La-Z-Boy Incorporated
Annual Report 2007

I N I T I A T I N G 
C H A NG E

D EL I V ER I N G 
C O M FO R T

LA-Z-BOY INCORPORATED

2007 ANNUAL REPORT

B OA RD   O F  D IR E C TO R S

JACK L. THOMPSON

ROCQUE E. LIPFORD

JOHN H. FOSS

W. ALAN MCCOLLOUGH

DAVID K. HEHL

NIDO R. QUBEIN

JAMES W. JOHNSTON

RICHARD M. GABRYS

KURT L. DARROW

DR. H. GEORGE LEVY

S HA RE H OL D ER S ’  ME ET

I N G

WEDNESDAY, AUGUST 15, 2007  11: 00 A.M. EDT    L A-Z-BOY AUDITORIUM    1284 N. TE LEGRAPH ROAD, MONROE, MI CHIGAN  USA 

 
La-Z-Boy Incorporated is turning the page on yet another difficult year. We 

have spoken before about the challenges our industry has faced recently, 

from  overall  weak  demand  to  expanding  offshore  competition  and  a 

rapidly  consolidating  retail  environment  that  quickly  changed  the  way 

furniture is distributed and sold in North America.

We’ve been on a course of aggressive change to ensure that this company 

succeeds despite the industry’s challenges. We evaluated our portfolio of 

companies and determined the actions needed to better align our business 

to compete in today’s environment. We strengthened our commitment to 

our  proprietary  distribution  system  to  secure  a  firm  foundation  for  future 

growth opportunities. We transitioned our casegoods business to primarily 

an  import  model  and,  as  a  result,  significantly  improved  the  segment’s 

operating  performance.  And,  we  increased  our  overall  competitiveness 

through  global  sourcing,  improving  how  we  operate  in  the  worldwide 

economy, to name just a few of our accomplishments.

 LETTER TO   
SHAREHOLDERS

2007 SALES MIX
71% UPH OLSTERY

16% C ASEGOO DS

13% RETAIL

We  are  disappointed,  however,  that  even  with  these  initiatives,  our 

performance did not meet expectations. For the year, on sales of $1.62 billion, 

we  earned  $0.38  per  share  from  continuing  operations.  We 

also focused on strengthening our balance sheet to give the 

ON A COURSE OF  
AGGRESSIVE CHANGE

company the financial flexibility and wherewithal to navigate its way through 

the challenging environment in which we are operating. Over the past 12 

months, we reduced our debt by $35 million, ending the year with a total 

debt-to-capitalization ratio of 23.5%, down from 26.5% last year. We also did 

a solid job in managing our inventories and receivables relative to declining 

sales, and generated cash of more than $120 million from operating activities 

and the sale of assets and discontinued operations.

We  remain  committed  to  building  shareholder  value  and  have  identified 

key initiatives to make us more competitive and position the company for 

future success. We are:

1.  Bringing  a  more  intense  focus  to  the  core  attributes  of  the  La-Z-Boy® 

brand and capitalizing on its rich heritage of innovation and comfort;

2.  Continuing  to  grow  and  develop  the  La-Z-Boy  Furniture  Galleries® 

proprietary  store  system  to  provide  consumers  with  an  enhanced 

shopping experience;

LA-Z-BOY ® SYRACUSE CH AIR

3.  pursuing  ongoing  operational  improvements  to 

segment, we have committed to a plan to sell Clayton 

increase consumer satisfaction, reduce costs and 

Marcus and pennsylvania house.

add efficiencies.

Our  company-owned  retail  network  continues  to 

Of  course,  even  as  we  change,  so  does  the 

grow,  expanding  our  brand  presence  and  giving  us 

environment  in  which  we  work.  this  year  brought  an 

more  insight  into  the  consumers  that  will  shape  our 

uncertain  housing  market,  unprecedented  gasoline 

business  in  the  future.  In  addition  to  optimizing  our 

prices  and  inconsistent  consumer  confidence  levels, 

back-end  retail  operations,  we  are  centralizing  our 

all  of  which  make  the  fight  for  discretionary  dollars 

merchandising, marketing and advertising functions, all 

harder  than  ever  before.  Innovation  and  changing 

of which will improve our cost structure and efficiency. 

the way we do business will ensure our positioning for 

We  expect  to  make  meaningful  improvement  to  our 

the future.

retail performance next year.

LEVERAGING THE pOWER OF OuR  
INDuSTRy-LEADING BRAND

We  also  are  making  our  manufacturing  processes 

leaner and more efficient to better operate in today’s 

At  La-Z-Boy,  evolution  is  leading  us  back  to  our 

increasingly  competitive  environment.  We  expect  to 

roots – to the legacy of comfort that has defined our 

complete the transition to cellular manufacturing in our 

company  for  80  years.  through  extensive  research, 

branded facilities by the end of fiscal year 2008, which 

we  gained  more  insight  into  how  today’s  consumers 

will  increase  our  speed  and  quality,  while  reducing 

shop for furniture and their perceptions of our brand. 

costs.  Already,  we  are  meeting  and  exceeding 

We  understand  the  potential  of  our  industry-leading 

customer expectations with faster delivery and more 

brand, and have identified the greatest opportunities 

fashion, color and customization options, which will be 

for  future  growth.  As  a  result,  this  fall,  La-Z-Boy  will 

difficult for competitors to replicate from offshore.

launch  a  new  marketing  campaign  for  the  La-Z-Boy 

Furniture  Galleries®  system  to  leverage  our  world-

renowned brand name and the power it has with our 

targeted consumers.

We  have  seen  tough  times  before  and  understand 

that our current situation will not turn around overnight, 

no  matter  how  quickly  we  adapt.  As  we  celebrate 

the  80th  anniversary  of  La-Z-Boy,  it  seems  fitting  to 

this  renewed  emphasis  on  our  core  brand  attributes 

consider  that  the  furniture  industry  has  weathered 

was  the  catalyst  for  strategic  enhancements  to  our 

business. We sold certain companies that didn’t fit with 

our long-term vision, so we can concentrate on growing 

those businesses that offer the most enduring potential.  

Last  July,  we  sold  our  remaining  non-residential 

company, hospitality furniture manufacturer American 

of  Martinsville.  In  our  upholstery  segment,  we  sold  

sam Moore in the fourth quarter, and in our casegoods 

La-Z-Boy FURNITURE GaLLERIES® SToRE, CoTToNwood, NEw MExICo

many ups and downs since the company began in 1927. Industry leaders 

understand that evolution is constant, and history has shown that La-Z-Boy 

can and will meet the challenges of an ever-changing marketplace.

Our direction is supported by our Board of directors, which was strengthened 

this  year  through  three  new  members.  richard  Gabrys,  former  Vice 

Chairman of deloitte & touche LLp, brings international business experience 

and  a  financial  background  in  industries  that  have  faced  tremendous 

change. Nido qubein, the president of High point university and Chairman 

NaTIoNaL TRUST
SoFa TaBLE
FRoM HaMMaRy

of the Great Harvest Bread Company, brings both business and academic 

success  as  he  provides  his  unique  point  of  view.  And  Alan  McCollough, 

former Chairman and CeO of Circuit City, will add invaluable insight into our 

retail business in addition to offering a great deal of experience in global 

supply chain management, distribution and logistics.

everyone  throughout  the  La-Z-Boy  organization  is  invested  in  and 

committed  to  the  ongoing  success  of  our  company.  Many  of  our  team 

members  are  highlighted  throughout  the  pages  of  this 

report,  providing  a  snapshot  of  the  talented  people  who 

pOISED FOR  
IMpROVED pERFORMANCE

are implementing change at every level of the company.

With  our  drive  for  continual  evolution,  we  are  poised  for  improved 

performance and are positioning ourselves to be competitive in a dynamic 

marketplace. While there are many things that we cannot control, we are 

aggressively pursuing transformation in those areas that we can influence 

and  are  focused  on  serving  our  customers,  delivering  quality  furniture 

quickly and providing an improved return to our shareholders.

No other company in our industry has been a part of the American culture 

like La-Z-Boy, but our history is just part of the story. As we continue to evolve 

our business and leverage our brand legacy, we are convinced that the 

best for La-Z-Boy is yet to come.

Kurt L. darrow 

James W. Johnston 

president and Chief executive Officer 

Chairman of the Board

L A- Z - BO Y ®   I N NO V A T I ON

DURING THE DEVELOPMENT OF THE LA-Z-TIME® RECLINING MECHANISM, CONSUMER RESEARCH WAS A VALUABLE RESOURCE USED BY (FROM LEFT) 
RICH MARSHALL, R&D CONTINUOUS IMPROVEMENT MANAGER ; L ESLIE SALENBEIN , OUTS OURCE PRODUCT MANAGER ; PAULA HOY AS, VP UPHOLSTERY 

MERCH ANDISING; AND TO M ZWOLAN, DIRECTOR OF CONSUMER RESE ARCH.

D E E P   CO N S U M E R   I N S I G HT
Research plays an important role in all La-Z-Boy does, from product development to the in-store 
experience. The company is focused on meeting consumer needs and making the La-Z-Boy® brand 
more relevant, particularly in the dynamic marketplace where its customer base is expanding. 
Additionally, consumer preferences and shopping habits are changing and the channels 
of distribution are shifting. A recent survey reveals that La-Z-Boy not only has universal brand 

C O M FO R T A B L E   A T  H OM E

AT HOME, THE CARMEN SOFA FEATURES THE LA-Z-TIME® RECLINING MECHANISM , ALLOWING CONSUMERS TO SIM PLY RELEASE A LATCH AND LEAN BACK.

recognition and near-universal favorability, but also enjoys a commanding lead over other brands 
with respect to the attributes consumers deem most important – comfort, quality and durability. And 
comfort is what we do at La-Z-Boy. Such research is integral to driving product innovation – like the 
La-Z-Time® reclining sofa with a smooth-action release latch, an example of our ability to consistently 
introduce new comfortable solutions to the consumer.

G L O BA L  S O U R CI N G

GLOBAL SOURCING ALLOWS THE COMPANY TO OFFER COMFORTABLE AND WELL-MADE PRODUCTS, WITH QUALITY CONTROL AND DISTRIBUTI ON OVERSEEN 

BY PEOPLE LIKE KEITH WINEBARGER  (LEFT), KINCAID WAREHOUSE MANAGER ; AND ZHIBIN  “JACK” WANG, LA-Z-BOY G LOBAL CHIN A OPERATIONS.

I N TE GR A T E D  S U PP L Y   CH A I N
Quick delivery and competitively priced, comfortable and well-designed products are what 
the consumer wants. La-Z-Boy Global, based in Asia, ensures the consumer gets just that – from 
the management of production and quality control to overseeing the furniture’s transit to its final 
destination. Overall, global sourcing is becoming an increasingly larger part of La-Z-Boy’s business. 
In addition to importing some 70% of its casegoods, the company sources fabric, in the form of 

E V ER Y D A Y   LI V IN G

THANKS TO LA-Z-BOY’S STRONG SUPPLY CHAIN AND HIGHL Y EFFICIENT SOURCING OPERATIONS, FAMILIES  CAN ENJOY QUICK DELIVERY OF BEAUTIFUL WOOD 

FURNITURE – LIKE THIS  KINCAID CO LONNADE TABLE, CHAIRS AND BOOKCASE.

cut-and-sewn kits, as well as component parts, such as wooden legs, for its domestic upholstery 
operation. La-Z-Boy also has begun to import a small percentage of fully upholstered leather 
products. With its strong supply chain, including La-Z-Boy Global, warehousing and logistics, La-Z-Boy 
Incorporated has developed highly efficient distribution systems, allowing for the delivery of beautiful 
wood furniture to retailers in less than two weeks from time of order.

C RE A T I V E  S OL U T I ON S

ANDREA FRINK, D IRECTOR OF DESIGN  AND IN-HOME SER VICES, IN PHIL ADELPHIA, WORKS WITHIN  THE LA-Z-BOY R ETAIL SEGMENT TO HEL P CONSUMERS 

VISU ALIZE THEIR  COMPLETE ROOM – FROM FURNITURE  TO LAMPS, RUGS AND ACCESS ORIES . 

B R I N G IN G   D E S I GN  H OM E
Designer assistance, the guarantee of a beautiful and comfortable room, and an easy and 
pleasant shopping experience – that’s what the consumer will receive when she takes advantage 
of La-Z-Boy’s complimentary In-Home Design service. After meeting with consumers in the comfort 
of their home, La-Z-Boy’s professional designers present room plans and layouts, sketches and fabric 

B EA U T I F U L  R E S U L T S

THE IN-HO ME DESIGN  PRESENTATION COMES TO LIFE IN THIS  BEAUTIFUL LIVING ROOM, FEATURING THE LA-Z-BOY ® KATANYIA SOFA, KARENA CHAIR AND 
COORDINATING TABLES FROM THE HAMMARY® NATIONAL TRUST COLLECTI ON.

and frame selections. In addition to finding the perfect colors and patterns for custom upholstered 
furniture, La-Z-Boy’s designers accessorize rooms with coordinating tables, lamps, rugs and other 
accent pieces. Thus, with the designer’s guidance and expertise, consumers envision and embrace 
the transformation and the beautiful, comfortable home of their dreams becomes a reality.

C U S T O M I Z E D   S EL E C TI ON

WITH THE KALEIDOSCOPE™ COLOR-MATCHING SYSTEM, LA-Z-BOY FURNITURE GALLERIES ® STORE MANAGERS LIKE TERRY MASON, FROM CLEVELAND, OHIO, CAN 
FIND LA-Z-BOY ® FABRICS IN COLORS THAT COORDINATE WITH AN ITEM BROUGHT FROM HOME, SUCH AS A PAINT CHIP, PILLOW OR, IN THIS CASE, A CANDLE.

S P E ED   T O   M A R KE T
Speed to market and quick delivery are at the core of the La-Z-Boy mission: to satisfy the consumer. 
And, delivering comfortable, custom furniture quickly is one of the most important ways the company 
is differentiating itself in the competitive marketplace. An objective of the company-owned La-Z-Boy 
Furniture Galleries® stores is to offer next-day delivery of in-stock merchandise by utilizing a new 
warehouse system. The company’s manufacturing operations are becoming more efficient through the 

Q U I C K  D EL I V ER Y

CUSTOMIZED PRODUCT ORDERS, INCLU DING THIS  LA-Z-BOY ® FLETCHER  RECLINER, ARE DELIVERED QUICKLY, DELIGHTING CUSTOMERS.

conversion of facilities producing La-Z-Boy® branded furniture to the cellular production process, which 
increases speed and quality while lowering costs. As a result, the company will have the ability to deliver 
custom upholstered furniture in four weeks or less. Innovation is what started La-Z-Boy 80 years ago, and 
it consistently plays a leading role in how the company operates across every discipline – from product 
design and development to an efficient delivery system that truly delights and satisfies customers.

CELEBRATING   

80  YEARS  OF   

COMFO RT …   

INNOVATION  … 

As La-Z-Boy celebrates its 80th anniversary, the ideals initiated by its founders 

still remain today … to provide comfortable, innovative and quality furniture 

to consumers at an affordable value.

Back  in  1927,  the  company  introduced  a  unique  way  to  recline  with  the 

invention  of  the  first  automatic  reclining  chair.  This  provided  consumers 

with  a  new  form  of  comfort.  Then  in  1961,  the  next-generation  reclining 

mechanism, which allowed a chair to rock and recline at the same time, 

launched  a  new  era  for  La-Z-Boy,  and  living  rooms  around  the  world 

QUALITY.

featured the Reclina-Rocker® chair.

Today,  the  company  markets  a  complete  line  of  stylish  and  comfortable 

furniture – from sofas and chairs to beautiful wood bedroom, dining room 

and occasional pieces. From its roots as a reclining chair company, La-Z-Boy 

is proud to provide comfort and quality for the entire home.

LA-Z-BOY® DEMI SOFA

C O M FO R T   CO M E S  H OM E
Watch for a new marketing campaign launching this fall. The tagline, “Comfort. It’s what we do.™” 
speaks to the core attribute of the La-Z-Boy® brand. Humorous and relevant commercials will focus 
on how La-Z-Boy® products provide consumers comfort from the pressures of the busy world. Shot in 
a La-Z-Boy Furniture Galleries® store, the commercials also highlight the features and benefits of the 
proprietary stores as the destination for consumers looking for La-Z-Boy® furniture.

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

Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 28, 2007

COMMISSION FILE NUMBER 1-9656

LA-Z-BOY INCORPORATED

(Exact name of registrant as specified in its charter)

MICHIGAN
(State or other jurisdiction of
incorporation or organization)

1284 North Telegraph Road, Monroe,
Michigan
(Address of principal executive offices)

38-0751137
(I.R.S. Employer
Identification No.)

48162-3390
(Zip Code)

Registrant’s telephone number, including area code (734) 242-1444
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Shares, $1.00 Par Value

New York Stock Exchange

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

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in rule 405 of the

Securities Act. Yes ¥

No n

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the

Exchange Act. Yes n

No ¥

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes ¥

No n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the 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. ¥

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

Large accelerated filer n

Accelerated filer ¥

Non-accelerated filer n

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes n

No ¥

Based on the closing price on the New York Stock Exchange on October 28, 2006, the aggregate market value

of Registrant’s common shares held by non-affiliates of the Registrant on that date was $650.8 million.

The number of common shares outstanding of the Registrant was 51,784,553 as of June 2, 2007.

DOCUMENTS INCORPORATED BY REFERENCE:

(1) Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission pursuant
to Regulation 14A for the Annual Meeting of Shareholders to be held on August 15, 2007 are incorporated by
reference into Part III.

LA-Z-BOY INCORPORATED

FORM 10-K ANNUAL REPORT FISCAL 2007

TABLE OF CONTENTS

Page
Number(s)

Cautionary Statement Concerning Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

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

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of

Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers, and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

4
9
11
11
11
11
11

12
16

19
37
38

72
72
72

72
72

72
73
73

PART IV

Item 15. Exhibits, and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

73

Note: The responses to Items 10 through 14 are included in the Company’s definitive proxy statement to be filed
pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on August 15, 2007. The required
information is incorporated into this Form 10-K by reference to that document and is not repeated herein.

2

Cautionary Statement Concerning Forward-Looking Statements

We are making forward-looking statements in this report. Generally, forward-looking statements include
information concerning possible or assumed future actions, events or results of operations. More specifically,
forward-looking statements include the information in this document regarding:

future income, margins and cash flows
future growth
adequacy and cost of financial resources

future economic performance
industry and importing trends
management plans

Forward-looking statements also include those preceded or followed by the words “anticipates,” “believes,”
“estimates,” “hopes,” “plans,” “intends” and “expects” or similar expressions. With respect to all forward-looking
statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995.

Actual results could differ materially from those anticipated or projected due to a number of factors. These
factors include, but are not limited to: (a) changes in consumer confidence; (b) changes in demographics;
(c) changes in housing sales; (d) the impact of terrorism or war; (e) continued energy price changes; (f) the
impact of logistics on imports; (g) the impact of interest rate changes; (h) changes in currency exchange rates;
(i) competitive factors; (j) operating factors, such as supply, labor or distribution disruptions including changes in
operating conditions or costs; (k) effects of restructuring actions; (l) changes in the domestic or international
regulatory environment; (m) ability to implement global sourcing organization strategies; (n) fair value changes to
our intangible assets due to actual results differing from those projected; (o) the impact of adopting new accounting
principles; (p) the impact from natural events such as hurricanes, earthquakes and tornadoes; (q) the impact of retail
store relocation costs, the success of new stores or the timing of converting stores to the New Generation format;
(r) the ability to procure fabric rolls or cut and sewn fabric sets domestically or abroad; (s) the ability to sell the
discontinued operations for their recorded fair value; (t) those matters discussed in Item 1A of this Annual Report
and factors relating to acquisitions and other factors identified from time to time in our reports filed with the
Securities and Exchange Commission. We undertake no obligation to update or revise any forward-looking
statements, either to reflect new developments or for any other reason.

3

ITEM 1. BUSINESS.

PART I

Edward M. Knabusch and Edwin J. Shoemaker started Floral City Furniture in 1927, and in 1928 the newly
formed company introduced its first recliner. In 1941, we were incorporated in the state of Michigan, and in 1996
the name was changed to La-Z-Boy Incorporated. Since then the La-Z-Boy name has become the most recognized
brand in the furniture industry. We have increased our ownership of retail stores during the past several years.
La-Z-Boy Incorporated is divided into three segments — the Upholstery Group, the Casegoods Group and the
Retail Group.

La-Z-Boy is the largest reclining-chair manufacturer in the world and North America’s largest manufacturer of
upholstered furniture. We also manufacture and import casegoods (wood) furniture products for resale in North
America. La-Z-Boy Incorporated markets furniture for every room of the home. According to the May, 2007 Top
100 ranking by Furniture Today, which is an industry trade publication, the largest retailer of single-brand
upholstered furniture in the U.S. is the La-Z-Boy Furniture Galleries» stores retail network.

On July 28, 2006, we completed the sale of our American of Martinsville operating unit, which supplied
contract furniture to the hospitality, assisted-living and governmental markets, and on April 28, 2007, we completed
the sale of our Sam Moore operating unit, an upholstered chair manufacturer. During the third quarter of fiscal 2007,
we committed to a plan to sell the operating units of Clayton Marcus and Pennsylvania House which were included
in the Casegoods Group. As we have continued to assess our long-term strategic direction, we have determined that
these operating units do not align with our current strategic plan.

In the fourth quarter of fiscal 2007, we committed to a restructuring plan which included the closures of our
Lincolnton, North Carolina and Iuka, Mississippi upholstery manufacturing facilities, the closure of our rough mill
lumber operation in North Wilkesboro, North Carolina, the consolidation of operations at our Kincaid Taylorsville,
North Carolina upholstery operation and the elimination of a number of positions throughout the remainder of the
organization. The Lincolnton and Iuka facility closures will occur in the first quarter of fiscal 2008 and will impact
approximately 250 and 150 employees, respectively. The closure of our North Wilkesboro lumber operation, the
consolidation of operations at Kincaid’s Taylorsville operation and the elimination of other positions occurred in the
fourth quarter of fiscal 2007 and impacted approximately 100 positions. These decisions were made to help align
our company with the current business environment and strengthen our positioning going forward.

Applicable accounting rules categorize some of our independent dealers that do not have sufficient equity to
carry out their businesses without our financial support as “variable interest entities” or “VIEs.” If it is determined
that we are the primary beneficiary of a VIE’s business activities, the rules require us to consolidate the VIE’s assets,
liabilities, and results of operations into our consolidated financial statements. We did not become the primary
beneficiary of any VIEs during fiscal 2007.

Principal Products and Industry Segments

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group.

Upholstery Group. The operating units in the Upholstery Group are Bauhaus, England, La-Z-Boy, U.K., and
La-Z-Boy. This group primarily manufactures and sells upholstered furniture to furniture retailers and proprietary
stores. Upholstered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper
sofas.

Casegoods Group. The operating units in the Casegoods Group are American Drew, Hammary, Kincaid, and
Lea. This group primarily sells manufactured or imported wood furniture to furniture retailers. Casegoods product
includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some coordinated uphol-
stered furniture.

Retail Group. The Retail Group consists of 70 company-owned La-Z-Boy Furniture Galleries» stores
located in nine markets ranging from the Midwest to the East Coast of the United States and also including

4

southeastern Florida. The Retail Group sells mostly upholstered furniture to end consumers through the retail
network.

Due to the dispositions and the impact of discontinued operations throughout fiscal 2007, segment data was
restated during fiscal 2007. Additional detailed information regarding our segments and the products which
comprise the segments is contained in Note 14 to our consolidated financial statements and our “Management’s
Discussion and Analysis” section, both of which are included in this report.

Raw Materials and Parts

The principal raw materials for the Upholstery Group are purchased cover (primarily fabrics and leather),
polyester batting and non-chlorofluorocarbonated polyurethane foam for cushioning and padding, lumber and
plywood for frames and steel for motion mechanisms. Purchased cover is the largest raw material cost for this
segment, representing about 28% of the Upholstery Group’s total material costs. We purchase cover from numerous
sources, but we do rely on a limited number of major suppliers. If one of these sources experienced financial or other
difficulties we could experience temporary disruptions in our manufacturing process until another source could be
found. Most of the cover is purchased in a raw state (a roll or hide), then cut and sewn into parts in our plants or from
third party offshore suppliers. The cover material costs are 67% fabric rolls and hides and 33% for cut and sewn
parts mainly from Argentina, Asia and Brazil. Of the cut and sewn parts, 62% is manufactured by one supplier
located in China. In addition we also import rolled fabric goods from overseas. We expect this trend to continue
given the lower labor costs in some of these areas and other existing economic conditions. By importing cut and
sewn leather and fabric sets, we are able to recognize savings compared to domestic purchases and fabrication of
these parts.

Purchased hardwood parts are also components for the Upholstery Group. These purchased parts are generally
external parts as opposed to frame or structural parts. The production process of these parts is relatively labor
intensive, making it more cost effective to import these parts from countries which have lower labor costs. The trend
of importing these parts is expected to continue.

Our Casegoods Group today is primarily an importer, marketer, distributor and manufacturer of casegood
furniture. Therefore, over the last few years the amount of raw materials purchased by the Casegoods Group has
been declining. The principal raw materials used in the Casegoods Group are hardwoods, plywood and chipwood,
veneers and liquid stains, paints and finishes and decorative hardware. Hardwood lumber and purchased hardwood
components are the Casegoods Group’s largest raw material costs, representing about 15% of the segment’s total
raw material costs, on domestically produced product.

Finished Goods Imports

The rapid growth of manufacturing capabilities in Asia has increased production capacities overseas. Due to
the low labor and overhead costs in those areas, the landed manufactured cost of product coming out of those
overseas manufacturing facilities is much lower than equivalent furniture produced domestically.

