The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report.

OVERVIEW

Over the last three years, demand for products manufactured by the United States carpet industry and our business has been significantly affected by declining demand as tighter credit conditions, lower consumer confidence and other economic factors reduced the level of new residential housing construction, the sales and refurbishment of existing homes and more recently, the levels of business construction and refurbishment activity. As a result of the continuing market weakness, sales of our business declined in each of the last two years and over 11% for the three year period ended December 27, 2008. During this same three year period, sales for the carpet industry were down approximately 15%. In the third and fourth quarters of 2008, our sales began slowing at a greater rate than the sales of the carpet industry. We believe our recent results reflect the impact of the overall downturn as it reaches the higher end of the market where our business is concentrated. While it is difficult to predict the length of the current downturn and its impact on the markets we serve, we believe our position in the upper end of the market will permit us to benefit from improved conditions and grow our sales at a rate that will exceed the rate of growth of the carpet industry, as and when economic conditions improve.

FACILITY CONSOLIDATIONS AND COSTS REDUCTION PLAN

In response to the continued difficult economic conditions, we developed plans to consolidate our North Georgia carpet tufting operation into our Atmore, Alabama tufting, dyeing and finishing facility, combine our two Santa Ana, California facilities and make organizational and other changes to reduce staff and expenses throughout our Company. The consolidation of our East Coast tufting operations was substantially completed in the first quarter of 2009.
Expenses for the consolidation and organizational changes were $2.3 million in 2008 and, included $1.9 million for relocation of equipment and inventory and $400 thousand for severance costs and employee relocation expenses.
Approximately $800 thousand of additional expenses are expected to complete the East Coast facilities consolidation and organizational changes. The East Coast facility consolidations and organizational changes are expected to reduce costs and expenses by approximately $4.0 million annually. In addition, we suspended our match of certain 401(k) contributions for 2009 and lowered the compensation of our salaried associates effective March 1, 2009. These actions should reduce expenses by an additional $1.7 million annually.

We are reviewing our alternatives for our West Coast operation and are considering the possibility of selling this business, or more likely, consolidating it into our East Coast facilities, beginning as early as the second half of 2009. If implemented, such a consolidation would further reduce costs, headcount and allow us to sell or lease our California real estate. The costs to fully implement this consolidation should be approximately $3.0 million to $5.0 million, and we expect a payback of one year or less. The sale of our California real estate would permit the Company to significantly further reduce debt.

In 2008, we reduced total employment by approximately 17%. The sale or consolidation of our West Coast operations into our East Coast facilities should reduce employment by another 12% to 18%.

GOODWILL AND LONG-LIVED ASSET IMPAIRMENTS

As a result of the effect of economic conditions on our business, we evaluated the recoverability of goodwill associated with our reporting units during the third quarter of 2008 and twice in the fourth quarter of 2008. The evaluation compares the carrying amount of our reporting units, including goodwill, to the fair value of the reporting unit using a discounted cash flow model. For these purposes, fair value is an estimate of the value of the reporting units' current and future cash flows, discounted at our weighted-average cost of capital ("WACC"). No potential goodwill impairment was indicated when we evaluated the recoverability of goodwill in the third quarter of 2008. When our annual goodwill impairment evaluation was performed in October of 2008, we reduced our projections for the future sales and profitability of our reporting units, because economic conditions in the carpet industry had continued to deteriorate.
In addition, higher interest rates for 20 year treasury constant maturities and Moody's Baa bonds increased our WACC. As a result of the decline in the cash flow projections for our reporting units and the higher WACC, goodwill was potentially impaired in the two reporting units that had goodwill associated with their operations.

Because our assessment indicated that goodwill may not be fully recoverable, we performed the second step in the goodwill evaluation process by comparing the "implied fair value" of our reporting units' goodwill with the carrying value of the reporting units' goodwill. For this purpose, the "implied fair value" of goodwill for each reporting unit that has goodwill

We retested goodwill for impairment at the end of the fourth quarter of 2008 and no additional impairment was indicated. Considering seasonal factors, economic conditions in the carpet industry at that date had not significantly changed and our future sales and profitability expectations were unchanged. Additionally, our WACC decreased from 12.4% to 11.0% by the end of the fourth quarter 2008 due to decreases in the rates for 20 year treasury constant maturities and Moody's Baa bonds.

