Forward-Looking Statements

The following discussion contains certain forward-looking statements about the Company's financial condition and results of operations.

Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as "believe," "anticipate," "expect," "estimate," "intend," "project," "plan," "will," or words or phrases of similar meaning. They may relate to, among other things, the risks described under the caption "Item 1A - Risk Factors" above and:

• the competitive nature of the textile industry and the impact of worldwide competition;

• changes in the trade regulatory environment and governmental policies and legislation;

• the availability, sourcing and pricing of raw materials;

• general domestic and international economic and industry conditions in markets where the Company competes, such as recession and other economic and political factors over which the Company has no control;

• changes in consumer spending, customer preferences, fashion trends and end-uses;

• its ability to reduce production costs;

• changes in currency exchange rates, interest and inflation rates;

• the financial condition of its customers;

• its ability to sell excess assets;

• technological advancements and the continued availability of financial resources to fund capital expenditures;

• the operating performance of joint ventures, alliances and other equity investments;

• the impact of environmental, health and safety regulations;

• the loss of a material customer;

• employee relations;

• volatility of financial and credit markets;

• the continuity of the Company's leadership;

• availability of and access to credit on reasonable terms; and

• the success of the Company's consolidation initiatives.

These forward-looking statements reflect the Company's current views with respect to future events and are based on assumptions and subject to risks and uncertainties that may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements. These risks and uncertainties may include those discussed above or in "Item 1A - Risk Factors." New risks can emerge from time to time. It is not possible for the Company to predict all of these risks, nor can it assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements. The Company will not update these forward-looking statements, even if its situation changes in the future, except as required by federal securities laws.

Business Overview

The Company is a diversified producer and processor of multi-filament polyester and nylon yarns, including specialty yarns with enhanced performance characteristics. The Company adds value to the supply chain and enhances consumer demand for its products through the development and introduction of branded yarns that provide unique performance, comfort and aesthetic advantages. The Company manufactures partially oriented, textured, dyed, twisted and beamed polyester yarns as well as textured nylon and nylon covered spandex products. The Company sells its products to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, furnishings, automotive, industrial and other end-use markets. The Company maintains one of the industry's most comprehensive product offerings and emphasizes quality, style and performance in all of its products.

Polyester Segment. The polyester segment manufactures partially oriented, textured, dyed, twisted and beamed yarns with sales to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, automotive, hosiery, furnishings, industrial and other end-use markets. The polyester segment primarily manufactures its products in Brazil, and the U.S., which has the Company's largest operations and number of locations. The polyester segment also includes a newly formed subsidiary in China focused on the sale and promotion of the Company's specialty and PVA products in the Asian textile market, primarily within China. For fiscal years 2009, 2008, and 2007, polyester segment net sales were $403.1 million, $530.6 million, and $530.1 million, respectively.

Nylon Segment. The nylon segment manufactures textured nylon and covered spandex products with sales to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, sock and other end-use markets. The nylon segment consists of operations in the U.S. and Colombia. For fiscal years 2009, 2008, and 2007, nylon segment net sales were $150.5 million, $182.8 million, and $160.2 million, respectively.

The Company's fiscal year is the 52 or 53 weeks ending on the last Sunday in June. Fiscal year 2008 had 53 weeks while fiscal years 2009 and 2007 had 52 weeks.

Line Items Presented

Net sales. Net sales include amounts billed by the Company to customers for products, shipping and handling, net of allowances for rebates. Rebates may be offered to specific large volume customers for purchasing certain quantities of yarn over a prescribed time period. The Company provides for allowances associated with rebates in the same accounting period the sales are recognized in income. Allowances for rebates are calculated based on sales to customers with negotiated rebate agreements with the Company. Non-defective returns are deducted from revenues in the period during which the return occurs. The Company records allowances for customer claims based upon its estimate of known claims and its past experience for unknown claims.

Cost of sales. The Company's cost of sales consists of direct material, delivery and other manufacturing costs, including labor and overhead, depreciation expense with respect to manufacturing assets, fixed asset depreciation and reserves for obsolete and slow-moving inventory.