During fiscal 2007 and 2006, about 70% of our casegoods finished goods sales were imported. Imported
finished goods represented less than 13% of our consolidated fiscal 2007 sales. While a significant portion of
upholstered product sold in this country is domestically produced, there is a growing trend of imported upholstered
product, particularly with leather sofas. Both imported finished goods and components have lower costs, which in
turn has deflated overall selling prices to consumers in the last few years.

The importing of furniture is also changing how some large retailers and dealers are purchasing goods for their
stores. Some retailers are buying direct from overseas and bypassing domestic distribution altogether. This
increased import activity was a major contributor to our decision to restructure our casegoods manufacturing
capability over the last few years. We are improving our purchasing, logistics and warehousing capabilities for these
imports across our different operating units as our importing continues to grow. Specifically, we have negotiated
contracts with freight forwarders that allow us to utilize consolidated purchasing power for shipping to obtain
favorable rates based on volume.

5

Seasonal Business

We generally experience our lowest level of sales during our first fiscal quarter for our Upholstery Group and
during our first and third fiscal quarters for the Casegoods Group. When possible, we schedule production to
maintain uniform manufacturing activity throughout the year to coincide with slower sales. We do, however, shut
down our plants in July due to the seasonality of our sales and to perform routine maintenance on our equipment. A
majority of our manufacturing facilities will shut down their production for one week in July, 2007.

Economic Cycle and Purchasing Cycle

The success of our business depends to a significant extent upon the level of consumer spending. A number of
economic conditions affect the level of consumer spending on the products that we offer, including, among other
things, the general state of the economy, general business conditions, the level of consumer debt, interest rates,
taxation and consumer confidence in future economic conditions.

While we are pleased with our progress in our Upholstery and Casegoods divisions, we are concerned about the
macro economic environment as the energy markets remain volatile and housing starts are down. Our Retail
division is continuing to feel the impact of these factors as well as the inconsistent consumer confidence across the
country, which has created an unprecedented weakness in the retail environment.

Upholstered furniture has a shorter life cycle and exhibits a less volatile sales pattern over an economic cycle
than does casegoods. This is because upholstery is typically more fashion and design oriented, and is often
purchased one or two pieces at a time. In contrast, casegoods products are longer-lived, less fashion-oriented, and
frequently purchased in groupings or “suites,” resulting in a much larger dollar outlay by the consumer.

Practices Regarding Working Capital Items

With the exception of company-owned stores, we do not carry significant amounts of upholstered finished
goods in inventory as these goods are usually built to order. However, we generally build or import casegoods
inventory to stock, with warehousing, in order to attain manufacturing efficiencies and/or to meet delivery
requirements of customers. This results in higher levels of finished casegoods product inventories than upholstery
products. Our company-owned La-Z-Boy Furniture Galleries» stores maintain inventory at the stores and at
warehouse locations to meet customer demand.

Our transition to importing has increased inventory levels of imported finished goods while reducing
domestically manufactured finished goods. During fiscal 2006 and 2007, we made a concerted effort to reduce
our inventory balances. These efforts have lead to the consolidation of some of our Casegoods Group warehousing
and more effective management of our inventory. Our overall inventory levels for the Casegoods Group excluding
discontinued operations declined 21% over the past two years.

Dealer terms generally range between net 30-120 days. We offer some extended payment terms as part of sales

promotion programs.

Customers

We sell to a significant number of furniture retailers primarily throughout the United States and Canada. We
also sell to consumers through our company-owned La-Z-Boy Furniture Galleries» stores. We did not have any
customers whose purchases amounted to more than 5% of our fiscal year 2007 sales for either the Upholstery Group
or the Casegoods Group. Sales in our Upholstery and Casegoods Groups are almost entirely to furniture retailers.
The Retail Group sales are to end-consumers.

We have formal agreements with many of our retailers for them to display and merchandise products from one
or more of our operating units and sell them to consumers in dedicated retail space, either in stand-alone stores or in
dedicated galleries within their stores. We consider these stores, as well as our own retail stores, to be “proprietary.”
Excluding sales to consumers by our own retail stores and VIEs, our 2007 customer mix was about 48% proprietary,
14% major dealers (for example, Art Van, Berkshire Hathaway, Raymour & Flanigan, Havertys) and 38% general
dealers.

6

Currently, we own 70 stand-alone La-Z-Boy Furniture Galleries» stores and consolidate four VIEs owning 29
stores. Additionally, we have agreements with independent dealers for 237 stand-alone La-Z-Boy Furniture
Galleries» stores and 304 in-store galleries, all dedicated to our Upholstery furniture products. These stores also sell
accessories that are purchased from approved vendors. There are 194 stand-alone La-Z-Boy Furniture Galleries»
stores in the New Generation format, which generally has more space and a more updated appearance. The 194 New
Generation format stores represent a 26% increase in this type of distribution in comparison to last year. About 58%
of our 336 stand-alone stores are less than six years old. Additionally, the New Generation stores on average
generate more revenue per square foot than the older formatted stores. Having dedicated retail floor space is
important to the success of product distribution. This distribution system originated with our La-Z-Boy Furniture
Galleries» stores network, which continues to have the largest number of proprietary stores and galleries among our
other operating units. Viewed by itself, La-Z-Boy Furniture Galleries» stores network would be the sixth largest
conventional furniture retailer in the U.S. Our proprietary distribution also includes in-store galleries for England,
Kincaid and Lea’s La-Z-Boy KidzTM. Total “proprietary” floor space is approximately 11 million square feet.

It is a key part of our marketing strategy to continue to expand proprietary distribution. The network plans to
open another 25-30 of our New Generation format La-Z-Boy Furniture Galleries» stores during fiscal 2008, with
10-15 of these being new stores and the remainder being store remodels or relocations. We select dealers for this
proprietary distribution based on the management and financial qualifications of those dealers. The location of these
proprietary stores is based on the potential for distribution in a specific geographical area. This proprietary method
of distribution is beneficial to La-Z-Boy, our dealers and the consumer. For La-Z-Boy, it allows us to have a
concentration of marketing of our product by sales personnel dedicated to our entire product line, and only that line.
For our dealers who join this proprietary group, it allows them to take advantage of practices that have been proven
successful based on past experiences of other proprietary dealers. As a part of this, we facilitate forums and
communications for these dealers to share best practices among their peers. For our consumers, these stores provide
a full-service shopping experience with knowledgeable sales associates and in-home design consultants to support
their purchasing process.

Sales Representatives

Similar to most of the U.S. furniture industry, independent sales representatives sell our products to our dealer-
customers. Typically these representatives represent one or more of our operating units’ products, but for our non-
La-Z-Boy branded business they may also represent products of other furniture companies. Independent sales
representatives are usually compensated based on a percentage of their actual sales for their territory plus other
performance criteria. In general, we sign one-year contracts with our independent sales representatives.

Orders and Backlog

Upholstery orders are primarily built to a specific dealer order (stock order) or a special order with a down
payment from a consumer (sold orders). These orders are typically shipped within two to six weeks following
receipt of the order. Casegoods are primarily produced to our internal order (not a customer or consumer order),
which results in higher finished goods inventory on hand but quicker availability to ship to customers and greater
batch size manufacturing efficiencies. Additionally, increased importing of finished product over the last few years
in our Casegoods Group has increased our imported finished goods inventories due to longer order lead times
necessary for imported product.

As of April 28, 2007 and April 29, 2006, Upholstery Group backlogs were approximately $116 million and
$154 million, respectively. Casegoods backlogs as of April 28, 2007 and April 29, 2006 were approximately
$16 million and $21 million, respectively. The measure of backlog at a point in time may not be indicative of future
sales performance. We do not rely entirely on backlogs to predict future sales. For most operating units, an order
cannot be canceled after it has been selected for production.

Competitive Conditions

We are currently the third largest manufacturer/distributor of residential (bedroom, dining room, living and
family room) furniture in the United States, as measured by annual sales volume, according to industry trade

7

publication Furniture Today. Competitors include (in alphabetical order) Ashley, Bassett Furniture, Berkline,
Bernhardt, Ethan Allen, Flexsteel, Furniture Brands International, Hooker Furniture, Klaussner, Natuzzi, Palliser,
Stanley Furniture and Universal.

In the Upholstery Group, the largest competitors are Ashley, Bassett Furniture, Berkline, Bernhardt, Ethan

Allen, Flexsteel, Furniture Brands International, Klaussner, Natuzzi, and Palliser.

In the Casegoods Group, our main competitors are Ashley, Bernhardt, Ethan Allen, Furniture Brands
International, Hooker, Stanley, and Universal. Additionally, there are market pressures related to foreign manu-
facturers entering the United States market, as well as by increased direct purchasing from overseas by some of the
larger United States retailers.

The La-Z-Boy Furniture Galleries» stores operate in the retail furniture industry throughout North America;
consequently, they have different competitors. La-Z-Boy Furniture Galleries» stores competitors include but are not
limited to: Ashley, Bassett Furniture Direct, Ethan Allen, Thomasville Home Furnishings Stores, several other
regional competitors, and family-owned independent furniture stores.

In addition to the larger competitors listed above, a substantial number of small and medium-sized firms

operate within our business segments, all of which are highly competitive.

During the past couple of years there has been an increase in alternative distribution affecting our retail
markets. Companies such as Costco, Sam’s Club, IKEA, Target, Walmart and others offer products that compete for
the same consumer base that we are targeting.

We compete primarily by emphasizing our brand names and the comfort, quality and styling of our products. In
addition, we strive to offer good product value, strong dealer support and above average customer service and
delivery. Our proprietary stores, discussed above under “Customers,” also are a key initiative for us in striving to
remain competitive with others in the furniture industry.

Research and Development Activities

We provide information regarding our research and development activities in Note 1 to our consolidated

financial statements, which is included in Item 8 of this report.

Trademarks, Licenses and Patents

We own several trademarks including La-Z-Boy, our most valuable. The La-Z-Boy trademark is essential to
the upholstery and retail segments of our business. To protect our trademarks we have registered them in the
United States and other countries where our products are sold. The trademarks remain valid for as long as they are
used properly for identification purposes, and we actively monitor the correct use of our trademarks. We license the
use of the La-Z-Boy trademark on furniture sold outside the United States. We also license the use of the La-Z-Boy
trademark on contract office furniture, outdoor furniture and on non-furniture products in the United States for the
purpose of enhancing brand awareness. In addition, we license our proprietary dealers to use our La-Z-Boy
trademark in connection with the sale of our products and related services, on their signs, and in other ways, which
we consider to be a key part of our marketing strategies. We provide more information about those dealers above,
under “Customers.”

We hold a number of patents that we actively enforce but we believe that the loss of any single patent or group

of patents would not materially impact our business.

Compliance with Environmental Regulations

We have been named as a potentially responsible party at six environmental clean-up sites. Based on a review
of all currently known facts and our experience with previous environmental matters, we have recorded reserves in
respect of probable and reasonably estimable losses arising from environmental matters, and we do not believe that
a material additional loss is reasonably possible for environmental matters.

8

Employees

We employed 11,729 persons as of April 28, 2007. The Upholstery Group employed 8,755, the Casegoods
Group employed 1,014, the Retail Group employed 992, there were approximately 316 employees from discon-
tinued operations and 652 non-segment personnel, which includes our VIEs. Substantially all of our employees are
employed on a full-time basis. At the end of April 29, 2006 we had 13,404 employees.

Financial Information About Foreign and Domestic Operations and Export Sales

Our direct export sales are approximately 10% of our total sales. We also sell upholstered furniture to Canadian
customers and to European customers through a United Kingdom subsidiary and a joint venture, La-Z-Boy Europe,
BV. We have a manufacturing joint venture in Thailand, which distributes furniture in Australia, England, Thailand
and other countries in Asia. In addition, we have a sales and marketing joint venture in Asia, which sells and
distributes furniture in China, Japan and Korea among other Asian countries. Information about sales in the United
States and in Canada and other countries is contained in Note 14 to our consolidated financial statements, which is
included in Item 8 of this report. Our property, plant, and equipment in the U.S. was $179 million, $205 million and
$203 million at the end of fiscal years 2007, 2006 and 2005, respectively. The property, plant, and equipment in
foreign countries was $5 million in fiscal 2007, $6 million in fiscal 2006 and $8 million in fiscal 2005.

Internet Availability

Available free of charge through our internet website are links to our forms 10-K, 10-Q, 8-K and amendments
to those reports. These reports can be found on our internet website www.la-z-boy.com as soon as reasonably
practicable after being electronically filed with, or furnished to, the Securities and Exchange Commission
(www.sec.gov).

ITEM 1A. RISK FACTORS.

Our business is subject to a variety of risks. You should carefully consider the risk factors detailed below in
conjunction with the other information contained in this document. These risks are not the only ones we face.
Interest rates, consumer confidence, housing starts, and other general economic factors that affect many other
businesses are particularly significant to us because our principal products are consumer goods. Additional factors
that are presently unknown to us or that we currently believe to be immaterial also could affect our business.

Our recently acquired retail markets and others we may acquire in the future may not achieve the growth
and profitability we anticipate when we acquire them. We could incur charges for impairment of goodwill
if we cannot meet our earnings expectations for these markets.

To make our recently acquired retail markets successful, we are remodeling and relocating a significant
number of existing stores, and we will need to add new stores to achieve sufficient market penetration. Profitability
will depend on increased retail sales justifying the cost of these activities and on our ability to reduce support costs
as a percent of sales in advertising, warehousing and administration. In addition, if we are unable to achieve these
strategies, the goodwill we recorded when we acquired these markets could be impaired, which would result in a
non-cash charge on our statement of operations. We may acquire additional retail markets in the future, and if we do,
they may be subject to many of the same risks.

Increased reliance on foreign sourcing of our products makes us more reliant on the capabilities of our
foreign vendors and more vulnerable to potentially adverse actions by foreign governments.

We have been increasing our offshore capabilities to provide flexibility in product offerings and pricing to meet
competitive pressures. Our Casegoods Group has moved from primarily domestically manufactured to mainly
foreign sourced products. In addition, our Upholstery Group has increased its purchases of cut and sewn fabric and
leather sets from foreign sourced vendors. Our sourcing partners may not be able to produce these goods in a timely
fashion, or the quality of their product may be rejected by us, causing delays in shipping to our customers for
Casegoods and disruptions in our Upholstery plants due to not receiving rolled fabric and fabric and leather cut and
sewn sets. The majority of our cut and sewn leather sets are purchased from a supplier in China.

9

Governments in the foreign countries where we do business may change their laws, regulations and policies,
including those related to tariffs and trade barriers, investments, taxation, and exchange controls. All these items
could make it more difficult to service our customers or cause disruptions in our plants that could reduce our sales,
earnings, or both in the future.

Fluctuations in the price, availability and quality of raw materials could cause delays that could result in
our inability to provide goods to our customers and could increase our costs, either of which could
decrease our earnings.

We use various types of wood, fabrics, leathers, upholstered filling material, steel, and other raw materials in
manufacturing furniture. Because we are dependent on outside suppliers for our raw material needs, fluctuations in
the price, availability and quality of the raw materials we use in manufacturing residential furniture could have a
negative effect on our cost of sales and our ability to meet our customers’ demands. Inability to meet our customers’
demands could result in the loss of future sales, and we may not always be able to pass along price increases to our
customers due to competitive and marketing pressures. Since we have a higher concentration in our upholstery
business (80%) than most of our competitors, the effects of steel, polyurethane and fabric price increases, quantity
shortages, or quality issues are more significant for our business than for most other furniture companies.

Specifically, the financial condition of some of our domestic and foreign fabric suppliers could impede their
ability to provide these products to us in a timely manner. We have seen the number of domestic suppliers declining,
and a majority of those larger suppliers that remain are experiencing financial difficulties. In addition, upholstered
furniture is highly fashion oriented, and if we are not able to acquire sufficient fabric variety, or if we are unable to
predict or respond to changes in fashion trends, we may lose sales and have to sell excess inventory at reduced
prices. This would lower our earnings as well as reduce our sales.

Credit risk may adversely affect our earnings through collection losses and/or consolidating variable
interest entities into our financial statements.

Applicable accounting rules categorize some of our independent dealers that do not have sufficient equity to
carry out their businesses without our financial support as “variable interest entities.” If we are considered the
primary beneficiary of a variable interest entity’s business activities, we are required to consolidate its assets,
liabilities, and results of operations into our consolidated financial statements. Once consolidated, the rules require
us to absorb all of the dealer’s net losses in excess of its equity and to recognize its net earnings, but only to the
extent of recouping losses we previously recorded. Consolidating variable interest entities’ results into our financial
statements tends to reduce our net income because these dealers often incur losses, and even if one of them does
achieve net earnings, we can only recognize its earnings to the extent we previously recognized its losses.

Although we have been working to reduce the number of these dealers, generally by acquiring their businesses,
closing the operation or arranging for better capitalized operators to take over their territories, we are still
consolidating four of them. Despite our efforts, we may not be able to eliminate all of these consolidated dealers as
quickly as we would like, and we may be required to consolidate additional dealers in the future if warranted by
changes in their financial condition.

Manufacturing realignments could result in a decrease in our near-term earnings.

We continually review our domestic manufacturing operations and offshore (import) sourcing capabilities. As
a result, we sometimes realign those operations and capabilities and institute cost savings programs. These
programs can include the consolidation and integration of facilities, functions, systems and procedures. We also
may shift certain products from domestic manufacturing to offshore sourcing. These realignments and cost savings
programs generally involve some initial cost and can result in decreases in our near-term earnings until we achieve
the expected cost reductions. We may not always accomplish these actions as quickly as anticipated, and we may
not fully achieve the expected cost reductions.

10

Business failures of large dealers or customers could result in a decrease in our future sales and
earnings.

Although we have no customers who individually represent 5% or more of the annual sales of any of our
segments, business failures or consolidation of large dealers or customers could result in a decrease in our future
sales and earnings. Also, we are either lessee on or guarantor of some leases of proprietary stores operated by
independent furniture dealers. Defaults by any of these dealers could result in our becoming responsible for
payments under these leases thereby reducing our future earnings.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

We owned or leased approximately 13.5 million square feet of manufacturing, warehousing, office, showroom,
and retail facilities, had approximately 1.4 million square feet of idle facilities and had about 1.0 million square feet
of discontinued operations facilities at the end of fiscal 2007. Of the 13.5 million square feet occupied at the end of
fiscal 2007, our Upholstery Group occupied approximately 7.0 million square feet, our Casegoods Group occupied
approximately 3.5 million square feet, our Retail Group occupied approximately 2.1 million square feet and our
corporate and other operations occupied the balance.

We sold several idle facilities during fiscal year 2007, and we also sold a significant amount of equipment that
had been idled in connection with our restructurings over the last few years. Our active facilities are located in
Arkansas, California, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kansas, Maryland, Massachusetts,
Michigan, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania,
Rhode Island, South Carolina, Tennessee, Utah, Virginia, Washington D.C., and the countries of Canada, Thailand
and the United Kingdom. Most of them are less than 50 years old, and all of them are well maintained and insured.
We do not expect any major land or building additions will be needed to increase capacity in the foreseeable future
for our manufacturing operations. However, we anticipate increased retail capacity in the future. We own most of
our plants, some of which have been financed under long-term industrial revenue bonds, and we lease the majority
of our retail stores. For information on terms of operating leases for our properties, see Note 8 to our consolidated
financial statements, which is included in Item 8 of this report.

ITEM 3. LEGAL PROCEEDINGS.

We have been named as a defendant in various lawsuits arising in the ordinary course of business including
being named as a potentially responsible party at six environmental clean-up sites. Based on a review of all currently
known facts and our experience with previous legal and environmental matters, we have recorded reserves in
respect of probable and reasonably estimable losses arising from legal and environmental matters, and we do not
believe that a material additional loss is reasonably possible for legal or environmental matters.

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

Nothing was submitted for a vote by our shareholders during the fourth quarter of fiscal 2007.

EXECUTIVE OFFICERS OF REGISTRANT

Listed below are the names, ages and current positions of our executive officers and, if they have not held those

positions for at least five years, their former positions during that period with us or other companies.

Kurt L. Darrow, age 52

(cid:129) President and Chief Executive Officer since September 2003

(cid:129) Formerly President La-Z-Boy Residential Division (August 2001 — September 2003)

11

Rodney D. England, age 55

(cid:129) Senior Vice President of La-Z-Boy and President of Non-Branded Upholstery since November 2003

(cid:129) President, England, Inc. since July 1987

Steven M. Kincaid, age 58

(cid:129) Senior Vice President of La-Z-Boy and President of Casegoods since November 2003

(cid:129) President, Kincaid Furniture Company, Incorporated since June 1983

Louis M. Riccio, Jr., age 44

(cid:129) Senior Vice President and Chief Financial Officer since July 2006

(cid:129) Vice President and Corporate Controller from February 2002 through June 2006

Otis S. Sawyer, age 49

(cid:129) Senior Vice President of Corporate Operations since May 2006

(cid:129) Vice President and Chief Information Officer from August 2004 through April 2006

(cid:129) Senior Vice President of Finance, England, Incorporated from December 2001 through August 2004

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS

AND ISSUER PURCHASES OF EQUITY SECURITIES.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not purchase any of our common shares during the fourth quarter of fiscal year 2007.

Recent Sales of Unregistered Securities

During the fourth quarter of fiscal 2007, we sold shares of our common stock to one of our non-employee
directors pursuant to our Restricted Stock Plan for Non-Employee Directors without registration under the
Securities Act of 1933 in reliance on the exemption provided in Section 4(2) of the Act. In accordance with
the terms of the plan, we sold these shares to our non-employee directors upon their acceptance of awards granted to
them to purchase shares at 25% of their fair market value on the date of grant. The following table shows the date of
these sales, the number of shares sold, and the per share and aggregate sales price.

Date of Sale

Number of
Shares Sold

Per Share
Price

Aggregate
Price

February 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,000

$3.18

$15,900

Equity Plans

The table below provides information, as of the end of fiscal 2007, concerning our compensation plans under

which common shares may be issued.

12

Equity Compensation Plan Information

Plan Category

Equity compensation plans approved by

shareholders . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by
shareholders (Note 3). . . . . . . . . . . . . . . .

Number of Securities
to be Issued Upon
Exercise of Outstanding
Options
(a)

Weighted-Average
Exercise Prices of
Outstanding
Options
(b)

Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)

2,240,882(1)

15,045

$16.63

$19.15

3,458,575(2)

None

Note 1: These options were issued under our 2004 Long-Term Equity Award Plan and our 1997 Incentive Stock
Option Plan. No additional options can be awarded under the 1997 plan.

Note 2: This amount is the aggregate number of shares available for future issuance under our 2004 Long-Term
Equity Award Plan, which has a stock option component, a restricted stock component and a performance award
component, and our Restricted Stock Plan for Non-Employee Directors. The stock component of the Long-Term
Equity Award Plan provides for awards of our common shares. The non-employee directors’ plan provides for
grants of 30-day options on our common shares. The performance award component of the long-term equity award
plan provides for awards of our common shares to selected key employees based on achievement of pre-set goals
over a performance period (normally of three fiscal years). At the end of fiscal 2007, 3,289,775 shares were
available for future issuance under the long-term equity award plan, of which a maximum of 1,098,314 shares may
be issued under previously granted performance awards for the three-year periods ending in April 2008 and 2009
and 168,800 shares were available for future issuance under the non-employee directors’ restricted plan.

Note 3: This line of the table relates only to an option plan that we adopted without shareholder approval at the time
we acquired LADD solely in order to replace options on LADD common shares with options on our common
shares. No additional options or other awards may be made under that plan.

13

Performance Graph

The graph below shows the return for our last five fiscal years that would have been realized (assuming
reinvestment of dividends) by an investor who invested $100 on April 27, 2002 in our common shares, in the S&P
500 Composite Index, and in a peer group comprised of the following publicly traded furniture industry companies:
Bassett Furniture, Chromcraft Revington, Inc., Ethan Allen Interiors, Flexsteel Industries, Furniture Brands
International, Hooker Furniture Company, and Stanley Furniture. The stock performance of each company in
the peer group has been weighted according to its relative stock market capitalization for purposes of arriving at
group averages.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among La-Z-Boy Incorporated, The S&P 500 Index And A Peer Group

La-Z-Boy Incorporated

S&P 500 Composite Index

Peer Group

S
R
A
L
L
O
D

180

160

140

120

100

80

60

40

20

0

2002

2003

2004

2005

2006

2007

Company/Index/Market

La-Z-Boy Incorporated

S&P 500 Composite Index

Peer Group

2002

$100

$100

$100

2003

2004

2005

2006

2007

$66.12

$ 71.91 $ 42.01 $ 56.10 $ 44.29

$86.69

$106.52 $113.28 $130.74 $150.66

$70.89

$ 92.27 $ 72.81 $ 93.07 $ 75.38

* $100 invested on 4/27/02 in stock or index-including reinvestment of dividends. Fiscal year ending April 30.
Copyright· 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm

14

Dividend and Market Information

The New York Stock Exchange is the principal market in which our common stock is traded. The tables below
show the high and low sale prices of our common stock on the New York Stock Exchange during each quarter of our
last two fiscal years, as well as the dividends we paid during each quarter.

Fiscal 2007 Quarter End

July 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oct. 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jan. 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
April 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fiscal 2006 Quarter End

July 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Oct. 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jan. 28 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
April 29 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High

$16.40
$15.60
$13.76
$15.20

High

$15.32
$14.59
$16.15
$17.25

Market Price
Low

$11.81
$12.10
$11.25
$11.96

Market Price
Low

$11.59
$10.13
$11.51
$14.91

Close

$13.06
$12.67
$12.50
$12.01

Close

$13.37
$11.66
$16.10
$15.32

Dividends
Paid

$0.12
$0.12
$0.12
$0.12

$0.48

Dividends
Paid

$0.11
$0.11
$0.11
$0.11

$0.44

Shareholders

We had about 23,900 shareholders of record at June 13, 2007.

15

ITEM 6. SELECTED FINANCIAL DATA.

