   $ 509,776

Cost of sales                           363,746      323,600     304,650
                                      ---------    ---------   ---------

    Gross profit                        315,575      248,238     205,126


Operating expenses:
  Selling                               110,240       85,927      74,582

  General and administrative             85,645       76,462      74,977
                                      ---------    ---------   ---------

    Operating income                    119,690       85,849      55,567
                                      ---------    ---------   ---------

Interest and other miscellaneous
  income, net                             3,449        1,272       1,039


Interest and related expense:
  Interest                                4,245        5,864       8,882
  Amortization of deferred
     financing costs                        364          563         734
                                      ---------    ---------   ---------
                                          4,609        6,427       9,616
                                      ---------    ---------   ---------


   Income before income
    taxes and extraordinary
    charge                              118,530       80,694      46,990

Income tax expense (note 9)              46,582       31,954      18,845
                                      ---------    ---------   ---------


   Income before extraordinary
     charge                              71,948       48,740      28,145

Extraordinary charge from early
  retirement of debt, net of
  income tax benefit of $527
  (note 5)                                  802         --          --   
                                      ---------    ---------   ---------


   Net income                         $  71,146    $  48,740   $  28,145
                                      =========    =========   =========

Per share data (notes 1 and 7):

Net income per basic share
  before extraordinary charge         $   2.51     $   1.69    $    0.98

Extraordinary charge (note 5)            (0.03)         --          --
                                       ---------   ---------   ---------

  Net income per basic share          $   2.48     $   1.69    $    0.98
                                       =========   =========   =========

Net income per diluted share
  before extraordinary charge         $   2.45     $  1.67     $    0.97

Extraordinary charge (note 5)            (0.03)         --     $    --
                                       ---------   ---------   ---------

Net income per diluted share          $   2.42     $  1.67     $    0.97
                                       =========   =========   =========

Dividends declared per common share   $   0.14     $  0.10     $    0.04
                                       =========   =========   =========

See accompanying notes to consolidated financial statements.













                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                    Years ended June 30, 1998, 1997 and 1996
                             (Dollars in thousands)



                                                                 1998              1997                1996   
                                                              ----------        ----------          ----------
                                                                                                

Operating activities:
  Net income                                                  $ 71,146          $ 48,740             $ 28,145

  Adjustments  to  reconcile  net  income
   to net  cash  provided  by  operating
   activities:
   Depreciation and amortization                                15,868            16,411               17,495

    Compensation expense related to
     restricted stock award                                      2,136               891                  180
   Provision for deferred
    income taxes                                                   683               575                  622
   Extraordinary charge                                            802              -                      -
   Other non-cash benefit (charges)                                 77               498                  (64)

   Change in:
      Accounts receivable                                       (3,340)            1,822                1,407
      Inventories                                               (6,839)            2,726                6,891

      Prepaid and other current assets                          (4,011)              653                  745
    Other assets                                                  (891)              137                 (271)
      Accounts payable                                          11,576             5,099                4,333
      Accrued expenses                                             414               973                1,621
    Other long-term liabilities                                    (3)              (221)                 (36)
                                                               -------            -------             -------

  Net cash provided by operating
   activities                                                   87,618            78,304               61,068
                                                               -------           -------              -------


 Investing activities:
  Proceeds from the disposal of property,
   plant, and equipment                                           827                110                1,216

  Proceeds from the disposal of property
   held for sale                                                  -                1,945                 -
  Capital expenditures                                        (29,665)           (23,383)             (13,314)

  Payments received on long-term notes
   receivable                                                   1,538              1,152                2,559

  Disbursements made for long-term notes
   receivable                                                    (302)            (1,077)                (935)

  Redemption of short term securities                          30,270               -                    -
  Investments in short term securities                        (12,295)           (17,975)                -   
                                                              -------            -------              -------

   Net cash used in investing activities                      ( 9,627)           (39,228)             (10,474)
                                                              -------            -------              -------


Financing activities:
  Borrowings on revolving credit facilities                      -                14,500               56,500

  Payments on revolving credit facilities                        -               (21,500)             (95,500)

  Redemption of Senior Notes                                  (52,543)            (9,457)              (6,000)

  Premium paid on Senior Note redemption                         (461)              -                    -
  Other payments on long-term debt and
   capital leases                                              (2,079)            (2,134)              (1,823)

  Other borrowings on long-term debt                              111                794                  500
  Payments to acquire treasury stock                          (23,310)            (7,249)              (3,895)
  Net proceeds from issuance of common stock                    1,255              1,235                1,294









Increase
in deferred financing costs                                        --               (173)                (138)

  Dividends paid                                               (3,450)            (2,304)                 --
                                                              --------           --------            --------


        Net cash used in financing activities                 (80,477)           (26,288)             (49,062)
                                                              --------           --------             --------


Net (decrease)/increase in cash and cash
   equivalents                                                (2,486)             12,788               1,532
Cash and cash equivalents
 at beginning of year                                         21,866               9,078               7,546
                                                            --------            --------            --------


Cash and cash equivalents
 at end of year                                             $ 19,380            $ 21,866            $  9,078
                                                            ========            ========            ========


Supplemental disclosure:
  Cash payments for:
    Income taxes                                            $ 45,382            $ 28,116            $ 12,515

    Interest                                                   5,585               6,138               9,073

Non cash transactions:
  Additions to obligations under
    capitalized leases                                           --                 504               1,107

  Acquisition of stores with treasury stock                      --               3,327                  --


See accompanying notes to consolidated financial statements.









                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
                 Consolidated Statements of Shareholders' Equity
                    Years ended June 30, 1998, 1997 and 1996
                             (Dollars in thousands)





                                                                   Retained
                                                                  Additional
                                                                   Earnings/
                                         Common      Paid-in         Notes         Treasury     (Accumulated
                                         Stock       Capital       Receivable        Stock        Deficit)        Total
                                         -----       -------       ----------        -----        --------        -----
                                                                                                 


Balance at June 30, 1995                   288       252,425           (592)        (1,476)       (57,547)       193,098

Issuance of common
  stock                                      4         1,470           --             --             --            1,474

Payments received on
  notes receivable                        --            --              541           --             --              541

Increase in vested
  management warrants
  (note 8)                                --             304           --             --             --              304

Purchase of 358,564 shares
  of treasury stock                       --            --             --           (3,895)          --           (3,895)


Dividend declared                         --            (574)          --             --             --             (574)

Tax benefit associated with the
  exercise of employee stock
  options and warrants                    --           1,200           --             --             --            1,200

Net income                                --            --             --             --           28,145         28,145
                                     ---------     ---------      ---------      ---------      ---------      ---------

Balance at June 30, 1996             $     292     $ 254,825      $     (51)     $  (5,371)     $ (29,402)     $ 220,293

Issuance of common stock                     2         2,124           --             --             --            2,126

Payments received
  on notes receivable                     --            --               51           --             --               51

Increase in vested
  management warrants
  (note 8)                                --              71           --             --             --               71