Selling general and administrative expenses. The Company's selling, general and administrative ("SG&A") expenses consist of selling expense (which includes sales staff compensation), advertising and promotion expense (which includes direct marketing expenses) and administrative expense (which includes corporate expenses and compensation). In addition, SG&A expenses also include depreciation and amortization with respect to certain corporate administrative and intangible assets.

Recent Developments and Outlook

The global economic downturn eroded U.S. consumer confidence which resulted in reduced customer spending which negatively impacted all global textile markets and related supply chains beginning in October 2008. U.S. apparel retail sales, home furnishing retail sales, and automotive sales were down approximately 7%, 13% and 35%, respectively, during the last three quarters of fiscal year 2009 as compared to the same period for fiscal year 2008.

The impact of the decline in retail sales was compounded further by excessive inventory levels across the supply chains as fabric mills, finished goods producers, and retailers reduced purchase levels below their current sales levels, in an effort to match their working capital investments with the lower sales volumes that they were experiencing. As a result of the decreased demand at retail, compounded by this inventory de-stocking, the Company's revenues declined by 31%, 30% and 26% for the second, third and fourth quarters of fiscal year 2009 as compared to the same prior year quarters, respectively. However, as the March 2009 quarter progressed into the June 2009 quarter, the Company experienced sales volume improvements in certain segments as retail sales improved slightly and the effects of the de-stocking began to subside. Compared to the March 2009 quarter, the Company's revenues increased 17% in the June 2009 quarter primarily due to a combination of improved demand for the Company's products and market share gains both domestically and in Brazil. In addition, the Company's domestic sales increased approximately $3.0 million in the fourth quarter of fiscal year 2009 as compared to the third quarter of fiscal year 2009 due to an unusually high amount of sales related to aged and slow-moving inventory. The Company had approximately 69% more sales of aged and slow-moving inventory during the fourth quarter of fiscal year 2009 than its normal quarterly average as a result of a decision to monetize its investment in such aged inventory. The negative impact on gross profit of these sales during the fourth quarter of fiscal year 2009 was approximately $1.1 million.

Like the rest of the supply chain, the Company also reacted to the reduced sales volumes by aggressively reducing our investment in working capital. Compared to June 2008, the Company reduced net customer

receivables by $25.5 million or 24.6% and inventories by $33.2 million or 27.0% which allowed it to significantly improve its cash position in an otherwise difficult year.

In addition to the difficult economic conditions in the U.S. markets, the Company was negatively impacted by the continued rising cost of raw materials and other petrochemical driven costs during the first quarter of fiscal year 2009. The impact of the surge in crude oil prices and feedstock supply issues since the beginning of fiscal year 2008 created a spike in polyester raw material prices. As raw material prices peaked in the first quarter of fiscal year 2009, the Company was not able to pass all of these raw material increases along to its customers which resulted in lower conversion margins. Operating results for the second and third quarters of fiscal year 2009 were also adversely impacted as these higher priced products worked through the Company's inventory. However, crude oil prices declined substantially during the second quarter of fiscal year 2009 and certain supply chain issues abated, resulting in a decline in the cost of polyester feedstock. The benefit of that decline was seen in the third and fourth quarters of fiscal year 2009 as the Company regained conversion margins lost during the run-up in the first half of fiscal 2009.

Internationally, the Company is committed to identifying growth opportunities to participate in the Asian textile market, specifically China. During the fourth quarter of fiscal year 2009, the Company completed the sale of its 50% interest in YUFI to YCFC and received net proceeds of $9.0 million. Maintaining a market presence in the Asian textile market is important to the Company's PVA yarn strategy and accordingly the Company formed UTSC, a wholly owned Chinese subsidiary. UTSC obtained its business license in the second quarter of fiscal year 2009, was capitalized during the third quarter of fiscal year 2009 with $3.3 million of registered capital, and became operational at the end of the third quarter of fiscal year 2009. UTSC will continue to expand the sales and promotion of the Company's specialty and PVA products, including our 100% recycled product family - Repreve®. The Company is very encouraged by the number of development projects that it has in process, including Repreve® filament and staple, Sorbtek® and Reflexx®. Similar to the U.S., the adoption timetable for some of these programs may be linked to improvements in the economy, however, the Company projects that UTSC will operate profitably in the fiscal year 2010 which will be a substantial improvement over the results of YUFI.