Our facility consolidations and cost reduction plan identified certain assets, primarily computer software, which would not be utilized in our ongoing operations. As a result, the Company recorded $4.5 million of non-cash asset impairments to reflect the loss in value of these assets in the fourth quarter of 2008.

RESULTS OF OPERATIONS

Our discussion and analysis of financial condition and results of operations is based on our Consolidated Financial Statements that were prepared in accordance with U. S. generally accepted accounting principles. The following table sets forth certain elements of our continuing operations as a percentage of net sales for the periods indicated:

                                                     Fiscal Year Ended
                                        December 27,     December 29,    December 30,
                                            2008             2007            2006
Net sales                                     100.0 %          100.0 %         100.0 %
Cost of sales                                  72.4 %           69.7 %          71.1 %
Gross profit                                   27.6 %           30.3 %          28.9 %
Selling and administrative expenses            26.9 %           24.5 %          22.9 %
Other operating income                         (0.2)%           (0.1)%          (0.2)%
Other operating expense                         0.3 %            0.2 %           0.2 %
Facility consolidation and severance
expense                                         0.8 %            0.0 %           0.0 %
Impairment of assets                            1.6 %            0.0 %           0.0 %
Impairment of goodwill                          8.2 %            0.0 %           0.0 %
Defined benefit pension plan
  merger/termination expenses                   0.0 %            0.5 %           1.0 %
Operating income/(loss)                       (10.0)%            5.2 %           5.0 %

Fiscal Year Ended December 27, 2008 Compared with Fiscal Year Ended December 29, 2007

Net Sales. Net sales for the year ended December 27, 2008 were $282.7 million, down 11.9% from $320.8 million in the year-earlier period. Continued weakness in residential carpet markets and softening commercial markets negatively affected the carpet industry and our business. The carpet industry reported a 7.4% decline in net sales in 2008, with residential carpet sales down 12.1% and commercial carpet relatively unchanged compared with the prior year. Our 2008 year-over-year carpet sales comparison reflected a 10.7% decline in total net carpet sales, with sales of residential carpet down 13.0% and sales of commercial carpet down 6.7%. Revenue from carpet yarn processing and carpet dyeing and finishing services decreased $5.5 million, or 34.5% in 2008, compared with 2007.

Cost of Sales. Cost of sales, as a percentage of net sales, increased 2.7 percentage points in 2008 compared with 2007. This increase was principally attributable to unabsorbed fixed cost from lower production volume and a lag in passing higher raw material, energy and other costs through to our customers.
LIFO inventory liquidations in 2008 reduced cost of sales by $170 thousand.

Gross Profit. Gross profit declined $19.0 million in 2008 compared with 2007 due to lower net sales and the higher cost of sales described above.

Selling and Administrative Expenses. Selling and administrative expenses were reduced $2.7 million in 2008, compared with 2007. As a percent of net sales, these expenses increased 2.4 percentage points principally as a result of lower sales volume.

Other Operating Income. Other operating income did not significantly change, compared with the prior year.

Facility Consolidation and Severance Expenses, Impairment of Assets and Goodwill. During the fourth quarter of 2008, we recorded $29.9 million of expenses related to the consolidation of facilities and severance cost, and impairments of assets and goodwill, of which $27.6 million were non-cash.
Facilities consolidation and severance costs were $2.3 million, impairment of assets was $4.5 million and the impairment of goodwill was $23.1 million.

Operating Income (Loss). Our 2008 operating loss was $28.4 million including $29.9 million of principally non-cash costs related to the facility consolidation and severance expenses, and impairments of assets and goodwill, compared with $16.7 million of operating income in 2007. Operating income in 2007 included $1.5 million of expenses to merge a defined benefit pension plan into a multi-employer plan.

Interest Expense. Interest expense decreased $382 thousand in 2008 principally due to lower interest rates.

Other Income. Other income increased $216 thousand in 2008 principally as a result of the sale of available-for-sale securities.

Other Expense. Other expense was not significant in 2008 or 2007.