The following table presents our selected financial data. The table should be read in conjunction with Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial
Statements and Supplementary Data, of this Annual Report on Form 10-K. This information is derived from our
audited financial statements and should be read in conjunction with those statements, including the related notes.

Consolidated Five-Year Summary of Financial Data

Fiscal Year Ended

(52 Weeks)
4/28/2007

Sales . . . . . . . . . . . . . . . . . . . . . . . . . $1,617,302
Cost of sales

Cost of goods sold . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . .

Total cost of sales . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . .
Selling, general and administrative . . .
Restructuring . . . . . . . . . . . . . . . . . . .
Write-down of intangibles . . . . . . . . . .

Operating income . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . .
Income from Continued Dumping and
Subsidy Offset Act, net . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . .

Income from continuing operations

before income taxes . . . . . . . . . . .
Income tax expense. . . . . . . . . . . . . . .

Income (loss) from continuing

1,187,876
3,371

1,191,247
426,055
386,438
7,662
—

31,955
10,206

3,430
4,679

29,858
10,090

(52 Weeks)
4/29/2006

(53 Weeks)
4/30/2005
(Dollar amounts in thousands, except per share data)
$1,815,202

(52 Weeks)
4/24/2004

$1,708,858

$1,695,012

1,273,505
8,479

1,281,984
413,028
375,793
—
22,695

14,540
11,540

—
2,168

5,168
10,758

1,371,243
2,931

1,374,174
441,028
362,967
—
—

78,061
10,442

—
173

67,792
25,363

1,302,089
8,448

1,310,537
398,321
291,138
—
29,729

77,454
11,255

—
4,112

70,311
33,450

(52 Weeks)
4/26/2003

$1,790,742

1,359,244
—

1,359,244
431,498
281,768
—
—

149,730
10,447

—
2,565

141,848
53,988

operations . . . . . . . . . . . . . . . . . .

19,768

(5,590)

42,429

36,861

87,860

Income (loss) from discontinued

operations (net of tax) . . . . . . . . .
Extraordinary gains (net of tax) . . . .
Cumulative effect of accounting

change (net of tax) . . . . . . . . . . .

(15,629)
—

—

2,549
—

—

(7,338)
2,094

(34,333)
—

8,238
—

—

(8,324)

(59,782)

Net income (loss) . . . . . . . . . . . . $

4,139

$

(3,041)

$

37,185

$

(5,796)

$

36,316

Diluted weighted average shares

outstanding . . . . . . . . . . . . . . . . . . .
Diluted income (loss) from continuing

operations per share . . . . . . . . . . . . $
Diluted net income (loss) per share . . . $
Dividends declared per share . . . . . . . . $
Book value on year-end shares

outstanding . . . . . . . . . . . . . . . . . . . $

Return on average shareholders’

equity* . . . . . . . . . . . . . . . . . . . . . .
Gross profit as a percent of sales . . . . .
Operating profit as a percent of sales . .
Effective tax rate*. . . . . . . . . . . . . . . .
Return on sales* . . . . . . . . . . . . . . . . .

51,606

51,801

52,138

53,679

57,435

0.38
0.08
0.48

9.45

4.1%
26.3%
2.0%
33.8%
1.2%

$
$
$

$

(0.11)
(0.06)
0.44

9.86

$
$
$

$

0.81
0.71
0.44

10.10

$
$
$

$

0.69
(0.11)
0.40

10.04

$
$
$

$

1.53
0.63
0.40

11.08

(1.1)%
24.4%
0.9%
208.2%
(0.3)%

8.0%
24.3%
4.3%
37.4%
2.3%

7.1%
23.3%
4.5%
47.6%
2.2%

14.4%
24.1%
8.4%
38.1%
4.9%

* Based on income from continuing operations

16

Consolidated Five-Year Summary of Financial Data (continued)

Fiscal Year Ended

(52 Weeks)
4/28/2007

(52 Weeks)
4/29/2006

(53 Weeks)
4/30/2005

(52 Weeks)
4/24/2004

(52 Weeks)
4/26/2003

Depreciation and amortization . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . .
Working capital . . . . . . . . . . . . . . . . . . . .
Current ratio . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . .
Ratio of total debt-to-equity . . . . . . . . . . .
Ratio of total debt-to-capital . . . . . . . . . . .
Shareholders . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . .

$ 27,204
$ 25,811
$183,218
$312,588
2.4 to 1
$878,691
$111,714
$149,402
$485,348

(Dollar amounts in thousand)
28,329
$
$
34,771
$ 210,565
$ 409,641
2.8 to 1
$1,026,357
$ 213,549
$ 226,309
$ 527,286

29,112
$
$
31,593
$ 212,739
$ 363,771
2.3 to 1
$1,040,914
$ 181,807
$ 224,370
$ 522,328

$ 29,234
$ 27,991
$209,986
$345,354
2.5 to 1
$956,752
$173,368
$184,212
$510,345

30,695
$
$
32,821
$ 209,411
$ 464,907
3.2 to 1
$1,123,066
$ 222,371
$ 223,990
$ 609,939

30.8%
23.5%

23,900
11,700

36.1%
26.5%

31,900
13,400

42.9%
30.0%

26,500
14,820

43.0%
30.0%

28,500
16,125

36.7%
26.9%

29,100
16,970

Unaudited Quarterly Financial Information Fiscal 2007

Fiscal Quarter Ended

(13 Weeks)
(13 Weeks)
7/29/2006
4/28/2007
(Dollar amounts in thousands, except per share data)

(13 Weeks)
1/27/2007

(13 Weeks)
10/28/2006

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continued Dumping and Subsidy Offset Act,

net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from continuing operations before income taxes . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .

Income from continuing operations . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations (net of tax) . .

$392,851

$413,628

$403,874

$406,949

295,584
—

295,584
97,267
94,035
—

3,232
2,526

—
270

976
(116)

1,092
1,203

305,893
(400)

305,493
108,135
99,359
2,265

6,511
2,614

—
1,348

5,245
1,949

290,860
—

290,860
113,014
100,704
2,855

9,455
2,750

3,430
1,633

11,768
4,823

3,296
(1,342)

6,945
(14,766)

295,539
3,771

299,310
107,639
92,340
2,542

12,757
2,316

—
1,428

11,869
3,434

8,435
(724)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

2,295

$

1,954

$ (7,821)

$

7,711

Diluted weighted average shares outstanding . . . . . . . . . . . .
Diluted income from continuing operations per share . . . . . .
Diluted net income (loss) per share . . . . . . . . . . . . . . . . . . .

51,971
0.02
0.04

$
$

51,639
0.06
0.04

$
$

51,609
0.13
(0.15)

$
$

51,522
0.16
0.15

$
$

17

Unaudited Quarterly Financial Information Fiscal 2006

Fiscal Quarter Ended

(13 Weeks)
(13 Weeks)
7/30/2005
4/29/2006
(Dollar amounts in thousands, except per share data)

(13 Weeks)
10/29/2005

(13 Weeks)
1/28/2006

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . .
Write-down of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) from continuing operations before income

taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) from continuing operations . . . . . . . . . . . . .
Income (loss) from discontinued operations (net of tax) . .

$396,695

$402,327

$446,614

$449,376

300,068
—

300,068
96,627
89,864
—

6,763
2,741
149

4,171
1,556

2,615
593

309,932
7,817

317,749
84,578
90,976
—

(6,398)
3,090
414

(9,074)
(3,265)

(5,809)
(638)

331,684
594

332,278
114,336
96,648
—

17,688
2,965
1,390

16,113
6,132

9,981
487

331,821
68

331,889
117,487
98,305
22,695

(3,513)
2,744
215

(6,042)
6,335

(12,377)
2,107

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

3,208

$ (6,447)

$ 10,468

$ (10,270)

Diluted weighted average shares outstanding . . . . . . . . . . . .
Diluted income (loss) from continuing operations per

52,195

51,655

51,857

51,747

share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income (loss) per share . . . . . . . . . . . . . . . . . . .

$
$

0.05
0.06

$
$

(0.11)
(0.12)

$
$

0.19
0.20

$
$

(0.24)
(0.20)

18

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS.

Our Management’s Discussion and Analysis is an integral part of understanding our financial results. This
Management’s Discussion and Analysis should be read in conjunction with the accompanying Consolidated
Financial Statements and related Notes to Consolidated Financial Statements. We begin the Management’s
Discussion and Analysis with an introduction to La-Z-Boy Incorporated’s key businesses, strategies and significant
operational events in fiscal 2007. We then provide a discussion of our results of operations, liquidity and capital
resources, quantitative and qualitative disclosures about market risk, and critical accounting policies.

Introduction

La-Z-Boy Incorporated is a manufacturer, marketer, distributor and retailer of upholstery products and an
importer and manufacturer of casegoods (wood) furniture products. Our La-Z-Boy brand is the most recognized
brand in the furniture industry, and we are the leading global producer of reclining chairs. We own 70 La-Z-Boy
Furniture Galleries» stores, which are retail locations dedicated to marketing our La-Z-Boy branded product. These
70 stores are part of the larger store network of La-Z-Boy Furniture Galleries» stores which includes a total of 336
stores, the balance of which are independently owned and operated. The network constitutes the industry’s largest
single-branded upholstered furniture retailer in North America. These stores combine the style, comfort and quality
of La-Z-Boy furniture with our in-home design service to help consumers furnish certain rooms in their homes.

Accounting rules require us to consolidate certain of our independent dealers who did not have sufficient
equity to carry out their principal business activities without our financial support. These dealers are referred to as
Variable Interest Entities (“VIEs”). During the first quarter of fiscal 2006 we had three VIEs, operating 22 stores,
consolidated into our statement of operations, and for the remaining three quarters of fiscal 2006, we had four VIEs,
operating 28 stores, in our Consolidated Statement of Operations. We had the same four consolidated VIEs,
operating 29 stores at the end of fiscal 2007.

On July 28, 2006, we completed the sale of our American of Martinsville operating unit, which supplied
contract furniture to the hospitality, assisted-living and governmental markets. This operating unit was not
strategically aligned with our current business model, which is centered on providing comfortable and stylish
furnishings for the home, and was not a large enough component of our overall business to justify our continued
corporate focus and resources. We sold the business for $33.2 million. This business has been classified within
discontinued operations and as such, all segment data was restated to reflect this change.

During the third quarter of fiscal 2007, we committed to a plan to sell Sam Moore, an upholstered chair
manufacturer located in Bedford, VA, included in the Upholstery Group, and to sell the combined operating unit of
Clayton Marcus and Pennsylvania House, included in the Casegoods Group. As we have continued to assess our long-
term strategic direction, we have determined that these operating units do not align with our current strategic plan.

After considering our decision to sell these businesses, we determined that the carrying value of these operations
exceeded the fair value. After completing our assessment we recorded a $7.3 million charge to write-down the carrying
value of the business to its fair value. This charge in the third quarter of fiscal 2007 related entirely to impairment of
goodwill. Impairment charges recorded in the third quarter of fiscal 2007 on the Pennsylvania House and Clayton Marcus
businesses amounted to $10.2 million, principally related to fixed assets ($3.7 million), intangible assets ($3.8 million),
and inventory ($2.7 million). The results of operations, including these impairment charges are presented with
discontinued operations for all periods and segment data for all periods has been restated to reflect these changes.

At the end of the fourth quarter of fiscal 2007, we reevaluated the carrying value of the Pennsylvania House and
Clayton Marcus disposal groups. Based on the difficult operating environment we have determined the fair value of
the disposal group is greater than the carrying value. In light of this we have recorded an additional write-down of
$1.3 million in fixed assets in the fourth quarter of fiscal 2007. All other assets and liabilities are recorded at fair
value less costs to sell at April 28, 2007. Depending on the final disposition of these businesses we could recognize
additional losses when the sales are completed.

On April 27, 2007, we sold Sam Moore for $9.9 million, consisting of $9.5 million in cash and a receivable of

$0.4 million, recognizing an after-tax loss in the fourth quarter of $0.3 million.

19

We completed our annual testing of intangibles under SFAS No. 142 during the fourth quarter of fiscal 2007
and concluded that the fair values of our remaining goodwill and intangible assets were greater than their carrying
values and as such no additional impairment charges were necessary.

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group.

Below is a chart that shows the organizational structure of La-Z-Boy segments.

Upholstery Group
(Manufactures upholstered
furniture)

Casegoods Group
(Imports and manufactures wood furniture)

Retail Group
(Company-owned La-Z-Boy
Furniture Galleries®)

La-Z-Boy

England

Kincaid

American
Drew

Own and
operate 70 La-Z-Boy
Furniture Galleries® stores

Bauhaus

La-Z-Boy U.K.

Lea

Hammary

In terms of revenue, our largest segment is the Upholstery Group, which includes La-Z-Boy, our largest operating
unit. During the fourth quarter of fiscal 2007 we announced a restructuring plan to close two of our upholstery
manufacturing facilities in Lincolnton, North Carolina and Iuka, Mississippi and shift the production from these plants
to other existing facilities in order to bolster our overall capacity utilization. In addition, we completed the
restructuring plan started during the second quarter of fiscal 2006 to close our Canadian manufacturing facility in
Waterloo, Ontario. This property was sold during the fourth quarter of fiscal 2007, and the related pension plan was
settled resulting in a non-cash charge of $1.3 million. We have continued to import cut and sewn fabric kits to
complement our leather kits that allow us to take full advantage of both the cost-saving opportunities presented in Asia
and the speed to market advantages of a United States manufacturing base. The Upholstery Group sells furniture
mainly to La-Z-Boy Furniture Galleries» stores, general dealers and department stores.

Our Casegoods Group today is primarily an importer, marketer and distributor of casegoods (wood) furniture as
well as operates two manufacturing facilities in North Carolina. Based on our current strategy for import versus
domestically manufactured casegoods product, we have completed the planned transition of this business. In order to
compete globally, we have significantly changed the cost structure from fixed to highly variable. During the fourth
quarter of fiscal 2007 we announced a restructuring plan to close the lumber operation in North Wilkesboro, North
Carolina, and consolidated several operations in Taylorsville, North Carolina resulting in cost savings for this group.

The Retail Group consists of 70 company-owned La-Z-Boy Furniture Galleries» stores in nine markets
ranging from the Midwest to the East Coast of the United States and also including southeastern Florida. The stores
located in the southeastern Florida market were acquired during the first quarter of fiscal 2007. In the second and
third quarters of fiscal 2007, we closed two stores in our Rochester, New York market and we consolidated four of
our warehouses into two larger facilities on the East coast. In January, 2007, we announced our plans to close the
four stores in the Pittsburgh, Pennsylvania market in order to focus on the larger markets with the greater potential.
During fiscal 2008, we plan to continue to take the following actions to grow sales and improve the operating results
for the Retail Group as well as to take advantage of synergies between the company-owned markets:

(cid:129) Relocate, convert or add stores to our New Generation format, which are more productive. Our plan is to add
three stores and convert or relocate three stores during fiscal 2008. During fiscal 2007, we acquired seven
stores, opened nine stores, converted or relocated five stores and closed nine stores.

(cid:129) Centralize certain of our advertising and marketing functions, and take advantage of the efficiencies gained

from the warehouse consolidation we began during the second quarter of fiscal 2007.

20

(cid:129) Consolidate information systems and eliminate redundant processes. We are currently in the process of
consolidating our information systems into one system and expect to complete this process by the end of
fiscal 2008.

(cid:129) Expand our in-home design service, which has increased the average sale per customer where employed.

Currently, 67% of our company-owned locations have this service available.

We believe that expanding our store network will drive top-line growth as we capitalize on the opportunities
presented in larger urban markets. With the further penetration in these markets we expect to gain the efficiencies in
advertising, distribution and administration we believe are necessary to achieve desired profitability. Currently, 47 of our
company-owned stores are in the New Generation format, and we expect to increase this number throughout fiscal 2008.
With this in mind, we continue to remain optimistic about the future performance of this segment and believe it will begin
to be profitable by the first half of fiscal 2009. The retail furniture industry as a whole experienced a significant decline in
same store sales during the first five months of calendar 2007. We believe our lack of sales growth, which was one of our
initiatives to become more profitable, has extended our breakeven time frame into fiscal 2009.

During fiscal 2007, we incurred restructuring costs totaling $7.3 million relating to the ongoing restructuring
of the Retail Group. The restructuring costs related to closing the Pittsburgh, Pennsylvania and Rochester, New York
retail operations, which included asset impairment and lease termination costs and severance costs, the cost of
closing warehouses as we have consolidated our operations, and other restructuring costs.

According to the May, 2007 Top 100 ranking by Furniture Today, an industry trade publication, the La-Z-Boy
Furniture Galleries» stores network ranks as the largest retailer of upholstered single-brand furniture in the U.S. One of
our major strategic initiatives is to expand the retail opportunities of the La-Z-Boy brand name in the United States and
Canada by opening new stores, relocating stores to better locations and converting existing stores to our New Generation
store format. Slightly more than half of the 336 stores in the network — the majority of which are independently
owned — are concentrated in the top 25 markets in the U.S. We will attempt to increase our market penetration over the
next few years in the top 25 markets, allowing our dealers and company-owned stores to create operating efficiencies,
particularly in the areas of advertising, distribution and administration. Additionally, we have an extensive La-Z-Boy in-
store gallery program with 304 in-store galleries. Beginning in fiscal 2008, we will begin rolling out a new model for our
in-store galleries referred to as our Comfort Studios. Comfort Studios are less expensive than the current in-store gallery
model and provide a better presentation to our consumer. Kincaid, England and Lea also have in-store gallery programs.
The chart below shows the current structure of the La-Z-Boy Furniture Galleries» store network.

La-Z-Boy Furniture Galleries® Store System
(336 Total Stores)

Company-Owned Stores
(70 Stores)

VIE Stores- Independently Owned
(29 Stores)
(4 Dealers)

Independently Owned
(237 Stores)
(103 Dealers)

Consolidated in La-Z-Boy
Statements

21

Results of Operations

Analysis of Operations: Year Ended April 28, 2007
(Fiscal 2007 compared with 2006)

(52 Weeks)
4/28/2007

(52 Weeks)
4/29/2006

Percent
Change

(Amounts in thousands, except
per share amounts and percentages)

Upholstery sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,194,220
262,721
Casegoods sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
220,319
Retail sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other/eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(59,958)
Consolidated sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,617,302
Consolidated gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
426,055
Consolidated gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated S, G&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S, G&A as a percent of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Upholstery operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Upholstery operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . $
Diluted income (loss) per share from continuing operations . . . . . . . . $

78,724
20,289
(31,161)
(24,864)
—
(11,033)
31,955

19,768
0.38

386,438

6.6%
7.7%
(14.1)%
2.0%

26.3%

23.9%

$1,265,952
292,553
213,438
(76,931)
$1,695,012
413,028

(5.7)%
(10.2)%
3.2%
22.1%
(4.6)%
3.2%

24.4%

375,793

2.8%

22.2%

83,160
17,125
(26,006)
(28,565)
(22,695)
(8,479)
14,540

(5.3)%
18.5%
(19.8)%
13.0%

119.8%

6.6%
5.9%
(12.2)%
0.9%

(5,590)
(0.11)

453.6%
445.5%

$

$
$

Sales

Consolidated sales were down 4.6% when compared with fiscal 2006. Our Upholstery and Casegoods Groups’

sales decreased, while our Retail Group and VIEs’ sales increased.

Upholstery Group sales were down 5.7% compared with fiscal 2006. This decrease in sales was mainly due to
an overall weakness at retail. In addition, our non-branded upholstery business had a significant decrease in sales
year over year due to the ongoing changes in the department store organizations.

Our Casegoods Group sales decreased 10.2% compared with the prior year. The decrease in sales occurred
across all of our Casegoods operating units and was primarily focused among smaller customers which have been
impacted more severely by the weak industry retail environment.

Retail Group sales increased 3.2% when compared with fiscal 2006. The acquisition of the six stores in the
southeastern Florida market generated a 6.5% sales increase for our Retail Group during fiscal 2007. This increase
in sales was partially offset by the continuing effects of inconsistent consumer confidence in the retail industry.

Intercompany sales eliminations and sales of VIEs increased $17.0 million, net, during fiscal 2007 when
compared with fiscal 2006. The majority of this increase was attributable to a $13.1 million increase in VIEs’ sales and
a $3.9 million decrease in intercompany sales eliminations. The reduction of intercompany sales eliminations was a
result of a decrease in same store sales to company-owned stores due to the weak retail environment. The VIE sales

22

increase was related to additional stores that were opened, the conversion of existing stores to the New Generation
format and our Canadian VIE being consolidated for four quarters in fiscal 2007 versus three quarters for fiscal 2006.

Gross Margin

Gross margin increased during fiscal 2007 in comparison to fiscal 2006 due to the following:

(cid:129) Our Retail margins improved during fiscal 2007 when compared with fiscal 2006 due to better merchan-
dising and selling plans. The overall retail gross margins were higher than those of our Upholstery and
Casegoods Groups. The changes in Retail created a 0.4 percentage point increase in consolidated gross
margin when compared with the prior year.

(cid:129) Our cost reduction efforts, which have been a key focus over the past year, had about a 4.0 percentage point
positive impact on our gross margins on less sales volume for fiscal 2007. These improvements were
somewhat offset by the decline in margins due to under-absorption of overhead in our plants, resulting from
lower volumes, cost of living wage increases and price increases on certain raw materials.

(cid:129) Fiscal 2007 was impacted by net restructuring expense totaling $3.4 million whereas fiscal 2006 had net

restructuring expense of $8.5 million.

(cid:129) Due to favorable trends in our severity rate for workers compensation claims over the past two years, we
were able to reduce our actuarially determined reserve for workers compensation by about $2.4 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (S, G&A) increased $10.6 million due primarily to the addition of
nine retail stores and the acquisition of six stores in our Retail Group and expansion in our VIEs. S, G&A also
increased as a percent of sales in fiscal 2007 compared with the prior year. The higher level of S, G&A in dollars was
mainly attributable to:

(cid:129) The Retail Group and our VIEs have a higher S, G&A structure than our Upholstery and Casegoods Groups.
As the retail side of our business grows as an overall percentage of our net sales, the overall S, G&A
percentage increases as a percent of sales. The impact on fiscal 2007 was approximately 1.0 percentage point
greater than fiscal 2006.

(cid:129) We incurred additional expenses in the Retail Group related to six acquired stores, including increased
advertising, higher occupancy costs and other selling expenses as well as transitional costs which added to
S, G&A for fiscal 2007. In addition the new retail locations impacted our S, G&A as a percent of sales due to
start-up costs.

(cid:129) The adoption of Statement of Financial Accounting Standards No. 123 (revised 2004) — Share-Based

Payment had a $2.4 million impact during fiscal 2007 for the expensing of stock options.

Somewhat offsetting these increases in S, G&A was a reduction of our warranty reserve by $4.2 million. This
adjustment of $4.2 million reflects our current trend towards lower aggregate warranty costs, particularly costs incurred
one year after sale of the product. The adjustment also reflects remediation of other specific warranty-related issues.
Together, these items have reduced the reserve for future warranty costs. Additionally we sold several properties during
the year resulting in increased gains of $10.4 million during fiscal 2007 when compared with fiscal 2006.

Restructuring

Restructuring costs totaled $11.0 million for fiscal 2007 as compared with $8.5 million in fiscal 2006. The
restructuring costs in fiscal 2007 related to our closure of several manufacturing facilities, consolidation of retail
warehouses, closure of underperforming retail stores, and our decision to exit the Pittsburgh, PA and Rochester, NY retail
markets and were somewhat offset by the sale of several facilities that were part of previous restructurings. These costs
were comprised mainly of fixed asset impairments and lease termination, severance and other restructuring costs. Due to
the Retail restructuring costs, the current year expense had $7.6 million reclassified as an operating expense line item
below S, G&A related to Retail operations. The restructuring cost for the prior year mainly related to the closure of our
Canadian manufacturing facility and was recorded as a component of cost of sales.

23

Operating Margin

Our consolidated operating margin was 2.0% for fiscal 2007 and included 0.7 percentage points of restruc-
turing charges and 0.9 percentage points of income related to gains on property sales. Operating margin for fiscal
2006 was 0.9% and included 1.3 percentage points relating to our write-down of intangibles, 0.5 percentage points
of restructuring charges and 0.2 percentage points of income related to gains on property sales.

The Upholstery Group operating margin was flat for fiscal 2007 when compared with the prior year. As
discussed under Selling, General and Administrative expenses, our warranty reserve decreased $4.2 million during
the year which increased our operating margin by 0.4 percentage points. Offsetting this was a decline in the margins
due to under-absorption of overhead in our plants resulting from reduced volume.

Our Casegoods Group operating margin increased 1.8 percentage points during fiscal 2007 versus fiscal 2006. The
significant changes that were made in the overhead structure as a result of transitioning to a primarily import business
model from a manufacturing based business model in addition to improved manufacturing efficiencies in our remaining
domestic manufacturing plants have allowed us to increase our operating margin despite the reduction in sales volume.

Our Retail Group operating margin decreased by 1.9 percentage points during fiscal 2007 in comparison to fiscal
2006. Although our sales increased when compared with the prior year, we acquired, opened, relocated or converted
22 stores during fiscal 2007 as well as closed nine stores, which increased our fixed costs as we assimilated these
changes. As we continue to aggressively open these new stores, consolidate our warehouses, convert our operating
systems and reduce our overall operating costs, we will continue to experience these short-term excess costs which are
affecting our profitability.

Corporate and Other operating loss decreased $3.7 million during fiscal 2007 when compared with fiscal
2006. Gains recognized in S, G&A on long-lived assets that we sold were $10.4 million higher than in fiscal 2006.
Offsetting those gains were consulting fees of $2.4 million for the review of our Retail operations in order to assess
our plan to improve profitability. In addition the adoption of SFAS 123(R) in the first quarter of fiscal 2007
contributed $2.4 million of stock option expense in fiscal 2007, and our VIEs’ operating losses for fiscal 2007 were
$1.2 million greater than fiscal 2006.