The CAFTA region continues to be a very important part of the Company's global sourcing strategy as U.S. brands and retailers take advantage of the shorter lead times and the competitiveness of the region. The CAFTA region's share of synthetic apparel U.S. imports is approximately 12% and is expected to grow over the next several years, making the region a critical component in the apparel supply chain. To better service customers in the CAFTA region, the Company is exploring options for placing manufacturing capabilities in Central America. At this point, all options are being explored, including joint venture opportunities as well as green-field scenarios, and the total investment in the initial stages is expected to be $10.0 million or less.

The Company's Brazilian operation had especially strong results in the first quarter of fiscal year 2009, but those results deteriorated through the second and third quarters of fiscal year 2009 due to softness in the Brazilian economy and supply chain volatility related to raw material costs and the negative impact of currency fluctuations. The subsidiary's results improved substantially during the fourth quarter of fiscal year 2009 as unit sales increased by 33% compared to the third quarter due to the strengthening of the Brazilian economy and a gain in market share.

The Company is committed to achieving operational and commercial excellence in its core businesses by driving improvement in operational discipline, statistical process control, and customer service - utilizing a disciplined improvement process. During fiscal year 2009, the Company made continual and substantial improvements to its costs and operational efficiencies, resulting in a reduction of the volume level required to operate the business profitably by more than ten percent. Such improvement efforts include changes to the Company's sourcing and purchasing model; improved operational efficiencies; reduction of employee related costs from headcount reductions and benefit changes; and cost reductions achieved through asset consolidations.

On May 14, 2008, the Company announced the closing of its Staunton, Virginia facility and the transfer of certain production to its facility in Yadkinville, North Carolina. The relocation of its beaming and warp draw production is consistent with the Company's strategy to maximize operational efficiencies and reduce production costs. The Company completed this transition in November 2008.

On September 29, 2008, the Company entered into an agreement to sell certain idle real property and related assets located in Yadkinville, North Carolina, for $7.0 million. On December 19, 2008, the Company completed the

sale and recorded a net pre-tax gain of $5.2 million in the second quarter of fiscal year 2009. The gain is included in the other operating (income) expense, net line on the Consolidated Statements of Operations.

Based on a decline in its market capitalization during the third quarter of fiscal year 2009 and difficult market conditions, the Company determined that it was appropriate to re-evaluate the carrying value of its goodwill during the quarter ended March 29, 2009. In connection with this third quarter interim impairment analysis, the Company updated its cash flow forecasts based upon the latest market intelligence, its discount rate and its market capitalization values. The projected cash flows are based on the Company's forecasts of volume, with consideration of relevant industry and macroeconomic trends. The fair value of the domestic polyester reporting unit was determined based upon a combination of a discounted cash flow analysis and a market approach utilizing market multiples of "guideline" publicly traded companies. As a result of the findings, the Company determined that the goodwill was impaired and recorded an impairment charge of $18.6 million in the third quarter of fiscal year 2009.

During the fourth quarter of fiscal year 2009, the Company used $8.8 million of domestic restricted cash to repurchase $8.8 million of its 11.5% senior secured notes due May 15, 2014 (the "2014 notes") at par value. In addition, the Company repurchased and retired 2014 notes having a face value of $2.0 million in open market purchases. The net effect of the gain on this repurchase and the write-off of the respective unamortized issuance cost related to the $8.8 million and $2.0 million of 2014 notes resulted in a net gain of $0.3 million.

On May 28, 2009, the Company announced that the Board appointed Mr. Michael Sileck to the Board effective May 28, 2009 and was also appointed to the Audit Committee. Mr. Sileck was appointed to a term expiring at the Company's 2009 Annual Meeting of Shareholders, at which time it is expected that he will be nominated to stand for election by the Shareholders of the Company.