Purchase of 333,296 shares of
  treasury stock                          --            --             --           (7,249)          --           (7,249)


Shares issued in connection with
  acquisition                             --           1,147           --            2,180           --            3,327


Dividends declared                        --          (1,152)          --             --           (1,442)        (2,594)

Tax benefit associated with the
  exercise of employee stock
  options and warrants                    --             669           --             --             --              669

Net income                                --            --             --             --           48,740         48,740
                                     ---------     ---------      ---------      ---------      ---------      ---------

Balance at June 30, 1997             $     294     $ 257,684      $    --        $ (10,440)     $  17,896      $ 265,434

Issuance of common stock                     2         3,389           --             --             --            3,391










Purchase of 516,064 shares of
  treasury stock                          --            --             --          (23,310)          --          (23,310)


Dividends declared                        --            --             --             --           (3,730)        (3,730)

Tax benefit associated with the
  exercise of employee stock
  options and warrants                    --           1,389           --             --             --            1,389

Net income                                --            --             --             --           71,146         71,146
                                     ---------     ---------      ---------      ---------      ---------      ---------

Balance at June 30, 1998             $     296     $ 262,462      $    --        $ (33,750)     $  85,312      $ 314,320
                                     =========     =========      =========      =========      =========      =========



See accompanying notes to consolidated financial statements.








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)      Summary of Significant Accounting Policies


         Basis of Presentation
         ---------------------

         Ethan Allen  Interiors Inc. (the  "Company") is a Delaware  corporation
         incorporated  on May 25, 1989. The  consolidated  financial  statements
         include the  accounts of the  Company and its  wholly-owned  subsidiary
         Ethan Allen Inc.  ("Ethan Allen") and Ethan Allen's  subsidiaries.  All
         intercompany  accounts and  transactions  have been  eliminated  in the
         consolidated  financial statements.  All of Ethan Allen's capital stock
         is owned by the  Company.  The Company has no other assets or operating
         results other than those associated with its investment in Ethan Allen.

         Nature of Operations
         --------------------

         The  Company,  through  its  wholly-owned  subsidiary,   is  a  leading
         manufacturer  and retailer of quality home furnishings and sells a full
         range of  furniture  products  and  decorative  accessories  through an
         exclusive  network  of  310  retail  stores,  of  which  67  are  Ethan
         Allen-owned  and  243  are  independently   owned.  Retail  stores  are
         primarily located in North America, with 20 located abroad. Ethan Allen
         has 21  manufacturing  facilities and 3 sawmills  throughout the United
         States.

         Cash Equivalents
         ----------------

         Cash  equivalents  of $4,999,000  and  $9,754,000 at June 30, 1998, and
         1997,  respectively,  consist of overnight  repurchase  agreements  and
         commercial  paper with an initial term of less than three  months.  For
         the purposes of the statements of cash flows, the Company considers all
         highly liquid debt instruments with original maturities of three months
         or less to be cash equivalents.

         Short Term Investments
         ----------------------

         Short term  investments  consist  primarily of certificates of deposits
         and debt  securities  and have  been  classified  as  held-to-maturity,
         having maturities of one year or less. Because of the short maturity of
         the short term  investments,  the  carrying  amount  approximates  fair
         value.

         Inventories
         -----------

         Inventories  are stated at the lower of cost  (first-in,  first-out) or
         market.

         Property, Plant and Equipment
         -----------------------------

         Property, plant and equipment are stated at cost. Depreciation of plant
         and  equipment  is  provided  over the  estimated  useful  lives of the
         respective assets on a straight-line  basis.  Estimated useful lives of
         the respective  assets  generally  range from twenty to forty years for
         buildings and improvements and from three to twenty years for machinery
         and equipment.

         Property Held for Sale
         ----------------------

         Property  held for  sale is  recorded  at net  realizable  values.  The
         Company continues to actively market the properties.








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


         Intangible Assets
         -----------------

         Intangible assets primarily represent goodwill,  trademarks and product
         technology which will be amortized on a straight-line  basis over forty
         years.  Goodwill  represents the excess of cost of the Company over the
         fair  value  of  net   identifiable   assets   acquired.   The  Company
         continuously  assesses the recoverability of these intangible assets by
         evaluating  whether the  amortization of the intangible  asset balances
         over the  remaining  lives can be  recovered  through  expected  future
         results.  Expected  future results are based on projected  undiscounted
         operating  results  before  the  effects  of  intangible  amortization.
         Product  technology is measured based upon wholesale  operating income,
         while goodwill and  trademarks are assessed based upon total  wholesale
         and retail  operating  income.  The amount of  impairment,  if any,  is
         measured  based  on the  fair  value  of  projected  discounted  future
         results.

         Notes Receivable
         ----------------

         Notes receivable  represent  financing  arrangements  under which Ethan
         Allen has made loans to certain of its dealers.  These loans  primarily
         have terms ranging from five to eight years and are  generally  secured
         by the assets of the  borrower.  Interest  is  charged  on  outstanding
         balances at a rate which generally  approximates the prime rate plus an
         additional rate which may be adjustable over the loan term.

         Financial Instruments
         ---------------------

         The carrying value of the Company's financial instruments  approximates
         fair market value.

         Deferred Financing Costs
         ------------------------

         Debt   financing   costs  are   deferred  and   amortized,   using  the
         straight-line method, over the term of the related debt.

         Income Taxes
         ------------

         Income taxes are accounted  for under the asset and  liability  method.
         Deferred tax assets and  liabilities  are recognized for the future tax
         consequences   attributable   to  differences   between  the  financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases and operating  loss and tax credit  carryforwards.
         Deferred  tax assets and  liabilities  are measured  using  enacted tax
         rates  expected to apply to taxable  income in the years in which those
         temporary  differences  are expected to be  recovered  or settled.  The
         effect on deferred tax assets and  liabilities of a change in tax rates
         is recognized in income in the period that includes the enactment date.

         Revenue Recognition
         -------------------

         Sales  are  recorded  when  goods  are  shipped  to  dealers,  with the
         exception of shipments under Ethan Allen's Home Delivery Service Center
         Program.  These sales are  recognized as revenue when goods are shipped
         to the Home Delivery Service  Centers,  at which point title has passed
         to the dealers. Ethan Allen, through its Home Delivery Service Centers,
         provides  preparation  and delivery  services for its dealers for a fee
         which is  recognized  as revenue  upon  delivery of goods to the retail
         customer.  Sales made through Ethan  Allen-owned  stores are recognized
         when delivery is made to the customer.

         Advertising Costs
         -----------------

         Advertising costs are expensed when first aired or distributed.








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         Advertising  costs  for the  fiscal  years  1998,  1997,  and 1996 were
         $40,035,000,   $27,712,000  and  $21,289,000,   respectively.   Prepaid
         advertising  costs for the fiscal years 1998 and 1997 were  $3,021,000,
         and $1,497,000.

