For the Years Ended
                                                               December 31,
                                                    2008           2007           2006
Net sales                                             100.0 %        100.0 %        100.0 %
Cost of sales                                          85.6           83.4           78.9

Gross profit                                           14.4           16.6           21.1
Selling, general and administrative expenses           16.1           14.0           13.7
Pension plan termination charge                                        2.3

Operating income                                       (1.7 )           .3            7.4
Income from Continued Dumping and Subsidy
Offset Act, net                                         5.1            3.7            1.4
Other income, net                                        .1             .1             .1
Interest expense, net                                   1.4            1.0             .5

Income before income taxes                              2.1            3.1            8.4
Income taxes                                            0.5            1.0            2.9

Net income                                              1.6 %          2.1 %          5.5 %

2008 Compared to 2007
Net sales decreased $56.3 million, or 19.9%, in 2008 compared to 2007. The decrease was due primarily to lower unit volume, resulting from continued weakness in demand, which we believe is due primarily to current economic conditions. Partially offsetting this lower unit volume was an increase in average selling prices.
Gross profit for 2008 decreased to 14.4% from 16.6% in 2007. Restructuring and related charges of $5.9 million and $3.6 million are included in cost of sales for 2008 and 2007, respectively. The remaining decline in gross profit margins resulted primarily from lower sales and production levels, and inflationary cost increases. These factors were partially offset by higher average selling prices and cost reduction initiatives.
Selling, general and administrative expenses as a percentage of net sales were 16.1% in 2008 compared to 14.0% in 2007. Included in 2008 expenses are $1.4 million of restructuring and related charges. Selling, general and administrative expenses decreased by $3.1 million in 2008 primarily due to lower selling expenses resulting from decreased sales and cost reduction initiatives. As a result of the above, operating loss as a percentage of net sales was 1.7% for 2008, compared to operating income as a percentage of net sales of .3% in 2007.
We recorded income of $11.5 million, net of legal expenses, from the receipt of funds under the Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) and related settlement payments in connection with the case involving wooden bedroom furniture imported from China compared to $10.4 million in 2007.
Interest expense for 2008 increased over 2007 due primarily to higher average debt levels during the year.
The effective tax rate for 2008 is 21.1% compared to 32.5% for 2007. The lower effective tax rate is due to the impact of permanent differences on lower earnings.
2007 Compared to 2006
Net sales decreased $24.7 million, or 8.0%, in 2007 compared to 2006. The decrease was due primarily to lower unit volume, resulting from continued weakness in demand, which we believe is due to an industry wide slow down. Gross profit for 2007 decreased to 16.6% from 21.1% in 2006. Lower margins resulted from lower sales and production levels, raw material inflation and increased compensation costs. The lower sales and production levels led to lower margins due to the under absorption of factory overhead costs. Also, a restructuring charge of $3.6 million for the conversion of one of our manufacturing facilities into a warehouse operation contributed to the lower gross profit margin in 2007.
Selling, general and administrative expenditures as a percentage of net sales were 14.0% in 2007 compared to 13.7% in 2006. The higher percentage for 2007 is due primarily to lower sales. Selling, general and administrative expenses decreased $2.6 million during 2007 compared to 2006, due to lower selling expenses resulting from decreased sales and cost control initiatives implemented in response to lower sales.
Final distribution of assets and termination of our defined benefit pension plan occurred during 2007, resulting in a settlement charge to earnings of $6.6 million and a final cash contribution of $1.6 million.
As a result of the above, operating income as a percentage of net sales was .3% for 2007, compared to 7.4% for 2006.
We recorded income of $10.4 million, net of legal expenses, from the receipt of funds under the Continued Dumping and Subsidy Offset Act of 2000 (CDSOA) and related settlement payments in connection with the case involving wooden bedroom furniture imported from China. CDSOA funds recorded in 2006 were 4.4 million, net of legal expenses and tariff adjustments.
Interest expense for 2007 compared to 2006 increased $1.0 million due primarily to the $25 million private note placement funded in 2007.
The effective tax rate for 2007 is 32.5%, compared to 34.5%, for 2006. The decrease in the effective tax rate is primarily due to lower taxable income.