Income Tax Provision (Benefit). Our effective income tax benefit rate was 8.5% in 2008, compared with an effective income tax rate of 35.3% in 2007. The change in the effective income tax, or benefit rates was principally attributable to a $23.1 non-deductible goodwill impairment.

Net Income (Loss). Continuing operations reflected a loss of $31.1 million, or $2.50 per diluted share in 2008, compared with income from continuing operations of $6.8 million, or $0.52 per diluted share in 2007. Our discontinued operations reflected a loss of $275 thousand, or $0.02 per diluted share in 2008, compared with a loss of $512 thousand, or $0.05 per diluted share in 2007.
Including discontinued operations, the net loss was $31.4 million, or $2.52 per diluted share in 2008, compared with net income of $6.3 million, or $0.49 per diluted share in 2007.

Fiscal Year Ended December 29, 2007 Compared with Fiscal Year Ended December 30, 2006

Net Sales. Net sales for the year ended December 29, 2007 decreased 3.1% to $320.8 million. Continued weakness in residential carpet markets had a negative impact on the sales of the carpet industry and our business. Nevertheless, our sales continued to significantly outpace the sales of the carpet industry, which reported that carpet sales declined 8.0%, with residential carpet sales down 13.1% and commercial carpet sales improving 1.6%, compared with the prior year.
Our 2007 year-over-year carpet net sales comparison reflected a 2.8% decline, with net sales of residential carpet down 9.1% and net sales of commercial carpet growing 10.5%. In addition to difficult conditions in the industry, over 95% of the decline in our carpet sales was a result of lower sales of residential carpet to one large home center customer. Revenue from carpet yarn processing and carpet dyeing and finishing services decreased 8.2% in 2007, compared with 2006.

Cost of Sales. The 1.4 percentage point decrease in cost of sales as a percentage of sales in 2007, compared with 2006 was principally attributable to higher selling prices, improved product mix and operational performance. The year-over-year comparison was also affected by LIFO inventory liquidations that reduced cost of sales by $297 thousand in 2006.

Gross Profit. Despite lower net sales and higher raw material and other costs, gross profit improved $1.4 million in 2007, compared with 2006. The improved results of our modular/carpet tile operation and the items described above that decreased cost of sales as a percentage of sales, more than offset the effect of lower sales volume.

Selling and Administrative Expenses. Selling and administrative expenses increased $2.9 million in 2007, compared with 2006. The higher level of these expenses is principally attributable to investments in our sales and marketing infrastructure, information systems and inflationary cost increases. As a percentage of net sales, these expenses also increased due to lower net sales volume.

Other Operating Income. Other operating income decreased $171 thousand in 2007 primarily due to insurance settlements and refunds in 2006 that did not repeat in 2007 which more than offset higher levels of miscellaneous income in 2007.

Other Operating Expense. Other operating expense decreased $60 thousand in 2007, compared with 2006, due to lower asset retirement and impairment losses and higher levels of miscellaneous expense.

Defined Benefit Pension Plan Merger/Termination Expenses. In 2007, $1.5 million of expenses were incurred to merge our one remaining defined benefit pension plan into a multi-employer plan. These expenses principally consisted

Operating Income. Operating income was $16.7 million, or 5.2% of sales in 2007, compared with $16.6 million, or 5.0% of sales in 2006.

Interest Expense. Interest expense decreased $866 thousand in 2007 due to lower levels of debt, lower interest rates and higher levels of capitalized interest.

Other Income. Other income decreased $291 thousand in 2007 principally as a result of a dispute settled in 2006 that did not repeat in 2007.

Other Expense. Other expense was not significant in 2007 or 2006.

Income Tax Provision. Our effective income tax rate was 35.3% in 2007, compared with 18.4% in 2006. The change in the effective tax rate is principally due to reductions in our tax contingency reserve in 2006 as a result of the resolution of federal and state tax examinations and expirations of tax statutes of limitations. We also were able to utilize more state and federal income tax credits in 2006.

Net Income. Income from continuing operations was $6.8 million, or $0.52 per diluted share in 2007, compared with $7.9 million, or $0.61 per diluted share in 2006. Our discontinued operations reflected a loss of $512 thousand, or $0.04 per diluted share in 2007, compared with a loss of $188 thousand, or $0.02 per diluted share in 2006. Including discontinued operations, net income was $6.3 million, or $0.48 per diluted share in 2007, compared with $7.7 million, or $0.59 per diluted share in 2006.