         Pre-opening Expenses
         --------------------

         All costs  incurred  prior to the  opening  of a new Ethan  Allen-owned
         store are deferred and  amortized  over the  respective  store's  first
         twelve months of operations.

         Closed Store Expenses
         ---------------------

         Future  expenses,  such as rent and real estate taxes,  net of expected
         lease or  sublease  recovery,  which  will be  incurred  subsequent  to
         vacating a closed Ethan  Allen-owned  store,  are charged to operations
         upon a formal decision to close the store.

         Earnings Per Share
         ------------------

         Effective  December  1997, the Company  adopted  Statement of Financial
         Accounting  Standard  ("SFAS")  No.  128,  "Earnings  per  Share".  The
         statement sets forth guidance on the presentation of earnings per share
         and requires dual  presentation of basic and diluted earnings per share
         on the face of the statement of operations. Basic earnings per share is
         computed  by  dividing  net income by the  weighted  average  number of
         common shares  outstanding for the period.  Diluted  earnings per share
         reflects  the  potential  dilution  that  could  occur if all  dilutive
         potential common shares were exercised.  All earnings per share amounts
         have been restated to reflect this new standard.

         Stock Options
         -------------

         In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock
         Based  Compensation".  As  permitted  by SFAS  123,  the  Company  will
         continue to follow the provisions of APB No. 25,  "Accounting for Stock
         Issued to Employees"  and related  interpretations  in  accounting  for
         compensation expense related to the issuance of stock options.

         Use of Estimates
         ----------------

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.

(2)      Inventories
         -----------

         Inventories  at  June  30  are   summarized  as  follows   (dollars  in
         thousands):

                                                  1998            1997
                                                  ----            ----

              Retail Merchandise               $ 38,329        $ 34,478
              Finished products                  28,931          32,665
                                                               
              Work in process                    15,707          13,333
              Raw materials                      31,397          27,049
                                                -------         -------
                                               $114,364        $107,525
                                               ========        ========










                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)





(3)      Property, Plant and Equipment

         Property,  plant and  equipment  at June 30 are  summarized  as follows
         (dollars in thousands):
                                                    1998                1997
                                                    ----                ----

              Land and improvements               $  26,941           22,624
              Buildings and improvements            182,437          168,990
              Machinery and equipment                80,294           70,288
                                                   --------          -------
                                                    289,672          261,902
              Less accumulated depreciation        (101,501)         (90,496)
                                                   --------          -------
                                                  $ 188,171         $171,406
                                                   ========          =======

(4)      Intangibles

         Intangibles  at  June  30  are   summarized  as  follows   (dollars  in
         thousands):

                                                       1998             1997
                                                       ----             ----
                                                                 
              Product technology                   $ 25,950         $ 25,950
              Trademarks                             28,200           28,200
              Goodwill                               11,333           11,333
              Other                                     350              350
                                                   --------         --------
                                                     65,833           65,833
              Less accumulated amortization         (15,060)         (13,414)
                                                   --------         --------
                                                   $ 50,773         $ 52,419
                                                   ========         ========

(5)      Borrowings

         Long-term  debt  at June  30  consists  of the  following  (dollars  in
         thousands):

                                                        1998        1997 
                                                        ----        ---- 
         
         8.75% Senior Notes due 2001                  $  --       $52,543
         
         Other Debt:
           9.75% mortgage note payable in
            monthly installments through 2015
            collateralized by Ethan Allen Inn           1,552       1,589
           Industrial Revenue Bonds, 4.0% - 8.0%,
            maturing at various dates through
           2011                                         8,455       8,455
           Other                                        1,627       1,626
                                                      -------     -------
                  Total debt                           11,634      64,213
         
         
                  Less current maturities                 154         147
                                                      -------     -------
                                                      $11,480     $64,066
                                                      =======     =======


         During  fiscal year 1998,  the Company  completed  its  optional  early
         redemption of all of its  then-outstanding  $52.4 million 8-3/4% Senior
         Notes,  due on March 15, 2001, at 101.458% of par value. As a result of
         the early redemption, an extraordinary charge of $.8 million or $0.03 a
         share,  net of tax benefit,  was  recorded.  The  extraordinary  charge
         included  the  write-off  of  unamortized   deferred   financing  costs
         associated  with the Senior Notes and the premium  related to the early
         redemption.  During  fiscal 1998,  1997,  and 1996,  $.1 million,  $9.5
         million,  and  $6.0  million,   respectively,   of  Senior  Notes  were
         repurchased   at   102.19%,   101.48%,   and  101.25%  of  face  value,
         respectively.








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         During  1995,   the  Company  had  completed  a  five  year   financing
         arrangement  to provide up to $110.0  million  of senior  secured  debt
         under a revolving  credit facility  pursuant to a Credit Agreement with
         Chase  Manhattan  Bank, as agent,  proceeds of which were used to repay
         existing senior secured debt. The revolving credit facility  includes a
         $40.0  million  sub-facility  for trade and  standby  letters of credit
         availability  and a $3.0 million  swingline  loan  sub-facility.  Loans
         under the revolving  credit  facility bear interest at Chase  Manhattan
         Bank's  Alternative  Base Rate,  or adjusted  LIBOR plus .5%,  which is
         subject to  adjustment  arising  from  changes in the credit  rating of
         Ethan  Allen's  senior  secured  debt.  For fiscal years ended June 30,
         1998,  1997 and 1996 the  weighted-average  interest  rates were 8.13%,
         7.37% and 6.81%, respectively. There are no minimum repayments required
         during the term of the facility.

         During  1997,  the Company  amended its Credit  Agreement  which it had
         originally  entered  into during  1995,  with Chase  Manhattan  Bank as
         agent. Amendments to the Credit Agreement include: (1) the reduction of
         the commitment of senior secured debt under a revolving credit facility
         to $100.0  million;  (2)  reduction  of the  Eurodollar  spread used in
         determining  adjusted LIBOR which is subject to adjustment arising from
         changes in the credit  rating of Ethan Allen's  senior  secured debt or
         Fixed Charge Ratio;  (3)  elimination of a lien on certain fixed assets
         as  collateral  and  (4)  amendment  of  certain  additional  debt  and
         restricted payment  limitations.  At June 30, 1998 and 1997, there were
         no outstanding revolving loans under the Credit Agreement.

         The  Credit  Agreement  is  secured by a first lien in respect of Ethan
         Allen's accounts  receivable,  inventory,  trademarks,  patents and the
         Company's  shares of Ethan  Allen's  capital  stock.  The  Company  has
         guaranteed Ethan Allen's  obligation under the Credit Agreement and has
         pledged all the outstanding  capital stock of Ethan Allen to secure its
         guarantee.

         The Credit Agreement  contains  covenants  requiring the maintenance of
         certain  defined  tests and ratios and limit the ability of Ethan Allen
         and the  Company to incur debt,  engage in mergers and  consolidations,
         make restricted payments,  make asset sales, make investments and issue
         stock.  The  Credit  Agreement  contains  various  customary  events of
         default. Ethan Allen satisfied the requirements of the covenants in the
         Credit Agreement at June 30, 1998.