Financial Condition, Liquidity and Capital Resources Sources of liquidity include cash on hand and cash from operations. We expect these sources of liquidity to be adequate for ongoing expenditures, debt payments and capital expenditures for the foreseeable future. We believe that cash on hand will be adequate during 2009 in the event we do not generate cash from operations.
Working capital, excluding cash and current maturities of long-term debt, decreased $7.2 million during 2008 to $54.5 million from $61.6 million in 2007. The decrease was primarily due to lower accounts receivable and inventories, reflecting lower sales and production levels.
We currently have $19.0 million available under our Board of Directors authorization to repurchase shares of our common stock. Consequently, we may, from time to time, either directly or through agents, repurchase our common stock in the open market, through negotiated purchases or otherwise, at prices and on terms satisfactory to us. Depending on market prices and other relevant conditions, such purchases may be discontinued at any time. Cash generated from operations was $18.3 million in 2008 compared to $23.0 million in 2007 and $35.3 million in 2006. The decrease in 2008 was primarily due to lower cash received from customers due to lower sales, partially offset by lower cash paid to suppliers and employees due to lower production. The decrease in 2007 was also due to lower cash received from customers, offset by lower tax payments due to lower taxable earnings. Net cash used by investing activities was $1.9 million in 2008 compared to $4.0 million in 2007 and $4.2 million in 2006, and consisted primarily of normal capital expenditures. Capital expenditures in 2009 are anticipated to be in the range of $3.0 million to $4.0 million.
Net cash used by financing activities was $4.0 million in 2008, compared to cash provided of $6.3 million in 2007 and cash used of $37.4 million in 2006. In 2008, cash from operations provided funds for dividend payments and scheduled debt payments. In 2007, a portion of the proceeds from our $25 million private note placement and cash from operations provided funds for the purchase and retirement of our common stock, payment of cash dividends and scheduled debt payments. In 2006, cash from operations was used to purchase and retire common stock, pay cash dividends and make scheduled debt payments. At December 31, 2008, long-term debt including current maturities was $29.3 million. Our note agreement requires us to maintain certain financial covenants. We were in compliance with these covenants as of December 31, 2008. In January 2009, we entered into an amendment to our note agreement providing that two financial covenants relating to operating income and earnings not apply during 2009. Instead, this amendment requires that we maintain unrestricted cash on hand of at least $20 million through March 30, 2010 and to maintain earnings before interest and taxes of not less than a loss of $10 million for each of the twelve month periods ending March 31, June 30, September 30 and December 31, 2009.
Debt service requirements are $1.4 million in both 2009 and 2010, $5.0 million in 2011, and $3.6 million in 2012 and 2013. As of December 31, 2008 approximately $25.0 million of borrowings were available under a revolving credit facility and cash on hand was $44.0 million. In view of the level of our cash on hand, we have terminated our revolving credit facility effective February 4, 2009. During 2009, we may pursue a new revolving credit facility, but do not anticipate needing a facility as a source of liquidity.

The following table sets forth our contractual cash obligations and other commercial commitments at December 31, 2008 (in thousands):

                                               Payment due or commitment expiration
                                            Less Than                                           Over
                              Total          1 year          1-3 years        3-5 years        5 years
Contractual cash
obligations:
Long-term debt              $  29,286      $     1,429      $     6,429      $     7,142      $  14,286
Postretirement benefits
other than pensions(1)          4,280              447              900              879          2,054
Fixed interest payment
on long-term debt               9,700            1,930            3,443            2,404          1,923
Operating leases                3,386              717            1,076              944            649

Total contractual cash
obligations                 $  46,652      $     4,523      $    11,848      $    11,369      $  18,912

Other commercial
commitments:
Letters of credit           $   1,666      $     1,666

(1) The 1983 Group Annuity Mortality tables were used in estimating future benefit payments, and the health care cost trend rate for determining payments is 7.0% for 2008 and gradually declines to 5.5% in 2010 where it is assumed to remain constant for the remaining years.

Not included in the above table is unrecognized tax benefits of $877,000, due to the uncertainty of the date of occurrence. Continued Dumping and Subsidy Offset Act (CDSOA) We recorded income of $11.5 million, $10.4 million and $4.4 million in 2008, 2007 and 2006, respectively, net of legal expenses, from CDSOA payments and related settlements. These payments came from the case involving Wooden Bedroom Furniture imported from China. The CDSOA provides for distribution of monies collected by U.S. Customs and Border Protection for imports covered by antidumping duty orders entering the United States through September 30, 2007 to qualified domestic producers. Antidumping duties for merchandise entering the U.S. after September 30, 2007 remain with the U.S. Treasury. According to U.S. Customs and Border Protection, as of October 1, 2008, approximately $100 million in duties had been secured by cash deposits and bonds on unliquidated entries, and this amount is potentially available for distribution under the CDSOA to eligible domestic manufacturers in connection with the case involving wooden bedroom furniture imported from China. In addition, approximately $99 million of funds available for distribution were set aside by the government over the past three years principally for domestic producers that have requested CDSOA funds and are not eligible to receive funds based on the CDSOA and the government's historical administration of the CDSOA. The government set aside these CDSOA funds in connection with two lower court cases involving the CDSOA that were decided against the government on constitutional grounds and that have been appealed. The resolution of these legal appeals will have a significant impact on the amount of additional CDSOA funds we receive with respect to the antidumping order on wooden bedroom furniture from China.
There are a number of factors that can affect how much additional CDSOA funds we receive. These factors include:
• the annual administrative review process which can retroactively increase or decrease the actual duties owed on entries secured by cash deposits and bonds,

• the ultimate resolution of the legal appeals discussed above, and

• other administrative and legal challenges that may be instituted.