LIQUIDITY AND CAPITAL RESOURCES

During the year ended December 27, 2008, cash generated from operating activities was $8.4 million. These funds were supplemented by $13.9 million of borrowings under our revolving credit line and capital leases and $822 thousand of proceeds from the sale of property, plant and equipment and available-for-sale securities. These funds were used to support our operations, purchase $10.0 million of property, plant and equipment, retire $8.7 million of debt and capitalized leases, purchase $3.5 million of our Common Stock and reduce outstanding checks in excess of cash by $729 thousand. Working capital increased $2.2 million in 2008 principally due to lower levels of accrued expenses, which more than offset lower levels of current deferred income tax assets. Receivables increased slightly due to a $5.3 million increase in income tax receivables, a $1.2 million increase in other miscellaneous receivables and a $6.1 million decrease in trade accounts receivable. We have developed an aggressive plan to improve our utilization of inventories in 2009. Depending on business activity levels, we could reduce inventories by as much as $15.0 million by the end of 2009.

During the year ended December 29, 2007, cash generated from operating activities was $19.8 million. These funds were supplemented by $6.0 million of borrowings to finance equipment purchases and $381 thousand of funds from the exercise of employee stock options. These funds were used to support our operations, purchase $16.7 million of property, plant and equipment, retire $6.4 million of debt, purchase $1.6 million of our Common Stock and reduce outstanding checks in excess of cash by $1.7 million. Working capital increased $2.3 million in 2007 principally due to higher levels of inventories and accounts receivable in excess of the increase in the levels of accounts payable and accrued expenses. Accounts receivable increased $1.8 million, inventories increased $6.3 million and accounts payable and accrued expenses increased $4.7 million. The increase in inventory is primarily due to higher levels of raw material.

During the year ended December 30, 2006, cash generated from operating activities was $19.4 million. These funds were supplemented by $6.5 million of borrowings to finance equipment purchases, $1.1 million of funds received from the exercise of employee stock options and a $2.3 million increase in outstanding checks in excess of cash. These funds were used to finance $16.5 million of purchases of property, plant and equipment, retire $12.2 million of debt and increase cash and cash equivalents by $538 thousand. Working capital decreased $2.4 million in 2006 principally as a result of lower levels of accounts receivable, inventories and income tax refunds receivable which more than offset lower levels of accounts payable and accrued expenses. Accounts receivable decreased by $2.4 million, inventory decreased by $3.3 million and accounts payable and accrued expenses decreased by $6.2 million, due to softness in our business in the fourth quarter of the year. Other current assets decreased due principally to lower levels of income tax refunds receivable.

Capital expenditures were $10.0 million in 2008, $16.7 million in 2007 and $16.5 million in 2006, while depreciation and amortization were $13.8 million in 2008, $12.9 million in 2007 and $11.5 million in 2006. Capital expenditures in 2008, 2007 and 2006 were primarily for newly designed manufacturing technology and information systems. We expect capital

In October 2008, we amended and restated our senior loan and security agreement to extend the term of the agreement. The amended and restated senior loan and security agreement matures on May 11, 2013 and provides $84.3 million of credit, consisting of $70.0 million of revolving credit and a $14.3 million term loan.
The term loan is payable in monthly principal installments of $126 thousand and is due May 11, 2013.

Interest rates available under the amended and restated senior loan and security agreement may be selected from a number of options that effectively allow us to borrow at rates ranging from the lender's prime rate plus 1.50% to the lender's prime rate plus 2.75% for base rate loans, or at rates ranging from LIBOR plus 2.00% to LIBOR plus 3.25% for LIBOR loans. The weighted-average interest rate on borrowings outstanding under this agreement was 5.68% at December 27, 2008 and 6.68% at December 29, 2007. Commitment fees ranging from 0.25% to 0.375% per annum are payable on the average daily unused balance of the revolving credit facility. The interest rate on a portion of borrowings under the amended and restated senior loan and security agreement are fixed by an interest rate swap arrangement that effectively fixes the interest rate on $30.0 million of such borrowings at 4.79% plus the applicable credit spreads. The levels of our accounts receivable and inventory limit the borrowing availability under the revolving credit facility. The facility is secured by a first priority lien on substantially all of our assets.