Key Performance Indicators

The Company continuously reviews performance indicators to measure its success. The following are the indicators management uses to assess performance of the Company's business:

• sales volume, which is an indicator of demand;

• margins, which are an indicator of product mix and profitability;

• adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization ("adjusted EBITDA"), which the Company defines as pre-tax income before interest expense, depreciation and amortization expense and loss or income from discontinued operations, adjusted to exclude equity in earnings and losses of unconsolidated affiliates, write down of long-lived assets and unconsolidated affiliate, non-cash compensation expense net of distributions, gains and losses on sales of property, plant and equipment, hedging gains and losses, asset consolidation and optimization expense, goodwill impairment, gain and loss on extinguishment of debt, restructuring charges and recoveries, and Kinston shutdown costs, as revised from time to time, which the Company believes is a supplemental measure of its performance and ability to service debt; and

• adjusted working capital (accounts receivable plus inventory less accounts payable and accruals) as a percentage of sales, which is an indicator of the Company's production efficiency and ability to manage its inventory and receivables.

Corporate Restructurings

Severance

On April 20, 2006, the Company re-organized its domestic business operations. Approximately 45 management level salaried employees were affected by this plan of reorganization. During fiscal year 2007, the Company recorded an additional $0.3 million for severance related to this reorganization.

On April 26, 2007, the Company announced its plan to consolidate its domestic capacity and close its recently acquired Dillon polyester facility. In accordance with the provisions of SFAS No. 141, "Business Combinations", the Company recorded a balance sheet adjustment to book a $0.7 million assumed liability for severance in fiscal

year 2007 with the offset to goodwill. Approximately 291 wage employees and 25 salaried employees were affected by this consolidation plan.

On August 2, 2007, the Company announced the closure of its Kinston, North Carolina polyester facility. The Kinston facility produced POY for internal consumption and third party sales. In the future, the Company will purchase its commodity POY needs from external suppliers for conversion in its texturing operations. The Company will continue to produce POY in the Yadkinville, North Carolina facility for its specialty and premium value yarns and certain commodity yarns. During fiscal year 2008, the Company recorded $1.3 million for severance related to its Kinston consolidation. Approximately 231 employees which included 31 salaried positions and 200 wage positions were affected as a result of this reorganization.

On August 22, 2007, the Company announced its plan to re-organize certain corporate staff and manufacturing support functions to further reduce costs. The Company recorded $1.1 million for severance related to this reorganization. Approximately 54 salaried employees were affected by this reorganization. In addition, the Company recorded severance of $2.4 million for its former Chief Executive Officer ("CEO") in the first quarter of fiscal year 2008 and $1.7 million for severance in the second quarter of fiscal year 2008 related to its former Chief Financial Officer ("CFO") during fiscal year 2008.

On May 14, 2008, the Company announced the closure of its polyester facility located in Staunton, Virginia and the transfer of certain production to its facility in Yadkinville, North Carolina which was completed in November 2008. During the first quarter of fiscal year 2009, the Company recorded $0.1 million for severance related to its Staunton consolidation. Approximately 40 salaried and wage employees were affected by this reorganization.

In the third quarter of fiscal year 2009, the Company re-organized and reduced its workforce due to the economic downturn. Approximately 200 salaried and wage employees were affected by this reorganization related to the Company's efforts to reduce costs. As a result, the Company recorded $0.3 million in severance charges related to certain salaried corporate and manufacturing support staff.

Restructuring

On October 25, 2006, the Company's Board of Directors approved the purchase of the assets of the Dillon Yarn Division ("Dillon") of Dillon Yarn Corporation. This approval was based on a business plan which assumed certain significant synergies that were expected to be realized from the elimination of redundant overhead, the rationalization of under-utilized assets and certain other product optimization. The preliminary asset rationalization plan included exiting two of the three production activities currently operating at the Dillon facility and moving them to other Unifi manufacturing facilities. The plan was to be finalized once operations personnel from the Company would have full access to the Dillon facility, in order to determine the optimal asset plan for the Company's anticipated product mix. This plan was consistent with the Company's domestic market consolidation strategy discussed in the Company's Annual Report on Form 10-K for the fiscal year ended June 25, 2006. On January 1, 2007, the Company completed the Dillon asset acquisition.