         In June 1996, the Company  closed on loan  commitments in the aggregate
         amount of  approximately  $1.4 million related to the  modernization of
         its Beecher Falls manufacturing facility.  Loans made pursuant to these
         commitments bear interest at rates of 3% to 8% and have maturities of 7
         to 30 years.  The loans  have a first and  second  lien in  respect  of
         equipment  financed  by such  loans  and a first  and  second  mortgage
         interest  in  respect  of a  building,  the  construction  of which was
         financed by such loans.

         Aggregate  scheduled  maturities of long-term debt for each of the five
         fiscal years  subsequent to June 30, 1998,  are as follows  (dollars in
         thousands):


                         1999 . . . . . . . . . . .   $ 154
                         2000 . . . . . . . . . . .     411
                         2001 . . . . . . . . . . .     168
                         2002 . . . . . . . . . . .     180
                         2003 . . . . . . . . . . .     195









                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



(6)      Leases

         Ethan Allen leases real property and equipment under various  operating
         and capital lease  agreements  expiring  through the year 2028.  Leases
         covering retail outlets and equipment generally require, in addition to
         stated minimums, contingent rentals based on retail sales and equipment
         usage. Generally, the leases provide for renewal for various periods at
         stipulated rates.

         Property,  plant and equipment include the following amounts for leases
         which have been capitalized at June 30 (dollars in thousands):

                                                     1998            1997 
                                                     ----            ---- 

             Land and improvements               $    103        $    103
             Buildings and improvements               911             911
             Machinery and equipment               11,131          11,131
                                                 --------        --------
                                                   12,145          12,145
             Less accumulated depreciation        (11,744)        (10,732)
                                                 --------        --------
                                                 $    401        $  1,413
                                                 ========        ========


         Future minimum payments by year and in the aggregate, under the capital
         leases and non-cancelable  operating leases,  with initial or remaining
         terms of one year or more  consisted of the  following at June 30, 1998
         (dollars in thousands):

                                                      Capital          Operating
        Fiscal Year Ending June 30:                   Leases             Leases
        ---------------------------                   ------             ------

        1999                                         $   841            $10,036
        2000                                             635              9,332
        2001                                             425              8,256

        2002                                              33              7,922
        2003                                              12              7,464
        Subsequent to 2003                                 9             24,928
                                                     -------            -------
                                                                       
        Total minimum lease payments                   1,955            $67,938
                                                                        =======
        
        Amounts representing interest                    214
        Present value of future minimum              -------
          lease payments                               1,741
        Less amounts due in one year                     725
                                                     -------
        Long-term obligations under capital leases   $ 1,016
                                                     =======

         The above  amounts  will be  offset  by  minimum  future  rentals  from
         subleases of $13,000,129 on operating leases.


         Total rent  expense  for the fiscal  years ended June 30 was as follows
         (dollars in thousands):

                                                 1998       1997        1996
                                               --------   --------    --------

         Basic rentals under operating
           leases                              $ 14,997   $ 14,578    $14,419

         Contingent rentals under
           operating leases                         977      1,028      1,082
                                               --------    -------     ------

                                                 15,974     15,606     15,501









                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         Less sublease rent             2,173        1,923        1,782
                                     --------     --------     --------
                                     $ 13,801     $ 13,683     $ 13,719
                                     ========     ========     ========




                                       35




                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



(7)      Shareholders' Equity

         On August 6, 1997, the Company declared a two-for-one stock split to be
         distributed  on September 2, 1997 to  shareholders  of record on August
         18,  1997.  All related  amounts  have been  retroactively  adjusted to
         reflect the stock split.

         During fiscal 1997, the Company  acquired a number of retail stores and
         used 146,224  treasury shares with a fair value of $3.3 million as part
         of the consideration of the transaction.

         On May 20, 1996,  the Board of Directors  adopted a Stockholder  Rights
         Plan and declared a dividend of one Right for each outstanding share of
         common stock as of July 10, 1996. Each Right entitles its holder, under
         certain circumstances,  to purchase one one-hundredth of a share of the
         Company's Series C Junior  Participating  Preferred Stock at a price of
         $62.50 on a post split basis.

         The Rights may not be  exercised  until 10 days after a person or group
         acquires 15% or more of the Company's  common  stock,  or 15 days after
         the commencement or the announcement of the intent to commence a tender
         offer which, if consummated, would result in a 15% or more ownership of
         the Company's common stock.

         Until then,  separate Rights  certificates will not be issued, nor will
         the Rights be traded separately from the stock.

         Should an acquirer become the beneficial  owner of 15% of the Company's
         common stock, and under certain additional circumstances, the Company's
         stockholders  (other than the acquirer) would have the right to receive
         in lieu of the Series C Junior Participating  Preferred Stock, a number
         of shares of the Company's  common stock,  or in stock of the surviving
         enterprise  if the Company is acquired,  having a market value equal to
         two times the Purchase Price.

         The Rights will expire on May 31, 2006,  unless  redeemed prior to that
         date. The redemption  price is $0.01 per Right.  The Board of Directors
         may redeem the Rights at its option any time prior to the  announcement
         that a person or group has acquired 15% or more of the Company's common
         stock.

         The  Company's  authorized  capital  stock  consists of (a)  70,000,000
         shares of Common Stock, par value $.01 per share, (b) 600,000 shares of
         Class B Common Stock, par value $.01 per share, (c) 1,055,000 shares of
         Preferred  Stock,  par value $.01 per share of which (i) 30,000  shares
         have been designated Series A Redeemable  Convertible  Preferred Stock,
         (ii) 30,000 shares have been designated Series B Redeemable Convertible
         Preferred Stock,  (iii) 155,010 shares have been designated as Series C
         Junior  Participating  Preferred Stock, and (iv) the remaining  839,990
         shares may be designated by the Board of Directors with such rights and
         preferences as they determine (all such preferred stock,  collectively,
         the  "Preferred  Stock").  As of June 30, 1998,  no shares of Preferred
         Stock or shares of Class B Common Stock were issued or outstanding.