The amended and restated senior loan and security agreement does not contain ongoing financial covenants and permits payment of dividends and repurchases of our Common Stock in an aggregate annual amount of up to $3.0 million and distributions in excess of $3.0 million under conditions specified in the agreement. The agreement also contains covenants that could limit future acquisitions. Unused borrowing capacity under the amended and restated senior loan and security agreement on December 27, 2008 was $11.4 million.

Effective January 1, 2009, the amended and restated senior loan and security agreement was further amended to modify certain interest rate definitions to change the relative relationship between base rates and LIBOR rates as used in the agreement and to reduce the applicable credit spreads for base rate loans by 0.50%.

Our equipment financing notes have terms ranging from five to seven years, are secured by the specific equipment financed, bear interest ranging from 5.55% to 6.94% and are due in monthly installments of principal and interest of $311 through February 2010 and monthly installments of principal and interest ranging from $263 thousand to $38 thousand from March 2010 through May 2014. The notes do not contain financial covenants.

Our capitalized lease obligations have terms ranging from four to seven years, are secured by the specific equipment leased, bear interest ranging from 6.65% to 7.27% and are due in monthly installments of principal and interest of $131 thousand through June 2010, monthly installments of principal and interest ranging from $32 thousand to $8 thousand from July 2010 through November 2015.
The capitalized leases do not contain financial covenants.

Our $6.3 million mortgage is secured by real property, is payable in monthly principal installments ranging from $20 thousand to $28 thousand during the remaining term and matures on March 2013. The mortgage bears interest at LIBOR plus 2.0% and its interest rate is fixed at 6.54% through March 13, 2013 by an interest rate swap.

Our convertible subordinated debentures bear interest at 7% per annum payable semi-annually, are due in 2012, and are convertible by their holders into shares of our Common Stock at an effective conversion price of $32.20 per share, subject to adjustment under certain circumstances. Mandatory sinking fund payments, which commenced May 15, 1998, retire $2.5 million principal amount of the debentures annually and approximately 86% of the debentures prior to maturity. The convertible debentures are subordinated in right of payment to all of our other indebtedness.

Interest payments were $6.1 million in 2008, $6.5 million in 2007, and $7.2 million in 2006. Interest capitalized by the Company was $367 thousand in 2008, $457 thousand in 2007, and $243 thousand in 2006.

The following table summarizes the Company's future minimum payments under contractual obligations as of December 27, 2008.

                                                Payments Due By Period
                           2009     2010     2011     2012     2013     Thereafter     Total
                                                 (dollars in millions)
Debt                      $  7.4   $  7.1   $  6.4   $ 12.9   $ 56.7     $      0.2   $  90.7
Interest - debt (1)          5.4      5.0      4.6      4.0      1.6            0.1      20.7
Capital leases               1.4      1.1      0.3      0.2      0.1            0.2       3.3
Interest - capital leases    0.2      0.1      ---      ---      ---            ---        .3
Operating leases             1.9      1.7      1.5      1.0      0.1            ---       6.2
Purchase commitments         1.2      ---      ---      ---                     ---       1.2
                          $ 17.5   $ 15.0   $ 12.8   $ 18.1   $ 58.5     $      0.5   $ 122.4

(1) Interest rates used for variable rate debt were those in effect at December 27, 2008.

We believe our operating cash flows, credit availability under our senior loan and security agreement and other sources of financing are adequate to finance our normal liquidity requirements. However, significant additional cash expenditures above our normal liquidity requirements or significant further deterioration in economic conditions that affect our business could require supplemental financing or other funding sources. There can be no assurance that such supplemental financing or other sources of funding can be obtained or will be obtained on terms favorable to us.

Income Tax Considerations. Approximately $5.3 million of income tax refunds are expected in 2009 due to overpayments of estimated income taxes and carrybacks of net operating loss to prior years. Other than these income tax refunds, we do not anticipate that cash outlays for income taxes will be materially different from our provision for income taxes during the next three fiscal years.
Approximately $500 thousand of state net operating loss and income tax credit carryforward benefits are expected to be utilized in the future. During 2008, . . .