Assuming our percentage allocation in future years is the same as it was for the 2008 payment (approximately 27% of the funds distributed), that the amount of $100 million collected by the government as of October 1, 2008 does not change as a result of the annual administrative review process or otherwise, and that the government loses the pending appeals based on constitutional issues (reducing our percentage allocation by approximately 62% based on the amount of funds held back for this pending litigation in 2008), we could potentially receive approximately $10 million in additional CDSOA funds. If the government ultimately prevails on the pending constitutional legal challenges and the other assumptions remain the same, we could potentially receive approximately $54 million in additional CDSOA funds. Due to the uncertainty of the various legal and administrative processes, we cannot provide assurances as to the amount of additional CDSOA funds that ultimately will be received, if any, and we cannot predict when we may receive any additional CDSOA funds.

Critical Accounting Policies
We have chosen accounting policies that are necessary to accurately and fairly report our operational and financial position. Below are the critical accounting policies that involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.
Allowance for doubtful accounts - We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We perform ongoing credit evaluations of our customers and monitor their payment patterns. Should the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which would reduce our earnings. Inventory valuation - Inventory is valued at the lower of cost or market. Cost for all inventories is determined using the first-in, first-out (FIFO) method. We evaluate our inventory to determine excess or slow moving items based on current order activity and projections of future demand. For those items identified, we estimate our market value based on current trends. Those items having a market value less than cost are written down to their market value. If we fail to forecast demand accurately, we could be required to write off additional non-saleable inventory, which would also reduce our earnings. Long-lived assets - Property, plant and equipment is reviewed for possible impairment when events indicate that the carrying amount of an asset may not be recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods that would lower our earnings. Depreciation policy reflects judgments on the estimated useful lives of assets. If the estimated remaining useful lives of our assets decrease, we would be required to depreciate our assets more quickly, which would also lower our earnings. Goodwill - Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We test goodwill for impairment annually (on December 31), or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. If the fair value of the reporting unit is less than its carrying value, we perform an additional step to determine the implied fair value of goodwill associated with that reporting unit. As of both December 31, 2008 and 2007, goodwill totaled $9.1 million, representing 5.4% and 5.2% of total assets, respectively.
The impairment test requires us to compare the fair value of business reporting units to their carrying value, including assigned goodwill. In assessing potential impairment of goodwill, we have determined that we have one reporting unit based on our reporting structure. As of December 31, 2008, our book value was $9.98 per share of outstanding common stock and the closing trading price of our common stock was $7.90 per share. The fair value of our single reporting unit is determined based on a discounted cash flow analysis and other generally accepted valuation methodologies. The valuations employ present value techniques to measure fair value and consider market factors. The results of the annual impairment tests performed as of December 31, 2008, 2007 and 2006 indicated the fair value of the reporting unit exceeded its carrying value and therefore our goodwill was not impaired.
Determining the fair value of our reporting unit involves the use of significant estimates and assumptions. The estimate of fair value of our reporting unit is based on our projection of revenues, gross margin, operating costs and cash flows considering historical and estimated future results, general economic and market conditions as well as the impact of planned business and operational strategies. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates.
It would have required a significant change in our assumptions for the fair value of our reporting unit to have declined to the point where an impairment charge would have been required at December 31, 2008. However, changes in the judgments and estimates underlying our analysis could result in a significantly different estimate of fair value of our reporting unit and could result in an impairment of goodwill in the future.
Off-Balance Sheet Arrangements
We do not have transactions or relationships with "special purpose" entities, and we do not have any off balance sheet financing other than normal operating leases primarily for showroom and certain technology equipment.

New Accounting Standards
We adopted FASB Statement No. 157, Fair Value Measurements and FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115, which permits entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had an impact on results for 2008. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 which delayed the effective date of SFAS No. 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until January 1, 2009. We have not yet conclusively determined the impact that the implementation of SFAS No. 157 will have on our non-financial assets and liabilities; however we do not anticipate it to significantly impact our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk Our obligation under the revolving credit facility bears interest at a variable rate; therefore, changes in prevailing interest rates impact our borrowing costs. A one-percentage point fluctuation in market interest rates would not have had a material impact on earnings in 2008. None of our foreign sales or purchases are denominated in foreign currency and we do not have any foreign currency hedging transactions. While our foreign purchases are denominated in U.S. dollars, a relative decline in the value of the U.S. dollar could result in an increase in the cost of products obtained from offshore sourcing and reduce our earnings, unless we are able to increase our prices for these items to reflect any such increased cost.
Item 8. Financial Statements and Supplementary Data The consolidated financial statements and schedule listed in items 15(a) (1) and
(a) (2) hereof are incorporated herein by reference and are filed as part of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
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 Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008. Changes in Internal Controls over Financial Reporting There were no changes in our internal control over financial reporting that occurred during the fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.