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)




         Basic and  diluted  earnings  per share are  calculated  based upon the
         provisions of SFAS 128, using the following share data (in thousands):

                                                 1998        1997        1996
                                                 ----        ----        ----

         Weighted average common shares
           outstanding for basic
           calculation                          28,700      28,793      28,624

         Add: Effect of stock options              724         417         504
                                                ------      ------      ------

         Weighted average common shares
           outstanding, adjusted for
           diluted calculation                  29,424      29,210      29,128
                                                ======      ======      ======

         (8)      Employee Stock Plans

         The Company has reserved  4,946,466 shares of Common Stock for issuance
         pursuant to the Company's stock option and warrant plans as follows:

                  1992 Stock Option Plan
                  ----------------------

                  The 1992 Stock  Option Plan  provides for the grant of options
                  to key employees and non-employee directors to purchase shares
                  of Common  Stock that are either  qualified  or  non-qualified
                  under  Section 422 of the Internal  Revenue  Code,  as well as
                  stock  appreciation  rights on such  options.  The awarding of
                  such options is  determined by the  Compensation  Committee of
                  the Board of Directors after  consideration of recommendations
                  proposed by the Chief Executive  Officer.  The options awarded
                  to employees vest 25% per year over a four-year period and are
                  exercisable  at the market  value of the  Common  Stock at the
                  date of grant.  The maximum  number of shares of Common  Stock
                  reserved  for  issuance  under the 1992 Stock  Option  Plan is
                  3,660,398  shares.  Through  June 30, 1997,  options  covering
                  68,000  shares,  which are  exercisable at prices ranging from
                  $9.00 to $9.75, were awarded to independent directors and will
                  vest 50% on each of the  first  two  anniversary  dates of the
                  grant.  During fiscal 1998,  options to purchase 24,000 shares
                  at an exercise  price of $31.75 per share were  granted to the
                  independent directors. Options to purchase 120,000 shares were
                  awarded  to  Mr.  Kathwari,   Chairman  of  the  Board,  Chief
                  Executive  Officer,  and  President  of Ethan Allen  Interiors
                  Inc.,  during  fiscal  year  1995  and an  additional  480,000
                  options to purchase shares were awarded to Mr. Kathwari during
                  1996.  These  options are  exercisable  at $9.75 and $9.50 per
                  share,  respectively and will vest over seven years commencing
                  with the first vesting date of July 27, 1994,  and each of the
                  next six years.  During fiscal 1998, Mr.  Kathwari was awarded
                  options to purchase  500,000  shares at an  exercise  price of
                  $31.75 and options to purchase  500,000  shares at an exercise
                  price of $41.28. These options will vest over three years from
                  the date of grant.  Through June 30, 1997, options to purchase
                  537,300  shares were issued to other  employees  with exercise
                  prices  ranging  from $9.50 to $21.75 per share and options to
                  purchase 49,600 shares were issued to certain key employees in
                  fiscal 1998 and are  exercisable at prices ranging from $27.31
                  to $49.00 per share.

                  Incentive Stock Option Plan
                  ---------------------------

                  Pursuant to the Incentive  Stock Option Plan,  the Company has
                  granted to members of management  options to purchase  553,028
                  shares  of  Common  Stock at an  exercise  price of $8.25  per
                  share.  Such  options  vest  twenty  percent  per year  over a
                  five-year period.








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



                  Management Warrants
                  -------------------

                  Warrants  to  purchase  466,374  shares of Common  Stock  were
                  granted to certain key  members of  management  during  fiscal
                  1991 and 1992.  The  warrants  are  currently  exercisable  at
                  $1.838 per share.

                  Earn-In Warrants
                  ----------------

                  Earn-In  Warrants  have been fully  earned and 266,666  shares
                  have been  allocated to Ethan Allen's  managers and employees.
                  Earn-In warrants were exercisable at $.188 per share.

                  Restricted Stock Award
                  ----------------------

                  Commencing in 1994 and for each of the four subsequent  years,
                  annual  awards  of  20,000  shares of  restricted  stock  were
                  granted to Mr.  Kathwari with the vesting based on performance
                  of the  Company's  stock  price  during the three year  period
                  after grant as compared to the Standard and Poors 500 index.

                  Stock Unit Award
                  ----------------

                  During fiscal 1998, pursuant to his New Employment  Agreement,
                  the Company has  established a book account for Mr.  Kathwari,
                  which will be credited with 14,000 Stock Units as of July 1 of
                  each  year,  commencing  July 1,  1997,  for a total  of up to
                  70,000  Stock  Units  over  the  term  of the  New  Employment
                  Agreement,  with  an  additional  14,000  Stock  Units  to  be
                  credited  in   connection   with  each  of  the  two  one-year
                  extensions.   Following  the  termination  of  Mr.  Kathwari's
                  employment,  Mr.  Kathwari will receive shares of Common Stock
                  equal to the number of Stock Units credited to the account.

         Stock  option and warrant  activity  during  1998,  1997 and 1996 is as
         follows:



                                                     Number of
                                                      shares
                               ----------------------------------------------------
                               1992 Stock      Incentive    Management    Earn-In
                               Option Plan     Options       Warrants     Warrants
                               ----------    ----------    ----------    ----------
                                                                 

Outstanding at June 30, 1995      453,400       479,968       241,558       240,902
                               ----------    ----------    ----------    ----------

Granted in 1996                   591,400          --            --            --
Exercised in 1996                  (5,900)     (134,700)      (60,638)      (87,992)
Canceled in 1996                  (25,450)      (21,750)       (6,234)      (11,932)
                                ----------    ----------    ----------   ----------

Outstanding at June 30, 1996    1,013,450       323,518       174,686       140,978

Granted in 1997                   139,900          --            --            --
Exercised in 1997                 (61,108)      (65,734)      (46,118)     (134,978)
Canceled in 1997                  (17,776)       (2,230)          (12)       (6,000)
                                ----------    ----------    ----------   ----------

Outstanding at June 30, 1997    1,074,466       255,554       128,556          --

Granted in 1998                 1,073,600          --            --            --
Exercised in 1998                 (75,086)      (36,807)      (72,183)         --
Canceled in 1998                   (4,600)          (10)          (10)         --
                                ----------    ----------    ----------   ----------

Outstanding at June 30, 1998    2,068,380       218,737        56,363          --
                                ==========    ==========    ==========   ==========











                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



The following tables  summarize  information  about stock awards  outstanding at
June 30, 1998:



                                                                                Options Outstanding
                                                                                                Weighted               Weighted
                                                                                                Average                Average
                                           Range of                     Number                  Remaining              Exercise
                                            Prices                      Outstanding               Life                  Prices 
                                         ---------------               ------------             ---------              --------
                                                                                                              

1992 Stock Option Plan                    $9.50 to  9.75                 866,180                6.2 yrs.                 $9.53
                                         $21.75 to 31.75                 673,600                9.1 yrs.                $29.70
                                         $41.28 to 49.00                 528,600                9.2 yrs.                $41.69
                                                                         -------
                                                                       2,068,380

Incentive Options                           $8.25                        218,737                1.5 yrs.                $8.25

Management Warrants                         $1.838                        56,363                1.5 yrs.                $1.838






                                                                           Options Exercisable
                                                                                                 Weighted
                                                                        Number of                Average
                                           Range of                      Shares                  Exercise
                                            Prices                      Exercisable               Prices
                                         ---------------               ------------             ---------
                                                                                           

1992 Stock Option Plan                    $9.50 to  9.75                 465,548                  $9.54
                                         $21.75 to 31.75                  23,675                 $21.75
                                                                         -------
                                                                         489,223

Incentive Options                           $8.25                        218,737                  $8.25