Income from Continued Dumping and Subsidy Offset Act

We recorded $3.4 million as Income from Continued Dumping and Subsidy Offset Act, net of legal expenses,
during fiscal 2007 from the receipt of funds under the Continued Dumping and Subsidy Act (“CDSOA”) of 2000 in
connection with the case involving wooden bedroom furniture imported from China. Receipt of funds during the
prior year was insignificant. The CDSOA provides for distribution of monies collected by U.S. Customs and Border
Protection from anti-dumping cases to domestic producers that supported the anti-dumping petition. Due to the
uncertainty associated with the timing and amount of future receipts we will record such amounts when all
conditions associated with their receipt are removed.

Interest Expense

Interest expense for fiscal 2007 was less than fiscal 2006 due to a $47.8 million decrease in our average debt,

slightly offset by a 0.5 percentage point increase in our floating rate debt.

Income Taxes

Our effective tax rate for continuing operations was 33.8% in fiscal 2007 compared with 208.2% in fiscal 2006.
The tax rate for fiscal 2006 was significantly affected by the write-down of the Bauhaus goodwill. In addition, the
effective state income tax component of our rate was substantially higher in fiscal 2006 compared with fiscal 2007.
This was due to a valuation reserve that was recorded during fiscal 2006 relative to state tax credits of Bauhaus.
Furthermore, during fiscal 2006 it was necessary to record a valuation reserve against the losses of our Canadian
subsidiary but during fiscal 2007 this reserve was reversed primarily due to a recent Canadian law change that
increased the carry-forward period from 10 to 20 years.

24

The rate for fiscal 2006 was also favorably impacted due to the increase in the cash surrender value of
company-owned life insurance policies. Typically the increase in cash surrender value of such policies is treated as a
permanent item not subject to taxation. During fiscal 2007, we expressed our intent to redeem a portion of these
policies, the redemption of which would be a taxable event. Consequently during fiscal 2007, the favorable tax rate
impact due to the current year increase in the value of all of the policies was almost entirely offset by the tax expense
that was accrued relative to the anticipated gain on the redemption of a portion of the policies.

Other Income

Other income increased in fiscal 2007 when compared with fiscal 2006 due to a decrease in realized foreign

currency exchange losses and increased interest income.

Discontinued Operations

As discussed in the introduction, we recorded an after-tax impairment charge of $14.6 million during fiscal 2007
relating to assets of our discontinued operations. In addition, our discontinued operations experienced a net operational
loss of $1.7 million after-tax. In the prior year, discontinued operations earned $2.5 million after-tax which was mostly
attributable to American of Martinsville who had minimal impact on fiscal 2007 due to their sale in the first quarter.

Results of Operations

Analysis of Operations: Year Ended April 29, 2006
(Fiscal 2006 compared with 2005)

Upholstery sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other/eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated gross margin . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated S,G&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
S,G&A as a percent of sales . . . . . . . . . . . . . . . . . . . . . . . . .
Upholstery operating income . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods operating income . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating income . . . . . . . . . . . . . . . . . . . . . . .
Upholstery operating margin . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods operating margin . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated operating margin . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations . . . . . . . . . . . . . . .
Diluted income (loss) per share from continuing

operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25

Percent
(52 Weeks)
4/29/2006
Change
(Amounts in thousands, except per share
amounts and percentages)

(53 Weeks)
4/30/2005

1,265,952
292,553
213,438
(76,931)
$1,695,012
413,028

1,379,684
309,792
173,099
(47,373)
$1,815,202
441,028

(8.2)%
(5.6)%
23.3%
(62.4)%
(6.6)%
(6.3)%

24.4%

24.3%

375,793

362,967

3.5%

22.2%

20.0%

83,160
17,125
(26,006)
(28,565)
(22,695)
(8,479)
14,540

6.6%
5.9%
(12.2)%
0.9%

(5,590)

(0.11)

$

$

$

$

$

$

99,779
14,010
(2,859)
(29,938)
—
(2,931)
78,061

(16.7)%
22.2%
(809.6)%
4.6%

(81.4)%

7.2%
4.5%
(1.7)%
4.3%

42,429

(113.2)%

0.81

(113.6)%

Sales

Consolidated sales declined 6.6% during fiscal 2006. Our Upholstery and Casegoods Groups’ sales were also
down when compared with the prior year due in large part to a volatile retail environment attributable to weak
consumer demand. A decline in business with rental stores and the liquidation of several large regional chains
accounted for approximately 1% of the sales decline during the year. Approximately 2% of the sales decline was
attributed to the extra week in fiscal 2005. Additionally, sales declined approximately 1.5% during the year due to
the polyurethane shortage that affected upholstered product shipments from October through the middle of
December. The sales declines noted above were mitigated by a 1.6% increase in sales due to sales price increases
and a 1.3% increase in sales which resulted from the retail stores acquired at the end of fiscal 2005.

Upholstery Group sales were down 8.2% year-over-year, 2% of which was attributable to the extra week in
fiscal 2005. Approximately 2% of the decrease in Upholstery Group sales for the year related to the polyurethane
supply shortage, which limited our ability to fill customer orders. Sales were also down due to the weak retail
environment. Around 1% of our upholstery sales decline was related to a decline in business with our rental
customers and the liquidation of several large regional chains in the past 12 months. The sales decline was mitigated
by a 2.0% increase in sales which resulted from sales price increases.

Our Casegoods Group sales decreased 5.6% during fiscal 2006, of which about 2% related to the extra week in

fiscal 2005. The remaining decline was attributed to the weak retail environment.

Retail Group sales increased 23.3% due to the acquisition of 21 stores in the fourth quarter of fiscal 2005. Eight
of these stores were consolidated as VIEs prior to our acquiring them in the fourth quarter of fiscal 2005. Excluding
the 21 recently acquired stores, Retail Group sales for our previously owned markets actually decreased during
fiscal 2006 due to slow retail activity.

The net total of intercompany sales eliminations and sales to VIEs decreased 62.4% as a result of greater sales

to company-owned retail stores and fewer VIEs in fiscal 2006 versus fiscal 2005.

Gross Profit

Our gross profit as a percent of sales (“gross margin”) increased in fiscal 2006 in comparison with fiscal 2005

due to the following:

(cid:129) Our company-owned La-Z-Boy Furniture Galleries» stores in the Retail Group were a larger part of our
consolidated results in fiscal 2006, and since retail sales generally carry a higher gross margin than our
manufacturing units, it had a more significant impact on our consolidated gross margins than in fiscal 2005
by 0.6 percentage points.

(cid:129) We initiated a significant cost reduction program during the current fiscal year focusing on manufacturing
cost reductions, indirect labor, distribution costs and waste reductions that positively impacted our gross
margins.

(cid:129) At the end of fiscal 2005, we changed our estimate for unpaid claims for workers’ compensation to an
actuarial estimate. As a result, we recorded a charge to increase our claims liability by $5.9 million, which
decreased gross margin by 0.3 percentage points in fiscal 2005 that was not repeated in fiscal 2006.

Factors negatively impacting gross margin in fiscal 2006 included the following:

(cid:129) Upholstery Group production was disrupted during the period by the polyurethane shortage, which
prevented us from producing and filling customer orders that we otherwise could have completed and
shipped. The polyurethane shortage decreased gross margin by 0.1 percentage points in fiscal 2006.

(cid:129) We had restructuring expense of $8.5 million in fiscal 2006 and $2.9 million in fiscal 2005. The restructuring

costs decreased gross margin by 0.5 percentage points in 2006 and 0.2 percentage points in 2005.

(cid:129) We experienced significant price increases in raw materials, especially in raw steel, during fiscal 2005. Raw
steel prices remained high but stabilized in fiscal 2006. During fiscal 2006, we experienced rising prices for
polyurethane foam, as a result of the damage inflicted by the hurricane season, which reduced our gross

26

margin approximately 1.3 percentage points. We increased our selling prices due to the high raw material
costs. This combined with our normal price increases helped increase our margins approximately 1.2 per-
centage points.

(cid:129) Following the acquisition of 21 stores in three markets by our Retail Group near the end of fiscal 2005, we
refreshed merchandise and cleared out older inventory in fiscal 2006 at the newly acquired stores, which
resulted in a lower gross margin for our Retail Group.

Selling, General and Administrative Expenses

Selling, general and administrative expense (“S, G&A”) increased in dollar amount and as a percent of sales in

fiscal 2006 compared with the prior year. This was attributable to:

(cid:129) The increased relative size of the Retail Group increased consolidated S, G&A because the Retail Group has
a higher S, G&A structure than our Upholstery and Casegoods segments. The impact on fiscal 2006 was
approximately 2.1 percentage points.

(cid:129) We incurred additional expenses in the Retail Group related to the 21 acquired stores, including increased
advertising, higher occupancy costs and other selling expenses as well as costs involved in establishing new
warehousing for two of our locations.

(cid:129) Our company-owned same store sales were down, therefore we were not able to absorb our fixed expenses

resulting in an increase in S, G&A as a percent of sales.

Somewhat offsetting these increases in S, G&A expense were gains recognized during fiscal 2006 on long-

lived assets that we sold, which reduced S, G&A as a percent of sales by 0.2 percentage points.

Operating Margin

Our consolidated operating margin was 0.9% for fiscal 2006 and included 0.5 percentage points of restruc-
turing costs and 1.3 percentage points of a write-down of intangibles at our Bauhaus division. Bauhaus was
impacted by several large customer bankruptcies and the merger of two major department stores, which reduced
production causing the closure of several production facilities. These events impacted our annual valuation of
intangibles resulting in an impairment loss of $22.7 million. Operating margin for fiscal 2005 was 4.3% and
included 0.2 percentage points of restructuring charges.

The Upholstery Group operating margin decreased due to lower sales volume caused by the weather-related
supply chain disruptions and soft retail conditions. The Upholstery Group benefited from selling price increases
compared with the same period last year which somewhat offset these factors.

Our Casegoods Group operating margin increased over the prior year due to improvements resulting from our

continuing transition to our import model for residential casegoods.

Our Retail Group operating margin decreased by 10.5 percentage points during fiscal 2006 in comparison to
fiscal 2005. Two of the three markets acquired in fiscal 2005 were operating at significant losses and were
previously reported as VIEs and contributed to operating losses during fiscal 2006. After acquiring the new
locations, we refreshed merchandise at our newly acquired locations by liquidating our older inventory which
resulted in a lower operating margin. The acquired stores also incurred transitional costs during the year. The
decrease in operating margin was also due in part to the decrease in both same store sales volume and acquired store
sales volume. Additionally, due to the acquisition of new markets and a slow retail environment, we increased
advertising spending, which had a negative effect on margins but was necessary to drive retail traffic. We also had an
increase in occupancy costs and selling expenses. Consequently, due to these acquisitions and an overall soft retail
environment, our retail operating results for fiscal 2006 were well below our expectations.

27

Interest Expense

Interest expense for fiscal 2006 was higher than fiscal 2005 due to rising interest rates on floating rate debt
equating to an increase of about 1% in our effective interest rate. Our weighted average debt was down slightly
compared with the prior year, due to the repayment of $26 million in debt occurring near the end of the fiscal year.

Income Taxes

Our effective tax rate was 208.2% in fiscal 2006 compared with 37.4% in fiscal 2005. The increase in the
effective tax rate was attributable to the write-off of goodwill at Bauhaus in the fourth quarter of fiscal 2006, which had
no tax benefit, as well as the restructuring charges incurred at our Canadian upholstery operation, which is generally
taxed at a lower rate, therefore reducing the tax benefit and increasing the effective rate relating to those expenses.

Liquidity and Capital Resources

Our total assets at the end of fiscal 2007 decreased $78.1 million compared with the end of fiscal 2006. A large
portion of that change related to the sale of our American of Martinsville and Sam Moore operating units during
fiscal 2007. A portion of the cash generated as a result of the sales was used to reduce debt. In addition, we wrote off
$10.9 million of intangibles and $7.9 million of inventory and fixed assets related to the discontinued operations
during the year. Although this write-off was non-cash, it did reduce our overall asset base.

Our sources of cash liquidity include cash and equivalents, cash from operations and amounts available under
credit facilities. These sources have been adequate for day-to-day operations, dividends to shareholders and capital
expenditures. We expect these sources of liquidity to continue to be adequate for the foreseeable future. Capital
expenditures for fiscal 2007 were $25.8 million compared with $28.0 million during fiscal 2006. During the first
quarter of fiscal 2007 we exercised a $3.0 million option to purchase property, which we subsequently sold and leased
back. There are no material purchase commitments for capital expenditures, which are expected to be in the range of
$23 to $26 million in fiscal 2008. After amending our revolving credit facility agreement as discussed under financing
activities, we had unused lines of credit and commitments of $219.1 million under several credit arrangements.

The following table illustrates the main components of our cash flows:

Cash Flows Provided From (Used For)

Year Ended

4/29/2006
4/28/2007
(Amounts in thousands)

Operating activities
Net income, depreciation and deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,953
14,936
Write-down of assets of businesses held for sale . . . . . . . . . . . . . . . . . . . . . .
—
Write-down of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(935)
Gain on sales of discontinued operations (net of tax) . . . . . . . . . . . . . . . . . . .
11,033
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,959
Stock option and restricted stock expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,713)
Working capital and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 22,790
—
22,695
—
6,643
762
36,887

Cash provided from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing activities
Proceeds from disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities and exchange rate changes . . . . . . . . . . . . . . . . . . .

33,233

89,777

46,974
42,659
(27,589)

(6,947)
(36,696)
(24,002)

11,499
—
(42,172)

(10,890)
(43,102)
(18,728)

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . $ 27,632

$(13,616)

28

Operating Activities

For fiscal 2007, net cash provided by operating activities was $33.2 million, compared with $89.8 million for
fiscal 2006. The decrease in 2007 operating cash flows was due mainly to changes in accounts payable and accrued
liabilities, which related to our overall reduction in business. If business returns to historical levels, we believe these
liabilities would change proportionately. Discontinued operations did not have a significant impact on the cash
provided by operating activities for fiscal 2007.

Investing Activities

During fiscal 2007, net cash provided by investing activities was $62.0 million, whereas $30.7 million was
used in investing activities during fiscal 2006. The increase in cash provided by investing activities in fiscal 2007
was primarily due to the $33.2 million in proceeds received for the sale of our operating unit American of
Martinsville and the $9.5 million in proceeds received for the sale of our operating unit Sam Moore. Additionally,
$47.0 million in proceeds was generated by the sale of multiple properties during fiscal 2007. Some involved a sale-
leaseback transaction which we entered into with a third party. These increases in cash flow were somewhat offset
by $25.8 million in capital expenditures.

Financing Activities

Our financing activities included borrowings and payments on our debt facilities, dividend payments,
issuances of stock and stock repurchases. We used $67.2 million of cash in financing activities in fiscal 2007
compared with $73.2 million of cash used in financing activities during fiscal 2006. Our discontinued operations did
not have a material impact on cash flows from financing activities for fiscal 2007.

The following table summarizes our contractual obligations of the types specified:

Payments by Period

Long-term debt obligations . . . . . . . . .
Capital lease obligations . . . . . . . . . . .
Operating lease obligations . . . . . . . . .
Interest obligations . . . . . . . . . . . . . . .
Other long-term liabilities not reflected
. . . . . . . . . . . .

on our balance sheet

Total

$147,620
1,782
362,827
24,570

Less Than
1 Year

4-5 Years

1-3 Years
(Amounts in thousands)
$ 44,575
712
83,182
9,216

$ 8,661
—
62,471
5,962

$36,618
1,070
42,255
7,215

More Than
5 Years

$ 57,766
—
174,919
2,177

8,251

1,931

3,862

2,458

—

Total contractual obligations . . . . . . .

$545,050

$89,089

$141,547

$79,552

$234,862

On February 9, 2007, we executed an amendment to our credit agreement to modify its fixed charge coverage
ratio requirements and interest rate provisions and to reduce our unsecured revolving credit facility from
$150 million to $100 million.

Our debt-to-capitalization ratio was 23.5% at April 28, 2007, 26.5% at April 29, 2006, and 30.0% at April 30,

2005.

On October 28, 1987, our Board of Directors announced the authorization of a plan to repurchase company
stock. The plan originally authorized 1.0 million shares and, subsequent to October 1987, 22.0 million additional
shares were added to this plan for repurchase. As of April 28, 2007, 5.4 million additional shares could be purchased
pursuant to this authorization. We repurchased 0.5 million shares during fiscal 2007.

We have guaranteed various leases of dealers with proprietary stores. The total amount of these guarantees is
$14.6 million. Of this, $3.2 million will expire within one year, $3.9 million in one to three years, $2.6 million in
four to five years, and $4.9 million thereafter. In recent years, we have increased our imports of casegoods product
and leather and fabric for upholstery product. At the end of the fourth quarter of fiscal 2007, we had $66.9 million in
open purchase orders, including those of our discontinued operations, with foreign casegoods, leather and fabric

29

sources. Some of these open purchase orders are cancelable. We are not required to make any contributions to our
defined benefit plans; however, we may make discretionary contributions.

Continuing compliance with existing federal, state and local statutes dealing with protection of the environ-
ment is not expected to have a material effect upon our capital expenditures, earnings, competitive position or
liquidity.

Critical Accounting Policies

An appreciation of our critical accounting policies is necessary to understand our financial results. These
policies may require management to make difficult and subjective judgments regarding uncertainties and, as a
result, such estimates may significantly impact our financial results. These policies were identified as critical
because they are broadly applicable within our operating units. The expenses and accrued liabilities or allowances
related to certain of these policies are initially based on our best estimates at the time of original entry in our
accounting records. Adjustments are recorded when our actual experience differs from the assumptions underlying
the estimates. These adjustments could be material if our experience were to change significantly in a short period
of time. We make frequent comparisons of actual experience to our assumptions in order to mitigate the likelihood
of material adjustments. Our critical accounting policies and changes to critical estimates are reviewed by
management with the Audit Committee of our Board of Directors and our independent accountants.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”)
basis for approximately 63% and 67% of our inventories at April 28, 2007, and April 29, 2006, respectively. Cost is
determined for all other inventories on a first-in, first-out (“FIFO”) basis.

Revenue Recognition and Related Allowances

Shipping terms using third-party carriers are FOB shipping point, and revenue is recognized upon shipment of
product. For product shipped on our company-owned trucks, revenue is recognized upon delivery. This revenue
includes amounts billed to customers for shipping. Provision is made at the time revenue is recognized for estimated
product returns and warranties as well as other incentives that may be offered to customers. We import certain
products from foreign ports, which are shipped directly to our domestic customers. In this case, revenue is not
recognized until title is assumed by our customer, which is normally after the goods pass through U.S. Customs.

Other incentives offered to customers include cash discounts, advertising agreements and other sales
incentives. Cash discounts are recorded as a reduction of revenues when the revenue is recognized. Other sales
incentives are recorded as a reduction to revenue at the time of sale. Our advertising agreements, expect co-op, give
our non-branded customers advertising allowances based on revenues and are recorded as a reduction to revenue
when the revenue is recognized.

Goodwill and Trade Names

In accordance with SFAS No. 142, goodwill and trade names are tested at least annually for impairment by
comparing their fair value to their carrying values. The fair value for each trade name was established based upon a
royalty savings approach. Additionally, goodwill is tested for impairment by comparing the fair value of our
operating units to their carrying values. The fair value for each operating unit is established based on the discounted
cash flows. In situations where the fair value is less than the carrying value, indicating a potential impairment, a
second comparison is performed using a calculation of implied fair value of goodwill to determine the monetary
value of impairment.

During the third quarter of fiscal 2007, we performed an evaluation of our goodwill and trade names due to
greater than anticipated decline in net sales for our operating units over the first half of the year. This sales decline
triggered the need to evaluate our goodwill and intangible assets for impairment under SFAS No. 142 in advance of
our normal impairment assessment in the fourth quarter. After completing this assessment, we determined that the
goodwill of Sam Moore and the intangible assets of Pennsylvania House and Clayton Marcus were recorded above

30

their fair value creating an impairment loss of $7.3 million for the goodwill at Sam Moore and a $3.6 million
impairment loss for the trade names at Pennsylvania House and Clayton Marcus. We performed additional testing
during the fourth quarter and found no additional impairments.

In the fourth quarter of fiscal 2006, the annual evaluation of goodwill and trade names was performed.
Following the evaluation procedures, it was determined that our trade names were not impaired. The carrying value
of goodwill exceeded its fair value at Bauhaus, creating an impairment loss of $22.7 million which was recorded as
a component of operating income. In the latter half of fiscal 2006, Bauhaus was impacted by several large customer
bankruptcies and the merger of two major department stores, which reduced production causing the closure of
several production facilities. There was no tax benefit recognized on this impairment charge.

Other Loss Reserves

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts
receivable balance. In fiscal 2007, our allowance for doubtful accounts for trade accounts receivable and long-term
notes decreased from $17.4 million to $15.6 million. The decrease in the allowance was due mainly to several write-
offs during the fourth quarter of fiscal 2007 for previously reserved accounts for a total of $2.7 million.

We have other loss exposures arising from the ordinary course of business, including inventory obsolescence,
litigation, environmental claims, health insurance, product liability, warranty, restructuring charges and the
recoverability of deferred income tax benefits. Establishing loss reserves requires the estimate and judgment of
management with respect to risk exposure and ultimate liability. We use legal counsel or other experts, including
actuaries as appropriate, to assist in developing estimates. Due to the uncertainties and potential changes in facts and
circumstances, additional charges related to these reserves could be required in the future.

Pensions

We maintain defined benefit pension plans for eligible factory hourly employees at some operating units. Our
largest plan has been frozen for new participants since January 1, 2001, but active participants still earn service cost.
Additionally, we closed our Canadian manufacturing facility during fiscal 2006 and terminated the pension plan
associated with that business during the fourth quarter of fiscal 2007. Annual net periodic expense and benefit
liabilities under our defined benefit plans are determined on an actuarial basis. Each year, we compare the actual
experience to the more significant assumptions used; if warranted, we make adjustments to the assumptions.

Our pension plan discount rate assumption is evaluated annually. The discount rate selected for our U.S. plans
is based upon a single rate developed after matching expected benefit payments to a yield curve for high-quality
fixed-income investments. Long-term interest rates on high-quality debt instruments, which are used to determine
the discount rate, were 5.85% based on the Citigroup High Grade Credit index at the end of fiscal 2007. Interest rates
were down at the end of fiscal 2007 and were up slightly at the end of fiscal 2006 after declining in fiscal 2005.
Accordingly, we decreased the discount rate used to determine our pension benefit obligation on our U.S. plans
40 basis points for fiscal 2007, after decreasing the rate 95 basis points for fiscal 2006. For our U.S. plans, we
utilized a discount rate of 6.05% at April 28, 2007, compared with a rate of 6.45% at April 29, 2006, and 5.50% at
April 30, 2005.

Pension benefits are funded through deposits with trustees and satisfy, at a minimum, the applicable funding
regulations. The expected long-term rates of return on fund assets are based upon actual historical returns modified
for known changes in the markets and any expected changes in investment policy.

Besides evaluating the discount rate used to determine our pension obligation, we also evaluate our assumption
relating to the expected return on plan assets annually. In selecting the expected long-term rate of return on assets,
we considered the average rate of earnings expected on the funds invested or to be invested to provide the benefits of
these plans. This included considering the trust’s asset allocation, investment strategy, and the expected returns
likely to be earned over the life of the plans. The rate of return assumption for U.S. plans as of April 28, 2007, and
April 29, 2006, was 8.0%. The expected rate of return assumption as of April 28, 2007, will be used to determine
pension expense for plans in 2008.

31

Our long-term stated investment objective is to maximize the investment return with the least amount of risk
through a combination of capital appreciation and income. The strategic asset allocation targets are 65% equities
and 35% fixed income within a range of 5% of the target. As of April 28, 2007, our weighted average asset
allocation was 71% equity securities and 29% debt securities. As of April 29, 2006, our weighted average asset
allocation was 69% equity securities and 31% debt securities.

Our non-qualified retirement plan was not funded at April 28, 2007. We do not expect to fund our non-qualified
defined benefit retirement plan as we hold funds equal to the liability of the plan in a Rabbi trust. We are not required
to make any contributions to the other defined benefit plans in fiscal year 2008; however, we reserve the right to
make discretionary contributions.

As of April 28, 2007, previously unrecognized differences between actual amounts and estimates based on
actuarial assumptions are included in Accumulated Other Comprehensive Income/(Loss) in our Consolidated
Balance Sheet as required by SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R). For fiscal 2007, we
recognized $8.2 million pre-tax ($4.9 million after tax) for previously unrecognized net actuarial losses in
Accumulated Other Comprehensive Income. In future reporting periods, the difference between actual amounts
and estimates based on actuarial assumptions will be recognized in Other Comprehensive Income (Loss) in the
period in which they occur.

We expect that the fiscal 2008 pension expense after considering all relevant assumptions will be minimal
compared with $2.4 million in fiscal 2007, which included $1.3 million of settlement losses related to our Canadian
pension plan. We do not believe that a 25 basis point change in our discount rate or our expected return on plan
assets would have a material impact on our financial statements. In fiscal 2008, we do not expect to amortize any
unrecognized actuarial losses as a component of pension expense.

Financial Guarantees

We have provided secured and unsecured financial guarantees relating to leases in connection with certain
La-Z-Boy Furniture Galleries» stores which are not operated by the company. The lease guarantees are generally for
real estate leases and have terms from five to eleven years. These lease guarantees enhance the credit of these
dealers. The dealer is required to make periodic fee payments to compensate us for our guarantees. We have
recognized liabilities for the fair values of the lease agreements that we have entered into, but they are not material
to our financial position.

We would be required to perform under these agreements only if the dealer were to default on the lease. The
maximum amount of potential future payments under lease guarantees was $14.6 million as of April 28, 2007.

We have, on occasion, entered into agreements which resulted in indemnifying third parties against certain
liabilities, mainly environmental obligations. We believe that judgments, if any, against us related to such
agreements would not have a material effect on our business or financial condition.