Concurrent with the acquisition the Company entered into a Sales and Services Agreement (the "Agreement"). The Agreement covered the services of certain Dillon personnel who were responsible for product sales and certain other personnel that were primarily focused on the planning and operations at the Dillon facility. The services would be provided over a period of two years at a fixed cost of $6.0 million. In the fourth quarter of fiscal year 2007, the Company finalized its plan and announced its decision to exit its recently acquired Dillon polyester facility.

The closure of the Dillon facility triggered an evaluation of the Company's obligations arising under the Agreement. The Company evaluated the guidance contained in SFAS No. 141 "Business Combinations", as well as the guidance contained in EITF Abstract Issue No. 95-3 ("EITF 95-3") "Recognition of Liabilities in Connection with a Purchase Business Combination" in determining the appropriate accounting for the costs associated with the Agreement. The Company determined from this evaluation that the fair value of the services to be received under the Agreement were significantly lower than the obligation to Dillon. As a result, the Company determined that a portion of the obligation should be considered an "unfavorable contract" as defined by SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The Company concluded that costs totaling approximately

$3.1 million relating to services provided under the Agreement were for the ongoing benefit of the combined business and therefore should be reflected as an expense in the Company's Consolidated Statements of Operations, as incurred. The remaining Agreement costs totaling approximately $2.9 million were for the personnel involved in the planning and operations of the Dillon facility and related to the time period after shutdown in June 2007. Therefore, these costs were reflected as an assumed purchase liability in accordance with SFAS No. 141, since these costs no longer related to the generation of revenue and had no future economic benefit to the combined business.

In fiscal year 2008, the Company recorded $3.4 million for restructuring charges related to contract termination costs and other noncancellable contracts for continued services after the closing of the Kinston facility. See the Severance discussion above for further details related to Kinston.

The Company recorded restructuring charges in lease related costs associated with the closure of its polyester facility in Altamahaw, North Carolina during fiscal year 2004. In the second quarter of fiscal year 2008, the Company negotiated the remaining obligation on the lease and recorded a $0.3 million net favorable adjustment related to the cancellation of the lease obligation.

During the fourth quarter of fiscal year 2009, the Company recorded $0.2 million of restructuring recoveries related to retiree reserves.

The table below summarizes changes to the accrued severance and accrued restructuring accounts for the fiscal years ended June 28, 2009, June 29, 2008, and June 24, 2007, respectively (amounts in thousands):

                          Balance at         Additional                         Amount        Balance at
                         June 29, 2008        Charges         Adjustments        Used        June 28, 2009

Accrued severance       $         3,668     $        371     $           5     $ (2,357 )   $         1,687 (1)
Accrued restructuring             1,414                -               224       (1,638 )                 -




                          Balance at         Additional                         Amount        Balance at
                         June 24, 2007        Charges         Adjustments        Used        June 29, 2008

Accrued severance       $           877     $      6,533     $         207     $ (3,949 )   $         3,668 (2)
Accrued restructuring             5,685            3,125              (176 )     (7,220 )             1,414




                          Balance at         Additional                        Amount        Balance at
                         June 25, 2006        Charges         Adjustments       Used        June 24, 2007

Accrued severance       $           576     $        905     $           -     $  (604 )   $           877
Accrued restructuring             3,550                -             3,133        (998 )             5,685

(1) As of June 28, 2009, the Company classified $0.3 million of the executive severance as long-term.

(2) As of June 29, 2008, the Company classified $1.7 million of the executive severance as long-term.

Joint Ventures and Other Equity Investments

YUFI. In August 2005, the Company formed YUFI, a 50/50 joint venture with YCFC, to manufacture, process and market polyester filament yarn in YCFC's facilities in Yizheng, Jiangsu Province, China. During fiscal year 2008, the Company's management explored strategic options with its joint venture partner in China with the ultimate goal of determining if there was a viable path to profitability for YUFI. Management concluded that although YUFI had successfully grown its position in high value and PVA products, commodity sales would continue to be a large and unprofitable portion of the joint venture's business, . . .