Management Warrants                         $1.838                        56,363                 $1.838




Had  compensation  costs  related to the  issuance  of stock  options  under the
Company's  1992 Stock Option Plan been  determined  based on the estimated  fair
value at the grant dates for awards under SFAS 123, the Company's net income end
earnings per share for the fiscal years ended June 30, 1998, 1997 and 1996 would
have been reduced to the proforma  amounts listed below,  (dollars in thousands,
except per share data):

                                          1998        1997         1996    
                                         -------    -------      --------
     Net Income
     ----------
       As reported                   $   71,146   $  48,740   $   28,145
       Proforma                          67,945      48,350       27,925
     
     Basic Earnings Per Share
     ------------------------
       As reported                   $    2.48    $    1.69    $    0.98
       Proforma                           2.37         1.68         0.97
     
     Diluted Earning Per Share
     -------------------------
       As reported                   $    2.42    $    1.67    $    0.97
       Proforma                           2.31         1.66         0.96

The per share weighted average fair value of stock options granted during fiscal
1998, 1997 and 1996 was $13.14, $8.90, and $3.78,  respectively.  The fair value
of each  stock  option  grant  was  estimated  on the  date of grant  using  the
Black-Scholes  option-pricing  model with the  following  assumptions;  weighted
average risk-free interest rates of 5.99%, 6.35% and 6.09% for fiscal 1998, 1997
and 1996, respectively,  dividend yield of .5%, 1%, and 1% for fiscal 1998, 1997
and 1996,








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



respectively, expected volatility of 43.3%, 39.8% and 38.7% in fiscal 1998, 1997
and 1996, respectively, and expected lives of five years for each.

(9)      Income Taxes

         Total income taxes were allocated as follows (dollars in thousands):


                                        1998              1997            1996 
                                      --------          --------        -------

         Income from operations       $46,582           $31,954         $18,845

         Extraordinary charge            (527)             -               -

         Stockholders' equity          (1,389)             (669)         (1,200)
                                      -------           -------         -------
                                      $44,666           $31,285         $17,645
                                      =======           =======         =======

         The income taxes  credited to  stockholders'  equity  relate to the tax
         benefit arising from the exercise of employee stock options.


         Income tax expense  attributable to income from operations  consists of
         the   following  for  the  fiscal  years  ended  June  30  (dollars  in
         thousands):

                                        1998             1997            1996  
                                      --------         --------        --------

         Current:
           Federal                    $ 37,205         $ 25,434        $ 14,445
           State                         8,694            5,945           3,778
                                        ------          -------         -------
                  Total current         45,899           31,379          18,223
                                        ------          -------         -------

         Deferred:
           Federal                         625              595             517
           State                            58              (20)            105
                                        ------          -------         -------
                  Total deferred           683              575             622
                                        ------          -------         -------

         Income tax expense
           on income before
           extraordinary charge       $ 46,582         $ 31,954        $ 18,845
                                       =======          =======         =======


         The following is a reconciliation of expected income taxes (computed by
         applying  the  Federal  statutory  rate  to  income  before  taxes  and
         extraordinary   charge)  to  actual  income  tax  expense  (dollars  in
         thousands):

                                        1998             1997           1996  
                                      --------         --------       --------
         Computed "expected"
            income tax expense        $ 41,486         $ 28,243       $ 16,447
         State income taxes,
            net of federal income
            tax benefit                  4,786            3,163          2,016

         Goodwill amortization              99               99             99
         Other, net                        211              449            283
                                       -------          -------         ------

         Income tax expense
            on income before
            extraordinary charge      $ 46,582         $ 31,954       $ 18,845
                                       =======          =======        =======








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)




         The significant components of the deferred tax expense (benefit) are as
         follows (dollars in thousands):

                                              1998          1997         1996  
                                            --------      --------     --------
         Deferred tax (benefit)
            exclusive of the
            component below                $    (825)     $   (933)    $   (885)
         Utilization of net operating
           loss carryforwards                  1,508         1,508        1,507
                                            --------       -------      -------
                                           $     683      $    575     $    622
                                            ========       =======      =======


         The  components  of the net deferred tax liability as of June 30 are as
         follows (dollars in thousands):
                                                 1998               1997
                                                --------           ------
         Deferred tax assets:
          Accounts receivable                  $   901            $   853
          Inventories                            2,483              2,774
          Other liabilities and reserves         3,710              3,726

          Net operating loss carryforwards      10,243             11,750
                                                ------             ------
             Total deferred tax asset           17,337             19,103
                                                ------             ------

         Deferred tax liabilities:
           Property, plant and equipment        25,423             26,811
           Intangible assets other than
             goodwill                           15,186             15,681
           Miscellaneous                         1,517                717
                                               -------            -------
               Total deferred tax liability     42,126             43,209
                                               -------            -------
               Net deferred tax liability      $24,789            $24,106
                                               =======            =======

         The Company has tax operating loss carryforwards of approximately $26.0
         million at June 30, 1998, of which $4.1 million expires in 2006,  $11.3
         million expires in 2007 and $10.6 million expires in 2008.  Pursuant to
         Section 382 of the Internal Revenue Code, the Company's  utilization of
         the  net  operating  loss   carryforwards  are  subject  to  an  annual
         limitation of approximately $3.9 million.

         During fiscal 1997, Ethan Allen received a $5.2 million  investment tax
         credit from the State of Vermont.  The credit may be utilized to offset
         80% of  current  and  future  years tax  liability  and may be  carried
         forward  up to 10  years.  Ethan  Allen  does not  expect to be able to
         utilize the entire credit.  The estimated net  realizable  credit of $2
         million  is  being  accounted  for  under  the  deferral  method,  with
         amortization over the average life of the related assets.

         Management believes that the results of future operations will generate
         sufficient taxable income to realize the deferred tax assets.


(10)     Retirement Programs - Employee Benefits

         The Ethan Allen Profit Sharing and 401(k) Retirement Plan
         ---------------------------------------------------------

         The Ethan Allen Profit Sharing and 401(k)  Retirement Plan (the "Plan")
         was formed  effectively  July 1, 1994 with the merger of the Retirement
         Program of Ethan Allen Inc. ("Retirement Program") into the Ethan Allen
         401(k)  Employee  Savings  Plan.  As a result of the  merger on July 1,
         1994, all participant investments in the Retirement Program (except for
         the Ethan Allen Restricted  stock which was transferred  directly) were
         liquidated  and  the  proceeds  were  transferred  into  the  Plan  and
         allocated to participant accounts at each participant's request.








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         The Plan is offered to  substantially  all employees of the Company who
         have completed both one year and 1,000 hours of service during the Plan
         year.

         Ethan Allen, may at its discretion, make a matching contribution to the
         401(k) portion of the Plan on behalf of each participant,  provided the
         contribution  does not exceed  the  lesser of 50% of the  participant's
         contribution or $1,000 per participant per Plan year.  Contributions to
         the profit  sharing  portion of the Plan are made at the  discretion of
         management.  Total profit  sharing and 401(k) company match expense was
         $2,287,549 in 1998, $1,595,099 in 1997, and $2,866,000 in 1996.