Our accounting policy for product warranties is generally to accrue an estimated liability at the time the
revenue is recognized. This estimate is based on historical claims and adjusted for currently known specific
warranty issues. Warranty expense is recorded as a component of S, G&A.

Variable Interest Entities

Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities
(“FIN 46”), requires the “primary beneficiary” of a VIE to include the VIE’s assets, liabilities and operating results
in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited-liability company,
trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of
equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity
owners that are unable to make significant decisions about its activities, or (c) has a group of equity owners that do
not have the obligation to absorb losses or the right to receive returns generated by its operations.

32

La-Z-Boy Furniture Galleries» stores that are not operated by us are operated by independent dealers. These
stores sell La-Z-Boy manufactured products as well as various accessories purchased from approved La-Z-Boy
vendors. In some cases we have extended credit beyond normal trade terms to the independent dealers, made direct
loans and/or guaranteed certain leases. Most of these independent dealers have sufficient equity to carry out their
principal operating activities without subordinated financial support. However, there are certain independent
dealers that we have determined may not have sufficient equity.

Based on the criteria for consolidation of VIEs, we have consolidated several dealers where we were the
primary beneficiary based on the fair value of our variable interests. All of our consolidated VIEs were recorded at
fair value on the date we became the primary beneficiary. Because these entities are accounted for as if the entities
were consolidated based on voting interests, we absorb all net losses of the VIEs in excess of the equity at the
dealerships. We recognize all net earnings of these VIEs to the extent of recouping the losses we recorded. Earnings
in excess of our losses are attributed to equity owners of the dealers and are recorded as minority interest. We had
three consolidated VIEs for the first quarter of fiscal 2006 and had four consolidated VIEs for the last three quarters
of fiscal 2006 and throughout fiscal 2007.

Our consolidated VIEs recognized $45.6 million and $36.8 million in sales, net of intercompany eliminations,
in fiscal 2007 and fiscal 2006, respectively. Additionally, we recognized a net loss per share of $0.11 and $0.09 in
fiscal 2007 and fiscal 2006, respectively, resulting from the operating results of these VIEs. The VIEs had
$2.8 million and $8.6 million of assets net of elimination of intercompany activity at the end of fiscal 2007 and fiscal
2006, respectively. During the third quarter of fiscal 2005, one of the equity owners of one of our VIEs contributed
$2.0 million of capital to the business. Because we consolidated this entity based on voting interests, we recorded
the capital contribution as income in that period to offset previously recorded losses. In fiscal 2005, the
extraordinary gain of $3.4 million ($2.1 million net of income taxes) was a result of the application of purchase
accounting relating to the acquisition of previously consolidated VIEs.

Restructuring

In the fourth quarter of fiscal 2007, we committed to a restructuring plan which included the closures of our
Lincolnton, North Carolina and Iuka, Mississippi upholstery manufacturing facilities, the closure of our rough mill
lumber operation in North Wilkesboro, North Carolina, the consolidation of operations at our Kincaid Taylorsville,
North Carolina upholstery operation and the elimination of a number of positions throughout the remainder of the
organization. The Lincolnton and Iuka facility closures will occur in the first quarter of fiscal 2008 and will impact
approximately 250 and 150 employees, respectively. The closure of our North Wilkesboro lumber operation, the
consolidation of operations at Kincaid’s Taylorsville operation and the remaining activities occurred in the fourth
quarter of fiscal 2007 and impacted approximately 100 positions. These decisions were made to help align our
company with the current business environment and strengthen our positioning going forward. We recorded pre-tax
restructuring charges of $4.3 million or $0.05 per diluted share covering severance and benefits, write-down of
certain fixed assets in addition to other restructuring costs which were expensed as incurred. Of these costs
$4.0 million was reported as a component of Cost of Sales with the remainder in Selling, General and Admin-
istrative. The write-down was accounted for in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. All other costs were accounted for in accordance with SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.

Offsetting these expenses during the year was a pre-tax gain of $2.0 million or $0.02 per diluted share relating
to the sale of properties idled as part of previous restructurings. These gains were recorded as a component of cost of
sales.

During fiscal 2007, several of our Retail warehouses were consolidated into larger facilities, and several
underperforming stores were closed. Approximately 85 jobs were eliminated as a result of these closures. We
recorded pre-tax restructuring charges of $7.3 million or $0.08 per diluted share covering contract termination costs
for the leases on these facilities, severance and benefits, write-down of certain leasehold improvements in addition
to other relocation costs which were expensed as incurred. These costs were reported as a component of Selling,
General and Administrative costs. The write-down was accounted for in accordance with SFAS No. 144,

33

Accounting for the Impairment or Disposal of Long-Lived Assets. All other costs were accounted for in accordance
with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

As of April 28, 2007, we had a remaining restructuring liability of $3.4 million which is expected to be paid out
or written off as follows: $2.4 million in fiscal 2008, $0.4 million in fiscal 2009, $0.4 million in fiscal 2010 and
$0.2 million thereafter.

In the second quarter of fiscal 2006, the decision was made to close our Canadian upholstery manufacturing
facility due to underutilization of capacity. The plant closure occurred in the third quarter of fiscal 2006, and
production was absorbed in other upholstery facilities. Approximately 413 jobs were eliminated as a result of this
closure. During fiscal 2006, pre-tax restructuring charges for our Canadian facility were $8.9 million, or $0.11 per
diluted share, covering severance and benefits, appropriate adjustments to our pension liability and the write-down
of certain fixed assets. Severance costs and other costs for this restructuring were expensed in accordance with
SFAS No. 112, Employers’ Accounting for Postemployment Benefits and SFAS No. 146. The write-down was
accounted for in accordance with SFAS No. 144. During the fourth quarter of fiscal 2007, we recorded a pre-tax
restructuring charge of $1.3 million or $0.02 per diluted share related to the settlement of the Canadian pension
plan.

Restructuring liabilities along with charges to expense, cash payments or asset write-downs were as follows:

Fiscal 2007

Cash
Payments
or Asset
Charges to
Write-Offs
Expense
(Amounts in thousands)
$(1,251)
$ 2,537
(1,091)
1,091
(2,184)
3,441
(3,964)
3,964

4/28/2007
Balance

$2,177
—
1,257
—

$11,033

$(8,490)

$3,434

Fiscal 2006

Cash
Payments
or Asset
Charges to
Write-Offs
Expense
(Amounts in thousands)
$ 2,327
$(2,327)
(8,117)
8,970

$ 6,643

$(5,790)

4/29/2006
Balance

$ —
891

$891

4/29/2006
Balance

$891
—
—
—

$891

4/30/2005
Balance

$—
38

$38

Severance and benefit-related costs . . . . . . . . . . . . . .
Fixed asset write-downs, net of gains . . . . . . . . . . . .
Contract termination costs . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total restructuring . . . . . . . . . . . . . . . . . . . . . . . . .

Fixed asset write-downs, net of gains . . . . . . . . . . . .
Severance and benefit-related costs . . . . . . . . . . . . . .

Total restructuring . . . . . . . . . . . . . . . . . . . . . . . . .

Stock-Based Compensation

On April 30, 2006, we adopted the fair-value recognition provisions of SFAS No. 123(R) using a modified-
prospective transition method. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees and requires us to record compensation cost for all stock awards granted after the required effective date
and for awards modified, repurchased or canceled after that date. In addition, we are required to record compen-
sation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. In March 2005, the SEC issued SAB 107 relating to SFAS No. 123(R).
We have applied the provisions of SAB 107 in our adoption of SFAS No. 123(R).

Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the
grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair
value of share-based awards at the grant date requires judgment, including estimating expected dividends, future

34

stock-price volatility, expected option lives and the amount of share-based awards that are expected to be forfeited.
We do not expect that changes in these assumptions would have a material impact on our results of operations.

The fair value of each option grant was estimated using the Black-Scholes option-pricing model. For the
options granted in fiscal 2007, expected volatility was estimated based on the historical volatility of our common
shares. The average expected life was based on the contractual term of the stock option and expected employee
exercise and post-vesting employment termination trends. The risk-free rate was based on U.S. Treasury issues with
a term equal to the expected life assumed at the date of grant. Forfeitures were estimated at the date of grant based on
historical experience.

Under the modified-prospective transition method, financial results for periods prior to fiscal 2007 were not
restated. In accordance with APB Opinion No. 25, there was no stock-based compensation expense recognized
related to employee stock options during fiscal 2006 or fiscal 2005.

Stock-based compensation expense recognized in Selling, General and Administrative expense under
SFAS No. 123(R) for fiscal 2007 was $2.4 million, which reduced net income by $1.7 million and earnings
per share by $0.03. As of April 28, 2007, there was $2.8 million of total unrecognized compensation cost related to
non-vested stock option awards, which is expected to be recognized over a weighted-average remaining contractual
term of all unvested awards of 1.72 years.

Regulatory Developments

The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection (“CBP”)
from anti-dumping cases to domestic producers that supported the anti-dumping petition. The Dispute Settlement
Body of the World Trade Organization (“WTO”) ruled that such payments violate the United States’ WTO
obligations. In response to that ruling, on February 8, 2006, the President signed legislation passed by Congress that
repeals CDSOA distributions to eligible domestic producers for duties collected on imports entered into the United
States after September 30, 2007.

CBP has reported that approximately $57.4 million in preliminary CDSOA amounts were available as of
April 30, 2007 for distribution to eligible domestic manufacturers in connection with the case involving wooden
bedroom furniture imported from China. These funds are subject to adjustment. Additional antidumping duties
actually collected through September 30, 2007 potentially will be available for distribution in calendar 2007. The
amount of the actual duties that CBP collects is determined retrospectively for those imports that are subject to
annual administrative reviews conducted by the U.S. Department of Commerce. Further, certain importers and
Chinese producers have appealed the initial findings of the anti-dumping order to the U.S. Court of International
Trade, and favorable rulings for these importers and Chinese producers could reduce the amount of duties
ultimately available for distribution. The tariffs attributable to importers and Chinese producers whose imports are
subject to appeals and administrative reviews are not available for distribution until those proceedings have been
completed. Consequently, the amount ultimately available for distribution in this case during calendar 2007 will
depend on the amount of duties on customs entries that CBP has liquidated and collected by September 30, 2007
(i.e., that are not subject to administrative reviews and pending legal appeals). Also, any amount we may receive
will depend on our percentage allocation, which is based on our qualifying expenditures in relation to the qualifying
expenditures of other domestic producers requesting distribution for the relevant time periods under CDSOA. In
two cases decided in 2006, the U.S. Court of International Trade has held unconstitutional CDSOA’s requirement
that a company that is not a petitioner must indicate its support for an antidumping petition in order to be eligible for
a distribution of duties. In Chez Sidney, L.L.C. v. United States, the Court did not reach the questions of whether the
support requirement is severable and the appropriate remedy, but it is possible that the Court could rule that the
entire statute is unconstitutional and prohibit further distributions. In SKF USA v. United States, the Court did not
find the entire statute to be unconstitutional, but instead ordered CBP and the U.S. International Trade Commission
to reconsider the plaintiff’s eligibility under CDSOA. These decisions are likely to be appealed to the U.S. Court of
Appeals for the Federal Circuit. Similar judicial challenges filed by domestic producers of wooden bedroom
furniture who currently are not entitled to CDSOA distributions could affect our percentage allocation. Our
percentage allocation for payments received in calendar 2006 was approximately 18%. We recorded $3.4 million,
net of legal fees, from CDSOA payments received in fiscal 2007. The percentage allocation included our American

35

of Martinsville division. Although we sold the division during the first quarter of fiscal 2007, we have retained
certain rights to payments received by the division subsequent to the sale. In view of the uncertainties associated
with this program, we are unable to predict the amounts, if any, we may receive during the remainder of calendar
2007 or thereafter under CDSOA. However, assuming CDSOA distributions continue, these distributions could be
material depending on the results of legal appeals and administrative reviews and our actual percentage allocation.

Recent Accounting Pronouncements

FASB Interpretation No. 48

The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109, during June, 2006. This interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting
for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The interpretation is effective for fiscal years beginning after December 15,
2006. Earlier application is encouraged if the enterprise has not yet issued financial statements, including interim
financial statements, in the period the interpretation is adopted.

We estimate that upon adoption, a cumulative effect adjustment of approximately $2 million to $4 million will
increase reserves for uncertain tax positions and decrease retained earnings in the first quarter of fiscal 2008. This
estimate is subject to revision as we complete our analysis and will be recorded as a component of stockholders’
equity.

FASB Statement of Financial Accounting Standards No. 157

The FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with early adoption
permitted.

We are currently in the process of determining the impact this pronouncement may have on our financial

statements.

FASB Statement of Financial Accounting Standards No. 158

The FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)
(“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization.
This statement also requires an employer to measure the funded status of a plan as of the date of its year-end
statement of financial position. The new reporting requirements and related new footnote disclosure rules of
SFAS No. 158 are effective for fiscal years ending after December 15, 2006.

We adopted SFAS No. 158 as of April 28, 2007 and the impact on our financials was $8.2 million ($4.9 million
after tax) of a decrease in assets and in accumulated other comprehensive income. The new measurement date
requirement applies for fiscal years ending after December 15, 2008, however this requirement will not have an
impact on our financial statements as we currently measure the funded status of our plans as of our year end date.

36

FASB Statement of Financial Accounting Standards No. 159

The FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”), which allows a company to choose to measure selected financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.

We are currently evaluating the impact SFAS No. 159 will have on our financial statements. This statement will

be effective for our fiscal 2009 year end.

SEC Staff Accounting Bulletin No. 108

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”).
SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that
registrants should quantify errors using both a balance sheet and an income statement approach and evaluate
whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are
considered, is material and therefore must be quantified. SAB No. 108 is effective for fiscal years ending on or after
November 15, 2006.

Our adoption of SAB No. 108 as of April 28, 2007 had no impact on our results of operations or financial

condition.

Emerging Issues Task Force Issue 06-5

In June 2006, the Emerging Issues Task Force (“EITF”) released Issue 06-5, Accounting for Purchases of Life
Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance. On September 7, 2006, the EITF concluded that a policyholder should
consider any additional amounts included in the contractual terms of the policy in determining the amount that
could be realized under the insurance contract. Amounts that are recoverable by the policyholder at the discretion of
the insurance company should be excluded from the amount that could be realized. Amounts that are recoverable by
the policyholder in periods beyond one year from the surrender of the policy should be discounted utilizing an
appropriate rate of interest. The effective date of EITF 06-5 is for fiscal years beginning after December 15, 2006.

We have reviewed this EITF and it did not have an impact on our financial statements.

Business Outlook

The external environment for home furnishings remains very difficult and the first quarter is typically the
company’s slowest period due to seasonal factors. While we have made progress in managing the cost structure of
our wholesale businesses, we believe challenging conditions in the marketplace will prevail and, we will continue to
focus on matching costs to our revenue stream. In a move consistent with recent trends among other public
companies, we are moving to yearly guidance for sales and earnings and will no longer provide quarterly
projections. We expect sales for the fiscal 2008 year to be down 5% to 10% compared with fiscal 2007 and expect
earnings per share to be in the range of $0.45 to $0.60 per share compared with $0.38 per share from continuing
operations in fiscal 2007. This estimated range does not include restructuring charges, potential income from any
anti-dumping monies or gains/losses on the sale of discontinued operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are exposed to market risk from changes in interest rates. Our exposure to interest rate risk results from our
lines of credit and our floating rate $100 million revolving credit facility under which we had no borrowings at
April 28, 2007. Management estimates that a one percentage point change in interest rates would not have a material
impact on our results of operations for fiscal 2008 based upon the current levels of exposed liabilities.

37

We are exposed to market risk from changes in the value of foreign currencies. Our exposure to changes in the
value of foreign currencies is reduced through our use of foreign currency forward contracts from time to time.
Substantially all of our imports purchased outside of North America are denominated in U.S. dollars. However, a
change in the value of Chinese currency could be one of several factors that could inflate costs in the future. We
believe that gains or losses resulting from changes in the value of foreign currencies will not be material to our
results from operations in fiscal year 2008.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Management’s Report to our Shareholders

Management’s Responsibility for Financial Information

Management of La-Z-Boy Incorporated is responsible for the preparation, integrity and objectivity of
La-Z-Boy Incorporated’s consolidated financial statements and other financial information contained in this
Annual Report to Shareholders. Those consolidated financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America. In preparing those consolidated financial
statements, Management was required to make certain estimates and judgments, which are based upon currently
available information and Management’s view of current conditions and circumstances.

The Audit Committee of the Board of Directors, which consists solely of independent directors, oversees our
process of reporting financial information and the audit of our consolidated financial statements. The Audit
Committee is informed of the financial condition of La-Z-Boy Incorporated and regularly reviews Management’s
critical accounting policies, the independence of our independent auditors, our internal control and the objectivity
of our financial reporting. Both the independent auditors and the internal auditors have free access to the Audit
Committee and meet with the Audit Committee periodically, both with and without Management present.

On September 15, 2006, La-Z-Boy Incorporated’s Chief Executive Officer submitted his annual certification
to the New York Stock Exchange stating that he was not aware of any violation by the corporation of the Exchange’s
corporate governance listing standards. La-Z-Boy filed the certifications by its Chief Executive Officer and Chief
Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to its Annual Report on
Form 10-K for the fiscal year ended April 28, 2007.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in
“Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation, our management concluded that our internal control over financial reporting
was effective as of April 28, 2007.

38

Management has excluded two La-Z-Boy Furniture Galleries» operations from our assessment of internal
control over financial reporting because we do not have the right or authority to assess the internal controls of the
consolidated entity and we also lack the ability, in practice, to make that assessment. These two retail furniture
businesses were created prior to December 15, 2003, and were consolidated by La-Z-Boy Incorporated on April 24,
2004 upon the adoption of Financial Accounting Standards Board Interpretation No. 46R, Consolidation of
Variable Interest Entities. The combined total assets and total revenues of the excluded businesses represent 0.7%
and 1.7%, respectively, of the related consolidated financial statement amounts as of and for the year ended April 28,
2007.

PricewaterhouseCoopers LLP, the independent registered public accounting firm who audited the consolidated
financial statements included in this annual report, has also audited our management’s assessment of the
effectiveness of our internal controls over financial reporting as of April 28, 2007, and the effectiveness of our
internal control over financial reporting as of April 28, 2007, as stated in their opinion which is included herein.

Kurt L. Darrow
President and Chief Executive Officer

Louis M. Riccio, Jr.

Senior VP and Chief Financial Officer

39

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of La-Z-Boy Incorporated:

We have completed integrated audits of La-Z-Boy Incorporated’s consolidated financial statements and of its
internal control over financial reporting as of April 28, 2007, in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of
La-Z-Boy Incorporated and its subsidiaries at April 28, 2007 and April 29, 2006, and the results of their operations
and their cash flows for each of the three years in the period ended April 28, 2007 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 of financial
statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 12 to the consolidated financial statements the Company changed its method of
accounting for share based compensation effective April 30, 2006. As discussed in Note 9 to the consolidated
financial statements the Company changed its method of accounting for defined benefit pension plans effective
April 28, 2007.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on
Internal Control over Financial Reporting, that the Company maintained effective internal control over financial
reporting as of April 28, 2007 based on criteria established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material
respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of April 28, 2007, based on criteria established in Internal
Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal
control over financial reporting in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we consider necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable

40

assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

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

As described in the accompanying Management’s Report on Internal Control over Financial Reporting,
management has excluded two La-Z-Boy Furniture Galleries operations from its assessment of internal control over
financial reporting because the Company does not have the right or authority to assess the internal controls of the
consolidated entity and also lacks the ability in practice, to make that assessment. The two retail furniture operations
were created prior to December 15, 2003, and were consolidated by the Company on April 24, 2004 upon the
adoption of Financial Accounting Standards Board Interpretation (FIN) No. 46R, Consolidation of Variable Interest
Entities. The combined total assets and total revenues of the excluded businesses represent 0.7% and 1.7%
respectively, of the related consolidated financial statement amounts as of and for the year ended April 28, 2007.

/s/ PricewaterhouseCoopers LLP

Toledo, Ohio
June 19, 2007

41

LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF OPERATIONS

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,617,302
Cost of sales

(52 Weeks)
4/28/2007

Fiscal Year Ended
(52 Weeks)
4/29/2006
(Amounts in thousands, except per share data)
$1,815,202
$1,695,012

(53 Weeks)
4/30/2005

1,187,876
3,371

1,191,247
426,055
386,438
7,662
—

1,273,505
8,479

1,281,984
413,028
375,793
—
22,695

1,371,243
2,931

1,374,174
441,028
362,967
—
—

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continued Dumping and Subsidy Act, net . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from continuing operations before income taxes. . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income (loss) from continuing operations . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations (net of tax of

$(4,682) in 2007, $1,716 in 2006 and $(3,856) in 2005) . . . . . .
Extraordinary gain (net of tax of $1,283 in fiscal 2005) . . . . . . . .

31,955
10,206
3,430
2,941
1,738

29,858
10,090

19,768

(15,629)
—

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

4,139

Basic average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic income (loss) from continuing operations per share . . . . . . . . $
Discontinued operations (net of tax) . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gains (net of tax). . . . . . . . . . . . . . . . . . . . . . . . . . . .

51,475
0.38
(0.30)
—

Basic net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . $

0.08

Diluted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income (loss) from continuing operations per share . . . . . . . $
Discontinued operations (net of tax) . . . . . . . . . . . . . . . . . . . . . . . .
Extraordinary gains (net of tax). . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . $

Dividends paid per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $

51,606
0.38
(0.30)
—

0.08

0.48

$

$

$

$

$

$

14,540
11,540
—
2,331
(163)

5,168
10,758

(5,590)

2,549
—

(3,041)

51,801
(0.11)
0.05
—

(0.06)

51,801
(0.11)
0.05
—

(0.06)

0.44

$

$

$

$

$

$

78,061
10,442
—
3,616
(3,443)

67,792
25,363

42,429

(7,338)
2,094

37,185

52,082
0.81
(0.14)
0.04

0.71

52,138
0.81
(0.14)
0.04

0.71

0.44

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

42

LA-Z-BOY INCORPORATED

CONSOLIDATED BALANCE SHEET

As of

4/29/2006
4/28/2007
(Amounts in thousands,
except par value)

Current assets

Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,721
230,399
Receivables, net of allowance of $13,635 in 2007 and $14,164 in 2006 . . . . . . . . . .
197,790
Inventories, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,283
Deferred income taxes — current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,278
Assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,327
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes — long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term assets, net of allowance of $1,942 in 2007 and $3,267 in 2006 . . . . . .

540,798
183,218
15,380
55,659
9,472
74,164

$ 24,089
270,578
238,826
12,854
—
23,730

570,077
209,986
—
56,926
18,794
100,969

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $878,691

$956,752

Current liabilities

Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

37,688
68,089
3,843
118,590

— $

8,000
2,844
85,561
—
128,318

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingencies and commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity

228,210
111,714
—
53,419
—

224,723
173,368
126
48,190
—

Preferred shares — 5,000 authorized; none issued . . . . . . . . . . . . . . . . . . . . . . . . . .
Common shares, $1 par value — 150,000 authorized; 51,377 outstanding in 2007

and 51,782 outstanding in 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

—

51,377
208,283
223,896
—
1,792

51,782
210,826
246,387
(3,083)
4,433

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

485,348

510,345

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $878,691

$956,752

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

43

LA-Z-BOY INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

4/28/2007

4/30/2005

Fiscal Year Ended
4/29/2006
(Amounts in thousands)

Cash flows from operating activities

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to cash provided by

operating activities

Extraordinary gain (net of tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-down of assets from businesses held for sale (net of tax) . . . . .
Gain on sale of discontinued operations (net of tax) . . . . . . . . . . . . .
Restructuring. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock option and restricted stock expense . . . . . . . . . . . . . . . . . . . . .
Change in receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Change in deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . .

Cash flows from investing activities

Proceeds from disposals of assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of discontinued operations . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of investments . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

4,139

$

(3,041)

$ 37,185

—
—
14,936
(935)
11,033
3,790
27,204
3,959
5,064
4,486
(11,607)
(12,446)
(16,390)

29,094

33,233

46,974
42,659
(25,811)
(18,165)
17,342
—
(955)

—
22,695
—
—
6,643
4,527
29,234
762
13,529
25,132
2,260
(8,561)
(3,403)

92,818

89,777

11,499
—
(27,991)
(25,289)
12,983
—
(1,875)

(2,094)
—
—
(668)
10,294
176
28,329
312
(9,300)
(10,633)
(10,032)
(9,236)
11,632

8,780

45,965

11,226
10,985
(34,771)
(14,890)
8,120
(6,806)
2,149

Net cash provided by (used for) investing activities . . . . . . . . . . . .

62,044

(30,673)

(23,987)

Cash flows from financing activities

Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock issued for stock and employee benefit plans . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Net cash used for financing activities . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and equivalents . . . . . . . . . . .

Change in cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and equivalents at beginning of period. . . . . . . . . . . . . . . . . . . . .

91,787
(128,483)
1,340
(6,947)
(24,886)

(67,189)
(456)

27,632
24,089

103,380
(146,482)
3,679
(10,890)
(22,923)

(73,236)
516

(13,616)
37,705

126,752
(124,813)
4,573
(2,476)
(22,868)

(18,832)
677

3,823
33,882

Cash and equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . .

$ 51,721

$ 24,089

$ 37,705

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

44

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

LA-Z-BOY INCORPORATED

Common
Shares

Capital in
Excess of
Par Value

Retained
Earnings

Unearned
Compensation

(Amounts in thousands)

Accumulated
Other
Comprehensive
Income(Loss)

At April 24, 2004 . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . .
Stock issued for stock and employee benefit plans . . . .
Amortization of unearned compensation . . . . . . . . . . .
Tax benefit from exercise of options . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on marketable securities (net of tax
of $0.1 million) . . . . . . . . . . . . . . . . . . . . . . . .
Realization of gains on marketable securities (net of
tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . .
Change in fair value of cash flow hedges (net of

tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in additional minimum pension liability (net
of tax of $8.7 million) . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . .
At April 30, 2005 . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . .
Stock issued for stock and employee benefit plans . . . .
Amortization of unearned compensation . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on marketable securities (net of tax
of $0.7 million) . . . . . . . . . . . . . . . . . . . . . . . .
Realization of gains on marketable securities (net of
tax of $0.3 million) . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . .
Change in fair value of cash flow hedges (net of

tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in additional minimum pension liability (net
of tax of $8.4 million) . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . .
At April 29, 2006 . . . . . . . . . . . . . . . . . . . . .

Reclassification of unearned compensation due to

adoption of SFAS No. 123(R) . . . . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . . . . . . . . . .
Stock issued for stock and employee benefit plans . . . .
Stock option and restricted stock expense . . . . . . . . . .
Tax benefit from exercise of options . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income (loss)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on marketable securities (net of tax
of $0.5 million) . . . . . . . . . . . . . . . . . . . . . . . .

Realized (gain) on marketable securities (net of tax

of $0.3 million) . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . .
Change in fair value of cash flow hedges (net of

tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in additional minimum pension liability (net
of tax of $0.1 million) . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . .
Adjustment upon adoption of SFAS No. 158 for

Pension (net of tax of $3.2 million). . . . . . . . . . .
At April 28, 2007 . . . . . . . . . . . . . . . . . . . . .

Total

$522,328
(2,476)
4,573
312
(6)
(22,868)

$52,031 $216,156 $253,012
(2,356)
8,170

(120)
314

(2,063)

(6)

(22,868)

37,185

$ —

$ 1,129

(1,848)
312

127

(93)
2,359

(11)

(14,144)

52,225 214,087

(760)
317

(3,261)

273,143
(10,130)
9,338

(22,923)

(3,041)

(1,536)

(10,633)

(2,715)
1,168

25,423
527,286
(10,890)
3,679
1,168
(22,923)

1,020

(451)
988

(63)

13,572

51,782 210,826

246,387

(3,083)

4,433

3,083

(540)
135

(3,083)

(3,458)
3,959
39

(6,407)
4,663

(24,886)

4,139

12,025
510,345

—
(6,947)
1,340
3,959
39
(24,886)

1,145

(458)
1,418

(118)

319

6,445

(4,947)
$ 1,792

(4,947)
$485,348

$51,377 $208,283 $223,896

$ —

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Accounting Policies

The following is a summary of significant accounting policies followed in the preparation of these consol-
idated financial statements. Our fiscal year ends on the last Saturday of April. Fiscal years 2007 and 2006 included
52 weeks, whereas fiscal year 2005 included 53 weeks.

Principles of Consolidation

The consolidated financial statements include the accounts of La-Z-Boy Incorporated and its majority-owned
subsidiaries (“the Company”). All significant intercompany transactions have been eliminated. Additionally,
Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities (“VIE”)
(“FIN 46”), requires us to consolidate several of our independently owned La-Z-Boy Furniture Galleries» stores.

Use of Estimates

The consolidated financial statements are prepared in conformity with accounting principles generally
accepted in the United States of America, which require management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, sales and expenses for the reporting periods. Some of the more
significant estimates include depreciation, valuation of inventories, valuation of intangibles including goodwill,
allowances for doubtful accounts, sales returns, legal, environmental, restructuring, product liability, insurance
reserves and warranty accruals. Actual results could differ from those estimates.

New Pronouncements

FASB Interpretation No. 48

The FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of
FASB Statement No. 109, during June 2006. This interpretation clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting
for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This
interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The interpretation is effective for fiscal years beginning after December 15,
2006. Earlier application is encouraged if the enterprise has not yet issued financial statements, including interim
financial statements, in the period the interpretation is adopted.

We estimate that upon adoption, a cumulative effect adjustment of approximately $2 million to $4 million will
increase reserves for uncertain tax positions and decrease retained earnings in the first quarter of fiscal 2008. This
estimate is subject to revision as we complete our analysis.

FASB Statement of Financial Accounting Standards No. 157

The FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those fiscal years, with early adoption
permitted.

We are currently in the process of determining the impact this pronouncement may have on our financial

statements.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

FASB Statement of Financial Accounting Standards No. 158

The FASB issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R)
(“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in which the changes occur through
comprehensive income of a business entity. This statement also requires an employer to measure the funded status
of a plan as of the date of its year end statement of financial position. The new reporting requirements and related
new footnote disclosure rules of SFAS No. 158 are effective for fiscal years ending after December 15, 2006.

We adopted SFAS No. 158 as of April 28, 2007 and the impact on our financials was $8.2 million ($4.9 million
after tax) of a decrease in assets and in accumulated other comprehensive income. The new measurement date
requirement applies for fiscal years ending after December 15, 2008, however this requirement will not have an
impact on our financial statements as we currently measure the funded status of our plans as of our year end date.

FASB Statement of Financial Accounting Standards No. 159

The FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”), which allows a company to choose to measure selected financial
assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.

We are currently evaluating the impact SFAS No. 159 will have on our financial statements. This statement will

be effective for our fiscal 2009 year end.

SEC Staff Accounting Bulletin No. 108

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”).
SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that
registrants should quantify errors using both a balance sheet and an income statement approach and evaluate
whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are
considered, is material and therefore must be quantified. SAB No. 108 is effective for fiscal years ending on or after
November 15, 2006.

Our adoption of SAB No. 108 as of April 28, 2007 had no impact on our results of operations or financial

condition.

Emerging Issues Task Force Issue 06-5

In June 2006, the Emerging Issues Task Force (“EITF”) released Issue 06-5, Accounting for Purchases of Life
Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance. On September 7, 2006, the EITF concluded that a policyholder should
consider any additional amounts included in the contractual terms of the policy in determining the amount that
could be realized under the insurance contract. Amounts that are recoverable by the policyholder at the discretion of
the insurance company should be excluded from the amount that could be realized. Amounts that are recoverable by
the policyholder in periods beyond one year from the surrender of the policy should be discounted utilizing an
appropriate rate of interest. The effective date of EITF 06-5 is for fiscal years beginning after December 15, 2006.

We have reviewed this EITF and it did not have an impact on our financial statements.

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Cash and Equivalents

For purposes of the consolidated balance sheet and statement of cash flows, we consider all highly liquid debt

instruments purchased with maturities of three months or less to be cash equivalents.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”)
basis for approximately 63% and 67% of our inventories at April 28, 2007, and April 29, 2006, respectively. Cost is
determined for all other inventories on a first-in, first-out (“FIFO”) basis.

Property, Plant and Equipment

Items capitalized, including significant betterments to existing facilities, are recorded at cost. All maintenance
and repair costs are expensed when incurred. Depreciation is computed using accelerated and straight-line methods
over the estimated useful lives of the assets.

Disposal and Impairment of Long-Lived Assets

In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we review

the carrying value of our long-lived assets for impairment on an annual basis.

Goodwill and Trade Names

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we test goodwill and indefinite lived
intangibles for impairment on an annual basis as of the end of our fiscal year, unless conditions arise that warrant a
more frequent evaluation. See Note 4 for additional information on our goodwill and trade names.

Investments

Available-for-sale securities are recorded at fair value with the net unrealized gains and losses reported, net of
tax, as a component of other comprehensive income. Realized gains and losses for available-for-sale securities are
based on the first-in, first-out method.

Life Insurance

Life insurance policies are recorded at the amount that could be realized under the insurance contract as of the
date of our consolidated balance sheet. These assets are classified as other non-current assets on our balance sheet,
and we expect to hold these policies to maturity. The change in cash surrender or contract value is recorded as
income or expense during each period.

Revenue Recognition

Shipping terms using third-party carriers are FOB shipping point and revenue is recognized upon shipment of
product. For product shipped on our company-owned trucks, revenue is recognized upon delivery. This revenue
includes amounts billed to customers for shipping. Provision is made at the time revenue is recognized for estimated
product returns and warranties, as well as other incentives that may be offered to customers. We import certain
products from foreign ports, which are shipped directly to our domestic customers. In this case, revenue is not
recognized until title is assumed by our customer, which is normally after the goods pass through U.S. Customs.

Other incentives offered to customers include cash discounts, advertising agreements and other sales incentive
programs. Cash discounts are recorded as a reduction of revenues when the revenue is recognized. Other sales
incentives are recorded as a reduction to revenue at the time of sale. Our advertising agreements, except co-op, give
customers advertising allowances based on revenues and are recorded when the revenue is recognized as a reduction
to revenue.

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Research and Development Costs

Research and development costs are charged to expense in the periods incurred. Expenditures for research and
development costs were $11.7 million, $14.7 million and $16.2 million for the fiscal years ended April 28, 2007,
April 29, 2006, and April 30, 2005, respectively.

Advertising Expenses

Production costs of commercials and programming and costs of other advertising, promotion and marketing
programs are charged to income in the period incurred. Cooperative advertising agreements exist with some
customers to reimburse them for actual advertising expenses. The reimbursements are recorded as advertising
expense when the customer substantiates the advertising. Advertising expenses were $60.4 million, $58.3 million
and $59.7 million for the fiscal years ended April 28, 2007, April 29, 2006, and April 30, 2005, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the estimated 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 in effect for the year in which
those temporary differences are expected to be recovered or settled.

Foreign Currency Translation

The functional currency of each foreign subsidiary is the respective local currency. Assets and liabilities are
translated at the year-end exchange rates, and revenues and expenses are translated at average exchange rates for the
period. Resulting translation adjustments are recorded as a component of shareholders’ equity in other compre-
hensive income.

Financial Instruments and Hedging

We had derivative instruments consisting of interest rate swap agreements that were used to fix the interest rate
on a portion of the variable interest rate borrowings on our revolving credit facility. These agreements were
designated and accounted for as cash flow hedges. These interest rate swap agreements expired in August 2006. The
effect of marking these contracts to fair value was recorded as a component of shareholders’ equity in other
comprehensive income.

We also enter into forward foreign currency exchange contracts to limit our exposure from changes in foreign
currency exchange rates. These foreign exchange contracts are entered into to support product sales, purchases and
financing transactions made in the normal course of business and, accordingly, are not speculative in nature. These
contracts are designed to match our currency needs and are therefore designated and accounted for as cash flow
hedges. The fair value of our foreign currency contracts is based on quoted market prices and the effect of marking
these contracts to fair value is recorded as a component of shareholders’ equity in other comprehensive income.

Accounting for Stock-Based Compensation

On April 30, 2006, we adopted the fair-value recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004) Share-Based Payment (“SFAS No. 123(R)”) using a modified-prospective
transition method. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees
and requires us to record compensation cost for all stock awards granted after the required effective date and for
awards modified, repurchased or canceled after that date. In addition, we are required to record compensation
expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”)
relating to SFAS No. 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS No. 123(R).

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

SFAS No. 123(R) requires us to estimate the fair value of share-based awards on the date of grant using an
option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods in our consolidated statement of operations using a straight-line single-
option method. Prior to the adoption of SFAS No. 123(R), we accounted for stock option awards to employees using
the intrinsic value method in accordance with APB 25. Under the intrinsic value method, no stock option
compensation expense was recognized in our Consolidated Statement of Operations because the exercise price
of our stock options granted to employees equaled the fair market value of the underlying stock at the date of grant.

As stock-based compensation expense recognized in the consolidated statement of operations for the twelve
months ended April 28, 2007 was based on awards ultimately expected to vest, it was reduced for forfeitures.
SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In our pro forma information required under
SFAS No. 123(R) for the periods prior to fiscal 2007, we accounted for forfeitures as they occurred. In accordance
with the modified-prospective transition method, prior periods have not been restated to include the impact of
SFAS No. 123(R).

As a result of the adoption of SFAS No. 123(R), our results for the twelve months ended April 28, 2007 include
stock-based compensation expense totaling $2.4 million. Such amounts have been included in the Consolidated
Statement of Operations within Selling, General and Administrative expenses. During the same period, we
recognized related tax benefits associated with our stock-based compensation arrangements totaling $0.7 million.

We adopted the long form method provided in SFAS No. 123(R) to use for calculating the beginning balance of
the additional paid in capital pool (“APIC pool”) related to the tax effects of employee stock-based compensation, and
to determine the subsequent impact on the APIC pool and Statement of Cash Flows of the tax effects of employee
stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R). We have not recognized
excess tax benefits related to employee stock-based compensation and, therefore, do not currently have an APIC pool.

As permitted by SFAS No. 123(R), we chose the nominal vesting period approach for recognizing the amount
of stock option expense to be included in the pro forma compensation expense for retirement eligible employees.
Under this method, expense was recognized over the normal four-year vesting period. With the adoption of
SFAS No. 123(R), we were required to continue applying the nominal vesting period approach for unvested options
granted prior to the date of adoption of April 30, 2006. For awards granted after that date we must apply the non-
substantive vesting period approach where expense is recognized over the period from grant date to the date
retirement eligibility is achieved, if expected to occur during the nominal vesting period. Our compensation expense
for the twelve months ended April 28, 2007 would have increased by $0.4 million, under the non-substantive vesting
period approach.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Under the modified-prospective transition method, financial results for periods prior to fiscal 2007 were not
restated. There was no stock-based compensation expense recognized related to employee stock options for the year
ended April 29, 2006 or the year ended April 30, 2005. The pro forma table below, which addresses the disclosure
requirements of SFAS No. 148, reflects basic and diluted net earnings per share for years ended April 29, 2006 and
April 30, 2005 assuming that we had accounted for our stock options using the fair value method promulgated by
SFAS No. 123(R) at that time.

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add back stock compensation expense included in net income (loss) (net of

tax). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduct fair value of stock plans (net of tax) . . . . . . . . . . . . . . . . . . . . . . . . . .

4/30/2005
4/29/2006
(Amounts in thousands,
except per share data)
$37,185
$(3,041)

472
(2,365)

193
(2,451)

Pro forma net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(4,934)

$34,927

Basic net income (loss) per share as reported . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma basic net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income (loss) per share as reported . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (0.06)
$ (0.10)
$ (0.06)
$ (0.10)

$ 0.71
$ 0.67
$ 0.71
$ 0.67

The fair value options granted was estimated on the date of grant using the Black-Scholes model with the

following assumptions (for the fiscal years ended):

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.25%
3.1%
5.0
29.0%
$3.21

3.4%
2.1%
5.5
36.0%
$5.02

4/29/2006

4/30/2005

Reclassifications

Certain prior year information has been reclassified to be comparable to the current year presentation. Most
notably we have reclassified our Consolidated Statement of Operations and related footnote data for discontinued
operations.

Insurance/Self-Insurance

We use a combination of insurance and self-insurance for a number of risks, including workers’ compensation,
general liability, vehicle liability and the company-funded portion of employee-related health care benefits.
Liabilities associated with these risks are estimated in part by considering historical claims experience, demo-
graphic factors, severity factors and other actuarial assumptions.

In the fourth quarter of fiscal 2005, we changed our estimate of workers’ compensation unpaid claims.
Previously, we established our workers’ compensation liability using historical trends as the basis for the liability.
The new estimate uses a third-party actuary to estimate settlement costs for incurred claims. We recognized an
additional expense of $5.9 million in the fourth quarter of fiscal 2005 based on our new estimate. In the fourth
quarter of fiscal 2007, we recorded a reduction in our workers’ compensation liability of $2.4 million as a result of
favorable claims experience.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Discontinued Operations

Under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
classify a business component that has been disposed or has been approved to be disposed of as a discontinued
operation. The results of operations of our discontinued operations, including any gains or losses on disposition, are
aggregated and presented on one line in the income statement. SFAS No. 144 requires the reclassification of
amounts presented for prior years as discontinued operations. The amounts presented in the Consolidated Statement
of Operations for years prior to fiscal 2007 were reclassified to comply with SFAS No. 144.

During the fourth quarter of fiscal 2005, we sold our La-Z-Boy Contract operating unit. As a result of this
divestiture, our Consolidated Statement of Operations for the prior years have been reclassified to reflect the results
of operations of this divested business as discontinued operations. The business unit was previously included in the
Upholstery Group, which has also been reclassified to reflect the discontinued operations.

During the first quarter of fiscal 2007, we sold our American of Martinsville operating unit. As a result of this
divestiture, our Consolidated Statement of Operations for the prior years have been reclassified to reflect the results
of operations of this divested business as discontinued operations. The business unit was previously included in the
Casegoods Group, which has also been reclassified to reflect the discontinued operations.

Additionally, during the third quarter of fiscal 2007, we committed to a plan to sell Sam Moore, which was a
part of our Upholstery Group, and to sell Clayton Marcus and Pennsylvania House, which were part of our
Casegoods Group. Due to this decision, these operating units qualified as discontinued operations. All segment
information has been restated to reflect these discontinued operations. In April 2007 we sold our Sam Moore
operating unit.

In the Consolidated Balance Sheet for fiscal 2007, Clayton Marcus and Pennsylvania House were classified as
businesses held for sale and the prior year was not reclassified. In the Consolidated Statement of Cash Flows, the
cash flows of discontinued operations were not reclassified. See Note 18 for additional information regarding our
discontinued operations.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts
receivable balance. We determine the allowance based on known troubled accounts, historical experience and other
currently available evidence.

In fiscal 2005, we reevaluated our allowance for doubtful accounts after the acquisition of a major La-Z-Boy
Furniture Galleries» store market and reassessment of our credit position of another significant dealer upon
obtaining additional credit-related information. Based on this valuation, we reduced the allowance for doubtful
accounts by $5.5 million.

Note 2:

Inventories

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 69,562
19,972
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
132,679
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/28/2007
4/29/2006
(Amounts in thousands)
$ 74,292
37,786
147,996

FIFO inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess of FIFO over LIFO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

222,213
(24,423)

260,074
(21,248)

Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $197,790

$238,826

52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 3: Property, Plant and Equipment

Estimated Useful
Lives

4/28/2007

4/29/2006

(Amounts in thousands)

Buildings and building fixtures . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . .
Information systems . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land and land improvements . . . . . . . . . . . . . . . . . . . . .
Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . .

3-40 years
3-30 years
3-10 years
3-40 years
3-10 years
3-20 years

Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . .

$ 186,403
151,896
48,388
27,951
16,556
12,135
5,834

$ 211,093
171,407
48,892
29,119
17,228
11,464
9,091

449,163
(265,945)

498,294
(288,308)

Net property, plant and equipment . . . . . . . . . . . . . .

$ 183,218

$ 209,986

Note 4: Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, we test goodwill and trade names for impairment on an annual basis as of
the end of our fiscal year, unless conditions arise that warrant a more frequent evaluation. We test our intangible
assets by comparing their fair value to their carrying values. The fair value for each trade name is established based
upon a royalty savings approach. Additionally, goodwill is tested using a combination of the discounted cash flows
and the projected profitability of the entity.

During the first quarter of fiscal 2007, we acquired several La-Z-Boy Furniture Galleries» stores in southeast
Florida that were independently owned. We recorded goodwill of $5.8 million relating to the acquisition of this
market. This acquisition impacted our consolidated net sales by less than 1.0%. During the first half of fiscal 2007,
we experienced a greater than anticipated decline in net sales in certain of our reporting units. Additionally in the
third quarter of fiscal 2007 we committed to a plan to sell Sam Moore, a reporting unit which was part of the
Upholstery Group, and a plan to sell Clayton Marcus and Pennsylvania House, which were included in our
Casegoods Group. These were considered to be triggering events under SFAS No. 142 and resulted in evaluating our
goodwill and intangible assets for impairment in the third quarter of fiscal 2007, in advance of our normal annual
impairment assessment in the fourth quarter. After completing this assessment we determined that there was an
indicated impairment of the goodwill of Sam Moore and the intangible assets of Pennsylvania House and
Clayton Marcus. As a result we took an impairment charge of $7.3 million, with no related tax benefit, for the
remaining goodwill of Sam Moore and we reduced the carrying value of the intangible assets of Pennsylvania
House and Clayton Marcus by $3.6 million, $2.3 million after tax, in line with the fair value determined by the
impairment assessment. These impairments were included as discontinued operations in our Consolidated State-
ment of Operations. The remaining trade names for these businesses of $5.7 million were presented as assets of
discontinued operations as of the end of fiscal 2007.

We completed our normal annual assessment of goodwill impairment under SFAS No. 142 in the fourth quarter
of fiscal 2007, and concluded that the fair values of our remaining goodwill and intangible assets were greater than
their carrying values and as such, no additional impairment charges were necessary.

In the fourth quarter of fiscal 2006, the annual evaluation of goodwill and trade names was performed.
Following the evaluation procedures, it was determined that our trade names were not impaired. The carrying value
of goodwill exceeded its fair value for Bauhaus creating an impairment loss of $22.7 million which was recorded as
a component of operating income. In the latter half of fiscal 2006, Bauhaus was impacted by several large customer
bankruptcies and the merger of two major department stores, which reduced production causing the closure of
several production facilities. There was no tax benefit recognized on this impairment charge.

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes the changes to goodwill and trade names during fiscal 2007 and fiscal 2006:

Fiscal 2007

Goodwill

Balance
as of
4/29/2006

Acquisitions,
Dispositions and
Other

Intangible
Write-
Down

Transfer to
Held for
Sale

Balance
as of
4/28/2007

(Amounts in thousands)

Upholstery Group . . . . . . . . . . . .
Retail Group . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . .

$26,959
21,845
8,122

Consolidated . . . . . . . . . . . . . .

$56,926

$ —
6,060
—

$6,060

$(7,327)
—
—

$ — $19,632
27,905
8,122

—
—

$(7,327)

$ — $55,659

Tradenames

Casegoods Group . . . . . . . . . . . .

$18,794

$ —

$(3,583)

$(5,739)

$ 9,472

Fiscal 2006

Goodwill

Balance
as of
4/30/2005

Acquisitions,
Dispositions and
Other

Intangible
Write-
Down

Transfer to
Held for
Sale

Balance
as of
4/29/2006

(Amounts in thousands)

Upholstery Group . . . . . . . . . . . .
Retail Group . . . . . . . . . . . . . . . .
Corporate and Other . . . . . . . . . .

$49,654
21,994
7,714

Consolidated . . . . . . . . . . . . . .

$79,362

Tradenames

Casegoods Group . . . . . . . . . . . .
Corporate and other . . . . . . . . . . .

$18,794
2,690

Consolidated . . . . . . . . . . . . . .

$21,484

$ —
(149)
408

$

259

$ —
(2,690)

$(2,690)

$(22,695)
—
—

$ — $26,959
21,845
8,122

—
—

$(22,695)

$ — $56,926

$

$

— $
—

— $18,794
—
—

— $ — $18,794

Note 5:

Investments

Included in other long-term assets were $34.8 million and $32.4 million at April 28, 2007, and April 29, 2006,
respectively, of available-for-sale marketable securities to fund future obligations of one of our non-qualified
retirement plans and our captive insurance company.

The following is a summary of available-for-sale securities at April 28, 2007, and April 29, 2006:

Fiscal 2007

Gross
Unrealized Gains

Gross
Unrealized Losses
(Amounts in thousands)

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total securities . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,278
122
5

$3,405

$ (3)
(146)
—

$(149)

Fair Value

$12,737
21,014
1,027

$34,778

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fiscal 2006

Gross
Unrealized Gains

Gross
Unrealized Losses
(Amounts in thousands)

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total securities . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,717
30
—

$2,747

$ (6)
(558)
—

$(564)

Fair Value

$12,573
19,400
413

$32,386

The following table summarizes sales of available-for-sale securities (for the fiscal years ended):

Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/30/2005

4/28/2007

4/29/2006
(Amounts in thousands)
$12,983
773
(91)

$17,342
987
(256)

$1,672
173
(25)

The fair value of fixed income available-for-sale securities by contractual maturity was $2.5 million within one

year, $7.2 million within two to five years, $9.5 million within six to ten years and $1.8 million thereafter.

Note 6: Accrued Expenses and Other Current Liabilities

Payroll and other compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,649
9,208
Accrued product warranty, current portion . . . . . . . . . . . . . . . . . . . . . . . . . .
9,820
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,141
Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35,772
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/28/2007
4/29/2006
(Amounts in thousands)
$ 56,411
13,534
4,901
19,683
33,789

Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . $118,590

$128,318

Note 7: Debt

Interest Rate

Fiscal Year
Maturity
(Amounts in thousands)

4/28/2007

4/29/2006

—

2010
3.7-7.0% 2010-2023
2008
2010
2013
5.5-13.7% 2007-2011
7.0-8.3% 2007-2011

6.5%
4.6%
5.3%

Revolving credit facility . . . . . . . . . . . . . . . . . .
Industrial revenue bonds . . . . . . . . . . . . . . . . . .
Private placement notes . . . . . . . . . . . . . . . . . .

Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . .

Long-term debt . . . . . . . . . . . . . . . . . . . . .

Weighted average interest rate . . . . . . . . . . . . .
Fair value of debt . . . . . . . . . . . . . . . . . . . . . . .

55

$

— $ 25,000
16,856
35,000
36,000
50,000
11,020
2,336

16,851
35,000
36,000
50,000
9,768
1,783

149,402
(37,688)

176,212
(2,844)

$111,714

$173,368

5.2%

4.8%

$148,462

$173,415

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

On March 30, 2004, we entered into an unsecured $150 million revolving credit facility agreement. The
facility has an accordion feature, enabling us to expand the facility by $50 million with the same terms and
conditions, subject to approval by the banks that are a party to the agreement. The agreement has a performance-
based interest rate pricing grid ranging from LIBOR plus 0.475% to LIBOR plus 0.800%, determined by our
consolidated debt-to-capital ratio. The agreement also requires that certain financial covenants be met. On
November 11, 2005, we executed a consent and waiver with the lenders under our credit agreement clarifying
that the assets, liabilities and operating results of VIEs are to be excluded for purposes of covenant calculations
under the agreement. On November 22, 2005, we executed an amendment to the credit agreement to modify its
fixed charge coverage ratio requirements and interest rate provisions. On February 9, 2007, we executed an
amendment to our credit agreement to modify its fixed charge coverage ratio requirements and interest rate
provisions and to reduce the facility from $150 million to $100 million. The revolving credit facility expires on
May 1, 2009. At April 28, 2007, we were in compliance with all of the covenants under this facility. As of April 28,
2007, we had $100.0 million available for future borrowings under this facility.