         Other Retirement Plans and Benefits
         -----------------------------------

         Ethan Allen provides  additional benefits to selected members of senior
         and  middle  management  in the  form of  previously  entered  deferred
         compensation arrangements and a management incentive program. The total
         cost of these benefits was  $3,105,000,  $1,567,000,  and $2,047,000 in
         1998, 1997 and 1996, respectively.

(11)     Wholly-Owned Subsidiary

         The Company owns all of the outstanding stock of Ethan Allen and has no
         material  assets  other than its  ownership  of Ethan  Allen  stock and
         conducts all significant  operating  transactions  through Ethan Allen.
         The Company has guaranteed  Ethan Allen's  obligation  under the Credit
         Agreement  and has pledged all the  outstanding  capital stock of Ethan
         Allen to secure its guarantee.

         The  condensed  balance  sheets  of  Ethan  Allen  as of June 30 are as
         follows (dollars in thousands):


                  Assets                      1998                    1997
                  ------                     --------               --------

         Current assets                      $187,677               $194,704
         Non-current assets                   282,874                244,880
                                             --------               --------
                  Total assets               $470,551               $439,584
                                             ========               ========

                  Liabilities

         Current liabilities                 $ 72,380               $ 62,398
         Non-current liabilities               45,191                 99,040
                                             --------                -------
                  Total liabilities          $117,571               $161,438
                                             ========                =======


         A summary of Ethan Allen's operating  activity for each of the years in
         the three-year period ended June 30, 1998, is as follows:

                                         1998            1997            1996
                                       --------        --------        --------
         
         Net sales                     $679,321        $571,838        $509,776
         Gross profit                   315,575         248,238         205,126
         Operating income               119,845          85,943          55,677
         Interest expense                 4,245           5,864           8,882
         Amortization of deferred
             financing costs                364             563             734
         Income before income
             taxes and extraordinary
             charge                     118,685          80,787          47,095
         Net income                    $ 71,301        $ 48,833        $ 28,250










                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



(12)     Business Reorganization

         The Company  implemented a business  reorganization  ("Reorganization")
         effective July 1, 1995,  which permitted a separation of  manufacturing
         operations from distribution and store operations. The Company believes
         that the separation of manufacturing  operations from  distribution and
         store  operations   provides  for  improved   measures  of  performance
         including profitability of operations and return on assets, by allowing
         the Company to more easily allocate income,  expenses and assets to the
         separate  operations  of the  Company's  business.  The  Reorganization
         consisted  principally of the following elements:  (i) the contribution
         of Ethan Allen's  manufacturing  equipment to Ethan Allen Manufacturing
         Corporation ("EAMC"), which is a wholly owned subsidiary of Ethan Allen
         (ii) EAMC entered into operating  lease  arrangements  with Ethan Allen
         for  real  property  used  in   manufacturing   operations   (iii)  the
         contribution by Ethan Allen of certain of Ethan Allen's  trademarks and
         service marks, design patents and related assets to Ethan Allen Finance
         Corporation ("EAFC") which is a wholly owned subsidiary of Ethan Allen,
         (iv) the full and  unconditional  guarantee on a senior unsecured basis
         of Ethan Allen's  obligations  under Ethan Allen's Credit Agreement and
         Senior Notes by each of EAMC and EAFC and Andover  Woods  Products Inc.
         ("Andover"), a wholly owned subsidiary of Ethan Allen (v) the amendment
         of the Company's existing guarantee of Ethan Allen's  obligations under
         the Senior Notes which were repurchased in March 1998 (refer to Note 5)
         to include a guarantee of each Guarantor Subsidiary's obligations under
         its Subsidiary Guarantee,  (vi) the execution of a management agreement
         and a service mark  licensing  agreement  between  Ethan Allen and EAFC
         (vii) the execution of a management agreement and a trademark licensing
         agreement  between  EAMC  and  EAFC  and  (viii)  the  execution  of  a
         manufacturing  agreement  between  Ethan  Allen and EAMC.  Ethan  Allen
         continues to own its headquarters building in Danbury, Connecticut, the
         real property associated with EAMC's  manufacturing  operations and the
         assets and liabilities  associated  with the current Ethan  Allen-owned
         retail  operations  and Ethan  Allen's  distribution,  service and home
         delivery operations.


         The summarized  historical combined balance sheet information for EAMC,
         EAFC, and Andover (the "Guarantor  Subsidiaries")  at June 30, 1998 and
         1997 is as follows (dollars in thousands):


                  Assets                      1998              1997  
                  ------                    ---------         --------

         Current assets                     $ 134,188         $  85,355
         Non-current assets                   174,427           168,540
                                             --------          --------
            Total assets                    $ 308,615         $ 253,895
                                             ========          ========

                  Liabilities
                  -----------

         Current liabilities                $  37,040         $  28,160
         Non-current liabilities               16,316            16,893
                                             --------          --------

            Total liabilities               $  53,356         $  45,053
                                             ========          ========











                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         Summarized  historical  combined  operating  activity of the  Guarantor
         Subsidiaries for each of the years in the three-year  period ended June
         30, 1998 is as follows (dollars in thousands):

                                     1998         1997         1996
                                     ----         ----         ----

             Net sales          $  408,884   $  357,470   $  317,563
             Gross profit           91,596       75,278       57,227
             Operating income       72,537       57,113       39,324
             Income before
              income taxes          76,871       61,475       43,636

             Net income         $   43,430   $   37,131   $   26,400


         The  summarized  historical  financial  information  for the  Guarantor
         Subsidiaries  above has been derived from the  financial  statements of
         the Company.

(13)     Litigation

         The Company has been named as a potentially  responsible  party ("PRP")
         for  the  cleanup  of four  sites  currently  listed  or  proposed  for
         inclusion  on  the   National   Priorities   List  ("NPL")   under  the
         Comprehensive Environmental Response, Compensation and Liability Act of
         1980  ("CERCLA").  Numerous other parties have been identified as PRP's
         at these sites. The Company believes its share of waste  contributed to
         these sites is small in relation to the total; however, liability under
         CERCLA may be joint and  several.  The  Company  has total  reserves of
         $500,000 applicable to these sites, which the Company believes would be
         sufficient  to cover any  resulting  liability.  With respect to all of
         these sites,  the Company  believes that it is not a major  contributor
         based on the very small  volume of waste  generated  by the  Company in
         relation to total  volume at the site.  The Company has  concluded  its
         involvement with one site and settled as a de-minimis party. For two of
         the sites,  the  remedial  investigation  is  ongoing.  A volume  based
         allocation of responsibility among the parties has been prepared.  With
         respect to the fourth  site,  a consent  decree to finally  resolve the
         matter with the EPA has been signed.

(14)     Segment Information

         The Company's  operations  are classified  into two business  segments:
         wholesale and retail home  furnishings.  The wholesale home furnishings
         segment  is  principally   involved  in  the   manufacture,   sale  and
         distribution   of   home   furnishing   products   to  a   network   of
         independently-owned  and Ethan  Allen-owned  stores.  The  retail  home
         furnishings segment sells home furnishing products through a network of
         Ethan  Allen-owned  stores.  These products consist of case goods (wood
         furniture),  upholstered products,  home accessories and indoor/outdoor
         furniture.

         Wholesale  profitability  includes the wholesale  gross margin which is
         earned  on  wholesale  sales  to all  retail  stores,  including  Ethan
         Allen-owned  stores.  Retail  profitability  includes  the retail gross
         margin which is earned based on purchases from the wholesale  business.
         Inter-segment  eliminations  primarily comprise the wholesale sales and
         profit  on  the  transfer  of  inventory  between  segments.  Operating
         earnings by business  segment are defined as sales less operating costs
         and expenses.  Income and expense  items,  such as corporate  operating
         expenses,  are included in the applicable segment.  Identifiable assets
         are those assets used  exclusively  in the  operations of each business
         segment. Corporate assets principally comprise cash, deferred financing
         costs, and deferred income taxes.








                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)



         The following table shows sales, operating earnings and other financial
         information by respective  business  segment for the fiscal years ended
         June 30, 1998, 1997, and 1996 (dollars in thousands):



                                                                           Inter-Segment
         1998                               Wholesale       Retail          Eliminations           Consolidated
         ----                               ---------       ------          ------------           ------------
                                                                                             

         Net sales                          $575,867       $235,230        $(131,776)               $679,321
         Operating income                    109,714         13,747           (3,771)                119,690
         Interest and other
          income                               3,159            290             -                      3,449
         Interest expense                        -              -                                    ( 4,609)
                                                                                                     -------
          Income before income
           tax expense and
           extraordinary charge                                                                      118,530
         Depreciation and
          amortization                        13,753          1,751             -                     15,504

         Identifiable assets                 336,210         69,807             -                    406,017
         Cash                                                                                         19,380
         Deferred income taxes                                                                         7,094
         Deferred financing costs                                                                        632
                                                                                                     -------
              Total assets                                                                           433,123
         Capital expenditures                 14,895         14,770             -                     29,665

                                                                           Inter-Segment
         1997                               Wholesale       Retail          Eliminations           Consolidated
         ----                               ---------       ------          ------------           ------------
                                                                                             

         Net sales                          $495,001       $175,825        $ (98,988)               $571,838
         Operating income                     84,034          7,419           (5,604)                 85,849
         Interest and other
          income                                 974            298              -                     1,272
         Interest expense                        -             -                 -                    (6,427)
                                                                                                     -------

          Income before income
           tax expense                                                                                80,694
         Depreciation and
          amortization                        14,235          1,613              -                    15,848

         Identifiable assets                 335,260         61,745              -                   397,005
         Cash                                                                                         21,866
         Deferred income taxes                                                                         7,353
         Deferred financing costs                                                                      1,560
                                                                                                     -------
              Total assets                                                                           427,784
         Capital expenditures                  9,990         13,393              -                    23,383

                                                                           Inter-Segment
         1996                               Wholesale       Retail          Eliminations           Consolidated
         ----                               ---------       ------          ------------           ------------
                                                                                             

         Net sales                          $433,886       $155,601        $(79,711)                $509,776
         Operating income                     53,745          4,059          (2,237)                  55,567
         Interest and other
          income                                 663            376            -                       1,039
         Interest expense                       -              -               -                      (9,616)
                                                                                                     -------

          Income before income tax
           expense and extraordinary
            charge                                                                                    46,990
         Depreciation and
          amortization                        15,199          1,562            -                      16,761

         Identifiable assets                 327,371         48,350            -                     375,721
         Cash                                                                                          9,078
         Deferred income taxes                                                                         9,305
         Deferred financing costs                                                                      1,877
                                                                                                     -------
              Total assets                                                                           395,981

         Capital expenditures                  7,421          5,893            -                      13,314









                    ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)






(15)     Selected Quarterly Financial Data (Unaudited)

         Tabulated  below are certain  data for each quarter of the fiscal years
         ended June 30, 1998 and 1997 (dollar  amounts in thousands,  except per
         share data).

                                                   Quarter Ended                
                                  ----------------------------------------------
                                  September 30  December 31   March 31   June 30
                                  ------------  -----------   --------   -------
          1998 Quarters:

          Net Sales                $152,494      $172,743   $171,434   $182,650
          Gross Profit               70,766        80,713     80,404     83,692
          Income before
           extraordinary charge    $ 14,034      $ 19,091   $ 18,793   $ 20,030
          Net income               $ 14,034      $ 19,091   $ 17,991   $ 20,030
          Net income per basic
            share                  $   0.49      $   0.66   $   0.62   $   0.70
          Net income per diluted
            share                  $   0.48      $   0.65   $   0.61   $   0.68
          Dividend declared per
            common share           $   0.03      $   0.03   $   0.04   $   0.04

          1997 Quarters:
          Net sales                $132,355      $138,330   $144,719   $156,434
          Gross profit               54,578        59,921     63,308     70,431
          Net income               $  8,783        12,227     12,849     14,881
          Net income per basic
            share                  $   0.31      $   0.42  $    0.45   $   0.52
          Net income per diluted
            share                  $   0.30      $   0.42  $    0.44   $   0.51
          Dividend declared per
            common share           $   0.02      $   0.02  $    0.03   $   0.03











                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           ETHAN ALLEN INTERIORS INC.
                                           (Registrant)


                                           By /s/ M. Farooq Kathwari
                                              ----------------------------------
                                              Chairman, Chief Executive Officer
                                               and Director


                                           ETHAN ALLEN INC.
                                           (Registrant)


                                           By /s/ M. Farooq Kathwari
                                              ----------------------------------
                                              Chairman, Chief Executive Officer
                                               and Director










         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the date indicated.




   /s/ M. Farooq Kathwari                   Chairman, Chief Executive
- ----------------------------------           Officer and Director
      (M. Farooq Kathwari)



  /s/ Clinton A. Clark                      Director
- ----------------------------------
     (Clinton A. Clark)



  /s/ Kristin Gamble                        Director
- ----------------------------------
     (Kristin Gamble)



  /s/ Horace McDonell                       Director
- ----------------------------------
     (Horace McDonell)



  /s/ Edward H. Meyer                       Director
- ----------------------------------
     (Edward H. Meyer)


   /s/ William W. Sprague                   Director
- ----------------------------------
      (William W. Sprague)



  /s/ Gerardo Burdo                         Vice President &
- ----------------------------------           Corporate Controller
     (Gerardo Burdo)


  /s/ Mary Beth Walsh                       Assistant Corporate
- ----------------------------------           Controller
     (Mary Beth Walsh)