We have short-term borrowing arrangements with several banks that allow us to borrow funds on demand. Our
availability of credit from short-term borrowing lines of credit total $119.1 million, with no borrowings at April 28,
2007.

Industrial revenue bonds were used to finance the construction of some of our manufacturing facilities. The

facilities constructed from the bond proceeds are mortgaged as collateral for the bonds.

We had entered into several interest rate swap agreements with counter-parties that were participants in the
revolving credit facility to reduce the impact of changes in interest rates on the floating rate debt. We believe that the
risk of potential credit loss from counter-party non-performance is minimal. The purpose of these swaps was to fix
interest rates on a notional amount of $10 million through August 4, 2006, at 3.05% plus the applicable borrowing
spread under the revolving credit facility.

Maturities of long-term debt, subsequent to April 28, 2007, are $37.7 million in 2008, $2.2 million in 2009,

$43.1 million in 2010, $4.2 million in 2011, $4.5 million in 2012 and $57.7 million thereafter.

Cash paid for interest during fiscal years 2007, 2006 and 2005 was $10.3 million, $11.5 million and

$10.1 million, respectively.

Note 8: Operating Leases

We have operating leases for manufacturing facilities, executive and sales offices, warehouses, showrooms and
retail facilities, as well as for transportation equipment and data processing. The operating leases expire at various
dates through fiscal 2027. Certain transportation leases contain a provision for the payment of contingent rentals
based on mileage in excess of stipulated amounts. We lease additional transportation, data processing and other
equipment under capital leases expiring at various dates through fiscal 2010.

We have certain retail facilities which we sublease to outside parties.

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The future minimum rentals for all non-cancelable leases and future rental income from subleases are as

follows (for the fiscal years):

Future
Minimum Rentals

Future
Minimum Income

(Amounts in thousands)

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 and beyond. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 42,255
43,179
40,003
33,330
29,141
174,919

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$362,827

$ 1,430
1,455
1,472
1,508
1,526
10,770

$18,161

Rental expense, rental income and contingent rentals for operating leases were as follows (for the fiscal years

ended):

Rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Note 9: Retirement and Welfare

4/28/2007

4/30/2005

4/29/2006
(Amounts in thousands)
$43,169
994
390

$35,773
612
408

$47,357
1,812
388

Eligible salaried employees are covered under a trusteed profit sharing retirement plan. Discretionary cash
contributions to a trust are made annually based on profits. We also maintain an Executive Qualified Deferred
Compensation plan for eligible highly compensated employees. An element of this plan is the Supplemental
Executive Retirement Plan (“SERP”), which allows contributions for eligible highly compensated employees. We
had life insurance contracts at April 28, 2007, and April 29, 2006, of $18.0 million and $18.3 million, respectively,
included in other long-term assets related to this plan which we expect to be held to maturity.

We maintain a non-qualified defined benefit retirement plan for certain former salaried employees. Included in
other long-term liabilities were plan obligations of $14.4 million and $13.8 million at April 28, 2007, and April 29,
2006, respectively. During fiscal 2007, the interest cost recognized for this plan was $0.9 million, the actuarial gain
recognized was $0.6 million and the benefit payments during the year were $0.9 million. During fiscal 2006, the
interest cost recognized for this plan was $0.8 million, the actuarial gain recognized was $1.3 million and the benefit
payments during the year were $0.8 million. This plan is not funded and is excluded from the obligation charts that
follow.

Voluntary 401(k) retirement plans are offered to eligible employees within certain U.S. operating units. For
most operating units, we make matching contributions based on specific formulas, and beginning on August 1,
2006, these contributions were made in cash. Prior to this date, the match was made in our common shares. We also
maintain defined benefit pension plans for eligible factory hourly employees at some operating units. Our largest
plan has been frozen for new participants since January 1, 2001, but active participants still earn service cost. As
discussed in Note 15, we closed our Canadian manufacturing facility during fiscal 2006 and terminated the pension
plan associated with that business, which caused a curtailment loss of $0.9 million in fiscal 2006 and a settlement
charge of $1.3 million in fiscal 2007 as shown in the table below.

The measurement dates for the pension plan assets and benefit obligations were April 28, 2007, April 29, 2006,

and April 30, 2005, in the years presented.

As of April 29, 2006, previously unrecognized actuarial losses were $9.9 million. As of April 28, 2007,
previously unrecognized differences between actual amounts and estimates based on actuarial assumptions are

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

included in Accumulated Other Comprehensive Income (Loss) in our Consolidated Balance Sheet as required by
SFAS No. 158. For fiscal 2007, we recognized $8.2 million pre-tax ($4.9 million after tax) for previously
unrecognized net actuarial losses in Accumulated Other Comprehensive Income. This adoption reduced our long-
term pension assets by $8.2 million in our Consolidated Balance Sheet as of April 28, 2007. In future reporting
periods, the difference between actual amounts and estimates based on actuarial assumptions will be recognized in
Other Comprehensive Income (Loss) in the period in which they occur.

The net periodic pension cost and retirement costs for retirement plans were as follows (for the fiscal years

ended):

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amortization and deferral . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment/settlement loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/30/2005

4/28/2007

4/29/2006
(Amounts in thousands)
$ 2,979
4,880
(6,514)
1,202
900

$ 2,190
5,489
(6,717)
98
1,323

$ 3,065
4,695
(6,126)
(53)
—

Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit sharing/SERP* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
401(k)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,383
2,551
5,414
98

3,447
6,405
4,415
755

1,581
10,970
4,973
1,130

Total retirement costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,446

$15,022

$18,654

* Not determined by an actuary

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The funded status of the defined benefit pension plans was as follows:

4/28/2007
4/29/2006
(Amounts in thousands)

Change in benefit obligation
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $86,438
2,190
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,489
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,639
Actuarial (gain)/loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,320)
Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,241)
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$90,222
2,979
4,880
(6,635)
(5,008)
—

Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in plan assets
Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

89,195

86,438

91,468
10,574
204
(8,320)

82,842
12,404
1,230
(5,008)

Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $93,926

$91,468

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,731

$ 5,030

Pension plans in which accumulated benefit obligation exceeds plan assets

at end of year

Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,982
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,956

$ 3,716
$ 3,671

Amounts recognized in the Consolidated Balance Sheet consist of:

Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/29/2006
4/28/2007
(Amounts in thousands)
$14,960
$4,757
(1,291)
(26)
1,291
—

Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,731

$14,960

The weighted average actuarial assumptions were as follows (for the fiscal years ended):

4/28/2007

4/29/2006

4/30/2005

Discount rate used to determine benefit obligations. . . . . . . . . . . . .
Discount rate used to determine net benefit cost . . . . . . . . . . . . . . .
Long-term rate of return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.1%
6.4%
8.0%

6.4%
5.5%
8.0%

5.5%
6.0%
8.0%

Our non-qualified retirement plan was not funded at April 28, 2007 or April 29, 2006. We do not expect to fund
our non-qualified defined benefit retirement plan as we hold funds equal to the liability of the plan in a rabbi trust.
We are not required to make any contributions to the defined benefit plans in fiscal year 2008; however, we reserve
the right to make discretionary contributions. In fiscal 2008, we do not expect to amortize any unrecognized
actuarial losses as a component of pension expense.

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our long-term stated investment objective is to maximize the investment return with the least amount of risk
through a combination of capital appreciation and income. The strategic asset allocation targets are 65% equities
and 35% fixed income within a range of 5% of the target. In selecting the expected long-term rate of return on assets,
we considered the average rate of earnings expected on the funds invested or to be invested to provide the benefits of
these plans. This included considering the trust’s asset allocation and the expected returns likely to be earned over
the life of the plans. This basis is consistent with the prior year.

The weighted average asset allocations at year end were as follows:

4/28/2007

4/29/2006

Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

71%
29%

69%
31%

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

100%

100%

The expected benefit payments by our pension plans for each of the next five years and for periods thereafter

are presented in the following table:

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Benefit Payments
(Amounts in thousands)
$ 4,058
3,823
4,016
4,217
4,423
30,924

$51,461

Note 10: Financial Guarantees and Product Warranties

We have provided secured and unsecured financial guarantees relating to leases in connection with certain
La-Z-Boy Furniture Galleries» stores which are not operated by the company. The lease guarantees are generally for
real estate leases and have terms from five to eleven years. These lease guarantees enhance the credit of these
dealers. The dealer is required to make periodic fee payments to compensate us for our guarantees. We have
recognized liabilities for the fair values of the lease agreements that we have entered into, but they are not material
to our financial position.

We would be required to perform under these agreements only if the dealer were to default on the lease. The
maximum amount of potential future payments under lease guarantees was $14.6 million as of April 28, 2007.

We have, on occasion, entered into agreements which resulted in indemnifying third parties against certain
liabilities, mainly environmental obligations. We believe that judgments, if any, against us related to such
agreements would not have a material effect on our business or financial condition.

Our accounting policy for product warranties is generally to accrue an estimated liability at the time the
revenue is recognized. This estimate is based on historical claims and adjusted for currently known specific
warranty issues. Warranty expense is recorded as a component of S,G&A.

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation of the changes in our product warranty liability is as follows:

Balance as of the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,655
14,938
Accruals during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,179)
Other adjustments during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,521)
Adjustments for discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14,910)
Settlements during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/28/2007
4/29/2006
(Amounts in thousands)
$ 18,688
14,347
(1,015)
—
(12,365)

Balance as of the end of the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,983

$ 19,655

Other adjustments of $4.2 million reflect our current trend towards lower aggregate warranty costs, partic-
ularly costs incurred one year after sale of the product. The adjustment also reflects remediation of other specific
warranty-related issues. Together, these items have reduced the reserve for future warranty costs.

Note 11: Contingencies and Commitments

We have been named as a defendant in various lawsuits arising in the ordinary course of business, including
being named as a potentially responsible party at six environmental clean-up sites. Based on a review of all currently
known facts and our experience with previous legal and environmental matters, we have recorded expense in respect
of probable and reasonably estimable losses arising from legal and environmental matters and do not believe that a
material additional loss is reasonably possible for legal or environmental matters.

Note 12: Stock-Based Compensation

On April 30, 2006, we adopted the fair-value recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004) Share-Based Payment (“SFAS No. 123(R)”) using a modified-prospective
transition method. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees
and requires us to record compensation cost for all stock awards granted after the required effective date and for
awards modified, repurchased or canceled after that date. In addition, we are required to record compensation
expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain
outstanding at the date of adoption. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”)
relating to SFAS No. 123(R). We have applied the provisions of SAB 107 in our adoption of SFAS No. 123(R).

In fiscal 2005, our shareholders approved a long-term equity award plan which replaced the former employee
incentive stock option plan, the former employee restricted share plan and the former performance-based stock
plan. The new plan allows for awards in the form of performance awards, restricted shares and non-qualified stock
options. Under this new plan, the aggregate number of common shares that may be issued through awards of any
form is 5.0 million. No further grants or awards may be issued under the former plans.

The long-term equity award plan and the former employee incentive stock option plan provide grants to certain
employees to purchase common shares at a specified price, which may not be less than 100% of the current market
price of the stock at the date of grant. Granted options generally become exercisable at 25% per year, beginning one
year from the date of grant for a term of five years. Granted options outstanding under the former plan remain in
effect and become exercisable at 25% per year, beginning one year from the date of grant for a term of five or ten
years. Additionally, we have outstanding options that were issued to replace outstanding options of a company
acquired in fiscal 2000. The options outstanding under this plan as of April 28, 2007, were 15,045 with a weighted
average exercise price of $19.15 per share. There are no shares available for future grant under this plan.

Stock option expense recognized in Selling, General and Administrative expense under SFAS No. 123(R) for
the twelve months ended April 28, 2007 was $2.4 million. This expense reduced net income by $1.7 million and
earnings per share by $0.03 for the twelve months ended April 28, 2007. We received less than $0.1 million in cash
during fiscal 2007 for exercises of stock options.

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Plan activity for stock options under the above plans is as follows:

Outstanding at April 29, 2006 . . . . . . . . . . .
Granted. . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding at April 28, 2007 . . . . . . . . . . .

Exercisable at April 28, 2007 . . . . . . . . . . .
Available for grants at April 28, 2007 . . . . .

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term (Years)

$18.29
13.26
13.57
20.21
13.88

16.63

$19.03

4.2

4.3

4.7

Aggregate
Intrinsic
Value
(In thousands)
$1,151

5

—

—

Number of
Shares
(In thousands)
2,325
649
(4)
(542)
(172)

2,256

1,128
3,290

As of April 28, 2007, there was $2.8 million of total unrecognized compensation cost related to non-vested
stock option awards which is expected to be recognized over a weighted-average remaining vesting term of all
unvested awards of 1.7 years. During the twelve months ended April 28, 2007, 0.6 million shares vested. The
aggregate intrinsic value of options exercised during fiscal 2006 and fiscal 2005 was less than $0.1 million and
$0.2 million, respectively.

The fair value of each option grant was estimated using the Black-Scholes option-pricing model. For the
options granted in the second quarter ended October 28, 2006, expected volatility was estimated based on the
historical volatility of our common shares. The average expected life was based on the contractual term of the stock
option and expected employee exercise and post-vesting employment termination trends. The risk-free rate was
based on U.S. Treasury issues with a term equal to the expected life assumed at the date of grant. Turnover rate was
estimated at the date of grant based on historical experience. The fair value of employee stock options granted
during the second quarter of fiscal 2007 was calculated using the following assumptions:

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Turnover rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/28/2007

4.8%
3.2%
4.0
35.0%
3.0%

$3.47

Under the long-term equity award plan, the Compensation Subcommittee of the Board of Directors is
authorized to award restricted common shares to certain employees. The shares are offered at no cost to the
employees, and the plan requires that all shares be held in an escrow account for a period of three to five years. In the
event of an employee’s termination during the escrow period, the shares are returned to the company at no cost to the
company. Restricted stock issued is recorded based on the market value of our common shares on the date of the
award and the related compensation expense is recognized over the vesting period. Expense relating to the restricted
shares recorded in Selling, General and Administrative expense was $1.6 million with an after-tax effect of
$1.0 million during fiscal 2007, and $0.8 million with an after-tax effect of $0.5 million during fiscal 2006. The
unrecognized compensation cost at April 28, 2007 was $3.2 million and is expected to be recognized over a
weighted-average remaining contractual term of all unvested awards of 2.6 years.

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes information about non-vested share awards as of and for the year ended

April 28, 2007:

Non-vested shares at April 29, 2006 . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Number of
Shares
(In thousands)
283
184
(42)
(59)

Non-vested at April 28, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

366

Weighted Average
Grant Date
Fair Value

$14.59
13.43
14.81
14.28

$14.03

Our shareholders have approved a non-employee directors’ restricted share plan, under which shares are
offered at 25% of the fair market value at the date of grant. The plan requires that all shares be held in an escrow
account until the participant’s service as a director ceases unless otherwise approved by the Board of Directors. In
the event of a non-employee director’s termination during the escrow period, the shares must be sold back to us at
their cost. Restricted stock issued is recorded based on the market value of our common shares on the date of the
award and the related compensation expense is recognized when the grant occurs. Actual pre-tax expense relating to
the restricted shares was $0.3 million and $0.2 million during fiscal 2007 and fiscal 2006, respectively.

Additionally under the long-term equity award plan, the Compensation Subcommittee of the Board of
Directors is authorized to award common shares to certain employees based on the attainment of certain financial
goals over a given performance period. The shares are offered at no cost to the employees. In the event of an
employee’s termination during the performance period, the potential right to earn shares under this program is
generally forfeited. No shares were issued during fiscal 2007 or fiscal 2006. The cost of performance-based awards
is expensed over the performance period. No expense was recognized during fiscal 2007 as we did not expect the
financial goals to be attained for any of the outstanding performance periods. In fiscal 2006 and fiscal 2005,
expenses of $0.5 million and $1.5 million, respectively, were reversed relating to prior year accruals for previously
anticipated payouts on this plan as financials goals were not attained.

Note 13: Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, are as follows:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment
Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains/(losses) on marketable securities . . . . . . . . . . . . . . . . . . . . .
Pension. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/28/2007
4/29/2006
(Amounts in thousands)
$ 4,066
$ 5,483
33
(85)
1,362
2,049
(1,028)
(5,655)

Total accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . .

$ 1,792

$ 4,433

Note 14: Segment Information

Our reportable operating segments are the Upholstery Group, the Casegoods Group and the Retail Group. On
July 28, 2006, we sold our American of Martinsville division which was part of our Casegoods Group, as it was not
strategically aligned with our current business model as a residential furniture company. On April 28, 2007 we sold
our Sam Moore operating unit, which was included in our Upholstery Group, to continue aligning our business with
our strategic plan. Additionally, in the third quarter of fiscal 2007, we committed to a plan to sell Clayton Marcus
and Pennsylvania House which were included in the Casegoods Group. These businesses have been presented as

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

discontinued operations and prior financial information was restated for the change in composition of our
Upholstery and Casegoods Groups. Income statement information presented below is restated accordingly.

Upholstery Group. The operating units in the Upholstery Group are Bauhaus, England, La-Z-Boy, and
La-Z-Boy U.K. This group primarily manufactures and sells upholstered furniture to furniture retailers. Uphol-
stered furniture includes recliners and motion furniture, sofas, loveseats, chairs, ottomans and sleeper sofas.

Casegoods Group. The operating units in the Casegoods Group are American Drew, Lea, Hammary and
Kincaid. This group primarily sells manufactured or imported wood furniture to furniture retailers. Casegoods
product includes tables, chairs, entertainment centers, headboards, dressers, accent pieces and some upholstered
furniture.

Retail Group. The Retail Group consists of 70 company-owned La-Z-Boy Furniture Galleries» stores. The

Retail Group primarily sells upholstered furniture to end consumers.

Our largest customer represents less than 5.0% of each of our segments’ sales.

The accounting policies of the operating segments are the same as those described in Note 1. Segment
operating income is based on profit or loss from operations before interest expense, other income and income taxes.
Identifiable assets are cash and equivalents, notes and accounts receivable, net inventories, net property, plant and
equipment, goodwill and trade names. Our unallocated assets include deferred income taxes, corporate assets
(including a portion of cash and equivalents), VIEs and various other assets. Substantially all of our long-lived
assets were located within the U.S. VIEs are included in Corporate and other in the following table.

4/28/2007

4/29/2006
(Amounts in thousands)

4/30/2005

Sales

Upholstery Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,194,220
262,721
Casegoods Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
220,319
Retail Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(59,958)
VIEs/Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,617,302
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,265,952
292,553
213,438
(76,931)
1,695,012

$1,379,684
309,792
173,099
(47,373)
1,815,202

Operating income (loss)

Upholstery Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible write-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Depreciation and Amortization

Upholstery Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78,724
20,289
(31,161)
(24,864)
(11,033)
—

31,955

13,723
3,002
4,806
4,065
25,596

83,160
17,125
(26,006)
(28,565)
(8,479)
(22,695)

14,540

13,282
3,594
3,801
3,834
24,511

99,779
14,010
(2,859)
(29,938)
(2,931)
—

78,061

14,230
3,773
2,710
3,062
23,775

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Capital Expenditures

Upholstery Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and Other* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assets

Upholstery Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Casegoods Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/28/2007

4/29/2006
(Amounts in thousands)

4/30/2005

10,172
1,051
7,356
7,232
25,811

472,854
125,234
123,208
157,395

14,782
3,027
4,038
6,144
27,991

493,702
231,092
103,611
128,347

13,275
3,621
7,126
10,749
34,771

564,689
250,133
97,805
113,730

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 878,691

$ 956,752

$1,026,357

Sales by Country

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

90%
7%
3%
100%

92%
6%
2%
100%

91%
6%
3%
100%

* Variable Interest Entities (“VIEs”) are included in corporate and other.

Note 15: Restructuring

In the fourth quarter of fiscal 2007, we committed to a restructuring plan which included the closures of our
Lincolnton, North Carolina and Iuka, Mississippi upholstery manufacturing facilities, the closure of our rough mill
lumber operation in North Wilkesboro, North Carolina, the consolidation of operations at our Kincaid Taylorsville,
North Carolina upholstery operation and the elimination of a number of positions throughout the remainder of the
organization. The Lincolnton and Iuka facility closures will occur in the first quarter of fiscal 2008 and will impact
approximately 250 and 150 employees, respectively. The closure of our North Wilkesboro lumber operation, the
consolidation of operations at Kincaid’s Taylorsville operation and the remaining activities occurred in the fourth
quarter of fiscal 2007 and impacted approximately 100 positions. These decisions were made to help align our
company with the current business environment and strengthen our positioning going forward. We recorded pre-tax
restructuring charges of $4.3 million or $0.05 per diluted share covering severance and benefits, write-down of
certain fixed assets in addition to other restructuring costs which were expensed as incurred. Of these costs
$4.0 million was reported as a component of Cost of Sales with the remainder in Selling, General and Admin-
istrative. The write-down was accounted for in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. All other costs were accounted for in accordance with SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities.

Offsetting these expenses during the year was a pre-tax gain of $2.0 million or $0.02 per diluted share relating
to the sale of properties idled as part of previous restructurings. These gains were recorded as a component of cost of
sales.

During fiscal 2007, several of our Retail warehouses were consolidated into larger facilities and several
underperforming stores were closed. Approximately 85 jobs were eliminated as a result of these closures. We
recorded pre-tax restructuring charges of $7.3 million or $0.08 per diluted share covering contract termination costs
for the leases on these facilities, severance and benefits, write-down of certain leasehold improvements in addition
to other relocation costs which were expensed as incurred. These costs were reported as a component of Selling,
General and Administrative costs. The write-down was accounted for in accordance with SFAS No. 144,

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Accounting for the Impairment or Disposal of Long-Lived Assets. All other costs were accounted for in accordance
with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.

As of April 28, 2007, we had a remaining restructuring liability of $3.4 million which is expected to be paid out
or written off as follows: $2.4 million in fiscal 2008, $0.4 million in fiscal 2009, $0.4 million in fiscal 2010 and
$0.2 million thereafter.

In the second quarter of fiscal 2006, the decision was made to close our Canadian upholstery manufacturing
facility due to underutilization of capacity. The plant closure occurred in the third quarter of fiscal 2006 and
production was absorbed in other upholstery facilities. Approximately 413 jobs were eliminated as a result of this
closure. During fiscal 2006, pre-tax restructuring charges for our Canadian facility were $8.9 million, or $0.11 per
diluted share, covering severance and benefits, appropriate adjustments to our pension liability and the write-down
of certain fixed assets. Severance costs and other costs for this restructuring were expensed in accordance with
SFAS No. 112, Employers’ Accounting for Postemployment Benefits and SFAS No. 146. The write-down was
accounted for in accordance with SFAS No. 144. During the fourth quarter of fiscal 2007, we recorded a pre-tax
restructuring charge of $1.3 million or $0.02 per diluted share related to the settlement of the Canadian pension
plan.

Restructuring liabilities along with charges to expense, cash payments or asset write-downs were as follows:

Severance and benefit-related costs . . . . . . . . . . . . . .
Fixed asset write-downs, net of gains . . . . . . . . . . . .
Contract termination costs . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total restructuring . . . . . . . . . . . . . . . . . . . . . . . . .

Fixed asset write-downs, net of gains . . . . . . . . . . . .
Severance and benefit-related costs . . . . . . . . . . . . . .

Total restructuring . . . . . . . . . . . . . . . . . . . . . . . . .

Fiscal 2007

Cash
Payments
or Asset
Charges to
Write-Offs
Expense
(Amounts in thousands)
$(1,251)
$ 2,537
(1,091)
1,091
(2,184)
3,441
(3,964)
3,964

$11,033

$(8,490)

Fiscal 2006

Cash
Payments
or Asset
Charges to
Expense
Write-Offs
(Amounts in thousands)
$ 2,327
$(2,327)
(8,117)
8,970

$ 6,643

$(5,790)

4/28/2007
Balance

$2,177
—
1,257
—

$3,434

4/29/2006
Balance

$ —
891

$891

4/29/2006
Balance

$891
—
—
—

$891

4/30/2005
Balance

$—
38

$38

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 16:

Income Taxes

The primary components of our deferred tax assets and (liabilities) were as follows:

4/28/2007
4/29/2006
(Amounts in thousands)

Assets
Deferred and other compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,631
5,854
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,307
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,221
Consolidation of variable interest entities . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,132
State income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,411
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
226
Workers’ compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,713
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
373
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,240
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11,520)
Valuation reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 13,890
7,810
7,212
5,705
11,096
2,002
929
—
4,228
1,376
(10,422)

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50,588

43,826

Liabilities
Trade names. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(8,218)
(1,830)
(7,716)
—
(161)

(7,049)
(5,457)
(13,902)
(2,660)
(2,030)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(17,925)

(31,098)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,663

$ 12,728

Our effective tax rate differs from the U.S. federal income tax rate for the following reasons:

(% of Pre-Tax Income)

Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend from foreign subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible meals and entertainment . . . . . . . . . . . . . . . . . . . . .
ESOP benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in value of life insurance contracts . . . . . . . . . . . . . . . . . .
Federal income tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deduction for U.S. manufacturing . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax — repatriation of foreign earnings . . . . . . . . . . . . . . .
Non-deductible stock option expense . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/28/2007

4/29/2006

4/30/2005

35.0%

35.0%

35.0%

1.6
—
—
1.1
(1.4)
(2.2)
(1.7)
(0.1)
(1.6)
(0.5)
3.2
1.0
(0.6)

28.6
153.7
—
8.0
(8.7)
17.4
(0.5)
(12.1)
(6.2)
(6.5)
—
—
(0.5)

4.1
—
0.4
0.6
(0.7)
(1.5)
(0.5)
—
(0.2)
—
—
—
0.2

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33.8%

208.2%

37.4%

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At April 28, 2007 and April 29, 2006, we had state net operating losses and credits of approximately
$12.4 million and $11.1 million, respectively. Due to the uncertainty of their actual utilization we have established a
valuation reserve at the end of each year in the amounts of $10.1 million and $8.7 million, respectively. These state
net operating losses and credits expire between fiscal year 2008 and fiscal year 2027.

Furthermore at April 28, 2007 and April 29, 2006, our foreign operating units had realized net operating losses
that, if fully utilized, would result in a tax reduction of approximately $3.7 million and $3.6 million, respectively.
Due to the uncertainty of their actual utilization, we have established a valuation reserve of $1.4 million and
$1.8 million at April 28, 2007 and April 29, 2006, respectively. The net decrease of $0.4 million is due to an increase
in the valuation reserve for our European operations in the amount of $0.4 million and a decrease of $0.8 million
relative to our Canadian operations. The Canadian reduction is in part due to recent Canadian legislation that
extended the net operating loss carry forward period from 10 to 20 years.

During fiscal year 2007, our La-Z-Boy UK operating unit recognized a substantial gain on the sale of real
estate. Due to our intentions to repatriate the net proceeds from this transaction, a deferred tax liability of
$0.9 million was recorded relative to all of La-Z-Boy UK’s undistributed profits.

For our Thailand operating unit, we continue to assert that the earnings of this operating unit are permanently
reinvested. Consequently, no deferred tax was recorded for their undistributed earnings. An estimate of these
permanently reinvested earnings is $2.4 million. The potential deferred tax attributable to these earnings is not
currently estimable.

Income tax expense applicable to continuing operations consists of the following components (for the fiscal

years ended):

Federal — current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State — current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign — current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/30/2005

4/28/2007

4/29/2006
(Amounts in thousands)
$14,287
(4,422)
2,091
178
214
(1,590)

$14,475
(7,976)
3,501
(2,144)
2,682
(448)

$10,752
11,746
2,479
(1,146)
2,073
(541)

Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$10,090

$10,758

$25,363

Income from continuing operations before income taxes consists of the following (for the fiscal years ended):

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$20,043
9,815

4/28/2007

4/30/2005

4/29/2006
(Amounts in thousands)
$11,588
(6,420)

$62,390
5,402

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$29,858

$ 5,168

$67,792

Cash paid for taxes during the fiscal years ended April 28, 2007, April 29, 2006, and April 30, 2005, was

$16.7 million, $6.2 million, and $23.7 million, respectively.

Note 17: Variable Interest Entities

Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities
(“FIN 46”), requires the “primary beneficiary” of a VIE to include the VIE’s assets, liabilities and operating results
in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited-liability company,
trust or any other legal structure used to conduct activities or hold assets that either (a) has an insufficient amount of
equity to carry out its principal activities without additional subordinated financial support, (b) has a group of equity

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

owners that are unable to make significant decisions about its activities, or (c) has a group of equity owners that do
not have the obligation to absorb losses or the right to receive returns generated by its operations.

La-Z-Boy Furniture Galleries» stores that are not operated by us are operated by independent dealers. These
stores sell La-Z-Boy manufactured products as well as various accessories purchased from approved La-Z-Boy
vendors. In some cases we have extended credit beyond normal trade terms to the independent dealers, made direct
loans and/or guaranteed certain leases. Most of these independent dealers have sufficient equity to carry out their
principal operating activities without subordinated financial support. However, there are certain independent
dealers that we have determined may not have sufficient equity.

Based on the criteria for consolidation of VIEs, we have consolidated several dealers where we were the
primary beneficiary based on the fair value of our variable interests. All of our consolidated VIEs were recorded at
fair value on the date we became the primary beneficiary. Because these entities are accounted for as if the entities
were consolidated based on voting interests, we absorb all net losses of the VIEs in excess of the equity at the
dealerships. We recognize all net earnings of these VIEs to the extent of recouping the losses we recorded. Earnings
in excess of our losses are attributed to equity owners of the dealers and are recorded as minority interest. We had
three consolidated VIEs for the first quarter of fiscal 2006 and had four consolidated VIEs for the last three quarters
of fiscal 2006 and throughout fiscal 2007.

Our consolidated VIEs recognized $45.6 million, $36.8 million and $46.0 million of sales, net of intercompany
eliminations, in fiscal 2007, fiscal 2006 and fiscal 2005, respectively. Additionally, we recognized a net loss per
share of $0.11, $0.09 and $0.11 in fiscal 2007, fiscal 2006 and fiscal 2005, respectively, resulting from the operating
results of these VIEs. The VIEs had $2.8 million and $8.6 million of assets net of elimination of intercompany
activity at the end of fiscal 2007 and fiscal 2006, respectively. During the third quarter of fiscal 2005, one of the
equity owners of our VIEs contributed $2.0 million of capital to their business. Because we consolidated this entity
based on voting interests, we recorded the capital contribution as income in that period to offset previously recorded
losses. In fiscal 2005, the extraordinary gain of $3.4 million ($2.1 million net of income taxes) is a result of the
application of purchase accounting relating to the acquisition of previously consolidated VIEs.

Note 18: Acquisitions, Dispositions, and Discontinued Operations

Acquisitions

In the first quarter of fiscal 2007, we acquired six stores in the southeastern Florida market from a dealer who
was previously a VIE of which we were not the primary beneficiary. This acquisition impacted our consolidated net
sales by less than 1.0%. Pro forma sales and results of operations were not presented as they were not materially
different from that of our consolidated results of operations as reported.

Dispositions

During fiscal 2007, we sold several long-lived assets which generated $47.0 million in cash and $14.1 million

of gains, which were recorded as a component of S,G&A.

Discontinued Operations

On July 28, 2006, we completed the sale of our American of Martinsville operating unit which supplied
contract furniture to the hospitality, assisted-living and governmental markets. This operating unit was not a
strategic fit with our current business model, which is centered on providing comfortable and stylish furnishings for
the home, and was not a large enough component of our overall business (about 5% of sales) to justify our continued
corporate focus and resources. We sold the business for $33.2 million, recognizing a pre-tax gain in the first quarter
of $2.1 million. This disposition qualified as discontinued operations. Accordingly, our Consolidated Statement of
Operations for the prior years have been reclassified to reflect the results of operations of this divested business as
discontinued operations with taxes allocated based on the operating units’ estimated effective tax rate and no

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

corporate expenses or interest allocated. The business unit was previously included in the Casegoods Group, which
has also been reclassified to reflect the discontinued operations.

Additionally, during the third quarter of fiscal 2007, we committed to a plan to sell Sam Moore, which was a
part of our Upholstery Group, and to sell the combined unit of Clayton Marcus and Pennsylvania House, which was
part of our Casegoods Group. As we have continued to assess our long-term strategic direction, we have determined
that these operating units do not align with our current strategic plan. Due to this decision these operating units are
presented as discontinued operations and segment data has been reclassified. Accordingly, our Consolidated
Statement of Operations for the prior years have been reclassified to reflect the results of these operations as
discontinued operations, with taxes allocated based on the operating units’ estimated effective tax rate and no
corporate expenses or interest allocated.

As a result of the decision to sell Sam Moore, Clayton Marcus and Pennsylvania House and subsequent testing
of the fair value of the assets remaining to be sold, we recorded a $17.5 million ($13.7 net of taxes) impairment
charge that is included in discontinued operations on our Consolidated Statement of Operations. The pretax
impairment charge was comprised of $3.6 million for impairment of the trade names, $7.3 million for impairment of
goodwill, $0.2 million of other intangibles, $1.7 million for write-down of LIFO inventory relating to the APB 16
acquisition adjustment, $1.0 million for allowance for inventory and $3.7 million for write-down of fixed assets.
During the fourth quarter of fiscal 2007, current market data indicated the fixed assets for Clayton Marcus and
Pennsylvania House were recorded above fair value which resulted in an additional $1.3 million impairment of their
fixed assets. Their assets and liabilities as of the end of the fiscal 2007 have been reclassified as assets and liabilities
of discontinued operations. The assets and liabilities of Pennsylvania House and Clayton Marcus were recorded at
fair value less cost to sell as of April 28, 2007; however, we could recognize additional losses depending on the final
disposition of these assets and liabilities. We have ceased depreciation of these assets.

On April 27, 2007, we completed the sale of our Sam Moore operating unit, an upholstered chair manufacturer.
We sold the business for $9.9 million, consisting of $9.5 million in cash and a receivable of $0.4 million,
recognizing a loss in the fourth quarter of $0.3 million.

Assets of discontinued operations:

Receivables, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Liabilities of discontinued operations:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4/28/2007
(Amounts
in thousands)

$ 7,140
10,978
5,740
420

$24,278

$ 1,591
2,057
195

$ 3,843

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The results of the discontinued operations for Sam Moore, Clayton Marcus, Pennsylvania House, La-Z-Boy

Contract and American of Martinsville for fiscal 2007, 2006 and 2005 were as follows:

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,713
(16,564)
Income (loss) from discontinued operations, net of tax . . . . . . .
935
Gain on sale of discontinued operations, net of tax . . . . . . . . . .

4/28/2007

4/30/2005

4/29/2006
(Amounts in thousands)
$221,952
2,549
—

$282,040
(8,006)
668

In the consolidated statement of cash flows, the cash flows of discontinued operations were not reclassified for
fiscal 2005, 2006 and 2007. The assets and liabilities of these operating units were not reclassified for fiscal 2006.
They are reported in the respective categories of the consolidated balance sheet and statement of cash flows along
with those of our continuing operations.

Note 19: Earnings per Share

Basic earnings per share is computed using the weighted average number of shares outstanding during the
period. Diluted net income per share uses the weighted average number of shares outstanding during the period plus
the additional common shares that would be outstanding if the dilutive potential common shares issuable under
employee stock options and unvested restricted stock were issued. A reconciliation of basic and diluted weighted
average common shares outstanding follows:

Weighted average common shares outstanding (basic) . . . . . . . . . . .
Effect of options and unvested restricted stock . . . . . . . . . . . . . . . .

4/28/2007

4/30/2005

4/29/2006
(Amounts in thousands)
51,801
—

52,082
56

51,475
131

Weighted average common shares outstanding (diluted) . . . . . . . . .

51,606

51,801

52,138

The weighted average common shares outstanding (diluted) at April 29, 2006 excludes outstanding stock
options of 0.2 million because the net loss from continuing operations in the fiscal year would cause the effect of
options to be anti-dilutive.

The effect of options to purchase 1.7 million, 1.7 million and 1.9 million shares for the fiscal years ended
April 28, 2007, April 29, 2006, and April 30, 2005, with a weighted average exercise price of $17.86, $20.11 and
$20.10, respectively, were excluded from the diluted share calculation because the exercise prices of these options
were higher than the weighted average share price for the fiscal years and would have been anti-dilutive.

Note 20: Related Parties

The former Chairman of our Board of Directors, who retired in August, 2006, was a member and lead director
of the Board of Directors of Culp, Inc through August, 2006. Culp, Inc. provided $33.3 million or 24.9% of the total
fabric purchased by us during fiscal 2006. The purchases from Culp were at prices comparable to other vendors and
under similar terms. Our former Chairman had no involvement in our selection or purchase processes related to
fabrics.

Note 21:

Income from Continued Dumping and Subsidy Offset Act

We recorded $3.4 million as Income from Continued Dumping and Subsidy Offset Act, net of legal expenses,
during fiscal 2007 from the receipt of funds under the Continued Dumping and Subsidy Act (“CDSOA”) of 2000 in
connection with the case involving wooden bedroom furniture imported from China. Receipt of funds during the
prior year were insignificant. The CDSOA provides for distribution of monies collected by U.S. Customs and
Border Protection from anti-dumping cases to domestic producers that supported the anti-dumping petition.

71

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that such disclosure controls and procedures are effective
to ensure that information required to be disclosed in our periodic reports filed under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the Securities and Exchange Commis-
sion’s rules and forms and is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control over Financial Reporting. Our management’s report on
internal control over financial reporting and our registered public accounting firm’s attestation report on
management’s assessment of our internal control over financial reporting are included in Item 8 of this report.

Changes in Internal Control over Financial Reporting. There were no changes in our internal control over
financial reporting during our fourth fiscal quarter of 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

On June 11, 2007, the Compensation Committee established, pursuant to our executive incentive compen-
sation plan, the annual bonus criteria for the year ending April 27, 2008 that will apply to our executive officers,
including each of the executive officers who will be named in the summary compensation table in the proxy
statement for our 2007 annual meeting. The information is included in Exhibit (10.7) to this report and incorporated
in this item by reference.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

We have adopted a Code of Business Conduct, which applies to all of our officers, directors, and employees. A
current copy of the code is posted at our website “http://www.la-z-boy.com”. We provide some information about
our executive officers in Part I of this report, under the heading “Executive Officers of Registrant.” All other
information required to be reported under this item will be included in our proxy statement for our 2007 annual
meeting, and all of that information is incorporated in this item by reference.

ITEM 11. EXECUTIVE COMPENSATION.

All information required to be reported under this item will be included in our proxy statement for our 2007

annual meeting, and all of that information is incorporated in this item by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS.

The information required to be reported under Item 201(d) of Regulation S-K is contained in Item 5 of this
report. All other information required to be reported under this item will be included in our proxy statement for our
2007 annual meeting, and all of that information is incorporated in this item by reference.

72

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE.

All information required to be reported under this item will be included in our proxy statement for our 2007

annual meeting, and all of that information is incorporated in this item by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

All information required to be reported under this item will be included in our proxy statement for our 2007

annual meeting, and all of that information is incorporated in this item by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report:

(1) Financial Statements:

Consolidated Statement of Operations for each of the three fiscal years ended April 28, 2007,

April 29, 2006 and April 30, 2005

Consolidated Balance Sheet at April 28, 2007 and April 29, 2006

Consolidated Statement of Cash Flows for the fiscal years ended April 28, 2007, April 29, 2006 and

April 30, 2005

Consolidated Statement of Changes in Shareholders’ Equity for the fiscal years ended April 28,

2007, April 29, 2006 and April 30, 2005

Notes to Consolidated Financial Statements

Management’s Report to Our Shareholders

Report of Independent Registered Public Accounting Firm

(2) Financial Statement Schedules

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

Schedule II — Valuation and Qualifying Accounts for each of the three fiscal years in the period

ended April 28, 2007

The Report of Independent Registered Public Accounting Firm and Schedule II immediately follow

this item.

All other schedules are omitted because they are not applicable or not required because the required

information is included in the financial statements or notes thereto.

Exhibit
Number

(2)
(3.1)

(3.2)

(3.3)

(3) Exhibits

The following exhibits are filed as part of this report:

Description

Not applicable
La-Z-Boy Incorporated Restated Articles of Incorporation (Incorporated by reference to an exhibit
to Form 10-Q for the quarter ended October 26, 1996)
Amendment to Restated Articles of Incorporation (Incorporated by reference to an exhibit to
Form 10-K/A filed September 27, 1999)
La-Z-Boy Incorporated Amended and Restated Bylaws (as of August 16, 2006) (Incorporated by
reference to an exhibit to Form 8-K filed August 21, 2006)

73

Exhibit
Number

(4.1)

(4.2)

(4.3)

(4.4)

(9)
(10.1)*

(10.2)*

(10.3)*

(10.4)*

(10.5)*

(10.6)*
(10.7)*
(10.8)*

(10.9)*

Description

$150 million dollar Credit Agreement dated as of March 30, 2004 among La-Z-Boy Incorporated,
the banks listed therein and Wachovia Bank, N.A., as Administrative Agent (Registrant hereby
agrees to furnish to the SEC, upon its request, a copy of each other instrument or agreement
defining the rights of holders of long-term debt of Registrant and its subsidiaries) (Incorporated by
reference to an exhibit to Form 10-K for the fiscal year ended April 24, 2004)
Consent and Waiver, dated as of November 11, 2005 to Credit Agreement dated as of March 30,
2004 (Incorporated by reference to an exhibit to Form 10-Q for the quarter ended October 29,
2005)
First Amendment, dated as of November 22, 2005 to Credit Agreement dated as of March 30, 2004
(Incorporated by reference to an exhibit to Form 10-Q for the quarter ended October 29, 2005)
Second Amendment, dated as of February 9, 2007 to Credit Agreement dated as of March 30, 2004
(Incorporated by reference to an exhibit to Form 10-Q for the quarter ended January 27, 2007)
Not applicable
La-Z-Boy Incorporated Restricted Stock Plan for Non-Employee Directors, amended and restated
through August 12, 2003 (Incorporated by reference to an exhibit to definitive proxy statement
dated July 9, 2003)
La-Z-Boy Incorporated 1997 Incentive Stock Option Plan (Incorporated by reference to an exhibit
to definitive proxy statement dated June 27, 1997)
Form of Change in Control Agreement (Incorporated by reference to an exhibit to Form 8-K dated
February 6, 1995). In effect for: Kurt L. Darrow, Steven M. Kincaid, Rodney D. England,
Louis M. Riccio, Jr., and Otis Sawyer.
Form of Indemnification Agreement (covering all directors, including employee-directors)
(Incorporated by reference to an exhibit to Form 8, Amendment No. 1, dated November 3, 1989)
2005 La-Z-Boy Incorporated Executive Deferred Compensation Plan (Incorporated by reference to
an exhibit to Form 10-Q for the quarter ended January 28, 2006)
La-Z-Boy Incorporated 2004 Long-Term Equity Award Plan as Amended on June 11, 2007
Summary of fiscal 2008 salaries for named executive officers
Performance Awards Goals (for Performance Cycle Ending April 2008) (Incorporated by reference
to an exhibit to Form 10-Q for the quarter ended July 30, 2005)
Performance Awards Goals (for Performance Cycle Ending April 2009) (Incorporated by reference
to an exhibit to Form 10-K for the fiscal year ended April 29, 2006)

(10.10)* Sample award agreement under the 2004 Long Term Equity Award Plan (Incorporated by reference

to an exhibit to Form 10-K for the fiscal year ended April 29, 2006)

(10.11)* Executive Incentive Compensation Plan — Description as of June 16, 2006 (Incorporated by

reference to an exhibit to Form 10-K for the fiscal year ended April 29, 2006)

(10.12)* Compensation of non-employee directors
(11)

Statement regarding computation of per share earnings (See Note 19 to the Consolidated Financial
Statements included in Item 8)
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
List of subsidiaries of La-Z-Boy Incorporated
Not applicable
Consent of PricewaterhouseCoopers LLP (EDGAR filing only)
Not applicable
Certifications pursuant to Rule 13a-14(a)

(12)
(13)
(14)
(16)
(18)
(21)
(22)
(23)
(24)
(31)

74

Exhibit
Number

(32)
(33)
(34)
(35)
(100)

Description

Certifications pursuant to 18 U.S.C. Section 1350
Not applicable
Not applicable
Not applicable
Not applicable

* Indicates a management contract or compensatory plan or arrangement under which a director or executive

officer may receive benefits.

75

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

To the Board of Directors of La-Z-Boy Incorporated:

Our audits of the consolidated financial statements, of management’s assessment of the effectiveness of
internal control over financial reporting and of the effectiveness of internal control over financial reporting referred
to in our report dated June 19, 2007 appearing in the 2007 Annual Report to Shareholders of La-Z-Boy Incorporated
(which report, consolidated financial statements and assessment are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Toledo, Ohio
June 19, 2007

76

LA-Z-BOY INCORPORATED AND SUBSIDIARIES SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts and Long-Term Notes

Fiscal Year Ended

Balance at
Beginning
of Year

Discontinued
Operations

Reductions
from
Consolidation of
VIEs

Additions
Charged
to Costs and
Expenses

(Dollars in thousands)

Trade
Accounts
Receivable
Written
Off Net of
Recoveries

Balance at
End of
Year

April 28, 2007 . . . . . . . . . . . . . . . . . $17,431
20,489
April 29, 2006 . . . . . . . . . . . . . . . . .
23,678
April 30, 2005 . . . . . . . . . . . . . . . . .

$(925)
—
—

$ —
(891)
—

$3,790
4,527

176(1)

$(4,719) $15,577
17,431
(6,694)
20,489
(3,365)

(1) Additions charged to costs and expenses includes a $5.5 million reduction relating mostly to the acquisition of
La-Z-Boy Furniture Galleries» Stores and reassessment of our credit position with respect to another significant
dealer.

77

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has

duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

LA-Z-BOY INCORPORATED

BY /s/ Kurt L. Darrow

President and Chief Executive Officer

DATE: June 19, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below, as of

June 19, 2007, by the following persons on behalf of the Registrant and in the capacities indicated.

J. W. Johnston

/s/
J. W. Johnston
Chairman of the Board of Directors

/s/ K. L. Darrow
K. L. Darrow
President and Chief Executive Officer, Director

/s/ R. M. Gabrys
R. M. Gabrys
Director

/s/ H. G. Levy
H. G. Levy
Director

/s/ W. A. McCollough
W. A. McCollough
Director

/s/ L. M. Riccio, Jr.
L. M. Riccio, Jr.
Senior Vice President, Chief Financial Officer and
Chief Accounting Officer

J. H. Foss

/s/
J. H. Foss
Director

/s/ D. K. Hehl
D. K. Hehl
Director

/s/ R. E. Lipford
R. E. Lipford
Director

/s/ N. R. Qubein
N. R. Qubein
Director

J. L. Thompson

/s/
J. L. Thompson
Director

78

BOARD OF DIRECTORS
James W. Johnston 

Chairman of the Board,  
La-Z-Boy Incorporated

Kurt L. darrow 

president and Chief executive Officer, 
La-Z-Boy Incorporated

John H. Foss 

retired Manufacturing Financial executive, 
Director, united Bancorp, Inc.

Richard M. Gabrys 

retired Vice Chairman of deloitte & touche LLp, 
dean, Wayne state University school of  
Business Administration

CORpORATE ExECuTIVES
Kurt L. darrow 

president and Chief executive Officer

rodney d. england 

senior Vp and president Non-Branded Upholstery 
and president, england, Inc. 

Steven M. Kincaid 

Senior Vp and president Casegoods and 
president, Kincaid

Louis M. Riccio, Jr. 

senior Vp and Chief Financial Officer, treasurer

Otis s. sawyer 

Senior Vp Corporate Operations

david K. hehl 

J. douglas Collier 

Member, Cooley hehl Wohlgamuth & Carlton, pLLC

Vp and Chief Marketing Officer

Dr. H. George Levy 

Otorhinolaryngologist

rocque e. Lipford 

senior principal, Miller, Canfield, paddock and 
Stone, pLC

W. Alan McCollough 

Former Chairman and CEO, Circuit City

Jack L. Thompson 

Chairman of the Board, the plastics Group, Inc., 
Acting CEO, union Corrugating Company

Nido R. qubein 

daniel F. deland 

Chief Information Officer

James p. Klarr 

secretary and Corporate Counsel

roger L. Miller 

Vp and General Manager International

Margaret L. Mueller 

Vp and Corporate Controller

Steven p. Rindskopf 

Vp Corporate Human Resources

president, High point university, 
Chairman, Great Harvest Bread Company

R. Rand Tucker 

Assistant secretary and Corporate Counsel

CHAIRMAN EMERITuS
patrick H. Norton

OTHER ExECuTIVES
John V. Labarowski 

president, Hammary Furniture

James h. (Mac) McCall, III 

president, Clayton Marcus and 
pennsylvania house

R. Jack Richardson, Jr. 

president, American drew and  
Lea Industries

Mark A. Wiltshire 

president, La-Z-Boy retail

James A. Wiygul 

president, Bauhaus

INVESTOR INFORMATION
SHAREHOLDER SERVICES
Inquiries regarding the dividend 
reinvestment plan, dividend payments, 
stock transfer requirements, address 
changes and account consolidations 
should be addressed to the company’s 
stock transfer agent and registrar:

CORpORATE HEADquARTERS
La-Z-Boy Incorporated 
1284 North telegraph road 
Monroe, MI 48162-3390 
734-242-1444 
www.lazboy.com

American Stock Transfer  
   & trust Company 
59 Maiden Lane 
New york, Ny 10038 
212-936-5100 
800-937-5449 
www.amstock.com

STOCK ExCHANGE
La-Z-Boy Incorporated common shares 
are traded on the New york stock 
exchange under the symbol LZB.

INVESTOR RELATIONS AND 
FINANCIAL REpORTS
We will provide the Form 10-K to any 
shareholder who requests it. security 
analysts, shareholders and investors 
may request information from:

Investor relations 
La-Z-Boy Incorporated 
1284 North telegraph road 
Monroe, MI 48162-3390 
investorrelations@la-z-boy.com 
734-241-4301

©2007 La-Z-Boy INCoRpoRaTEd 

ExCEpT aS NoTEd, aLL dESIGNaTEd TRadEMaRkS aNd SERvICE MaRkS UTILIZEd IN THIS REpoRT aRE owNEd By La-Z-Boy INCoRpoRaTEd oR ITS 

SUBSIdIaRy CoMpaNIES. 

L A - Z - B O y 

C O M p A N I E S 

O N L I N E

W W W . L A Z B O y . C O M

W W W . A M E R I C A N D R E W . C O M

W W W . B A u H A u S u S A . C O M

W W W . C L A y T O N M A R C u S . C O M

W W W . E N G L A N D F u R N I T u R E . C O M

W W W . H A M M A R y . C O M

W W W . K I N C A I D F u R N I T u R E . C O M

W W W . L E A F u R N I T u R E . C O M

W W W . L A Z B O y K I D Z . C O M

W W W . L A - Z - B O y . C O . u K

W W W . p E N N S y L V A N I A H O u S E . C O M

1 2 8 4   N O r t h   t e L e G r A p h   r O A d ,   M O N r O e ,   M I C h I G A N   4 8 1 6 2 - 3 3 9 0   U s A