Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2008, under Item 7 of that Form 10-K. Our discussions here focus on our results during the quarter and nine months ended, or as of, October 4, 2009, and the comparable periods of 2008 for comparison purposes, and, to the extent applicable, any material changes from the information discussed in that Form 10-K or other important intervening developments or information since that time. These discussions should be read in conjunction with that Form 10-K for more detailed and background information.

Forward-Looking Statements

This report contains statements which may constitute "forward-looking statements" within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Important factors currently known to management that could cause actual results to differ materially from those in forward-looking statements include risks and uncertainties associated with economic conditions in the commercial interiors industry as well as the risks and uncertainties discussed under the heading "Risk Factors" included in Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2008, which discussion is hereby incorporated by reference. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

11 3/8% Senior Secured Notes

On June 5, 2009, we completed a private offering of $150 million aggregate principal amount of 11 3/8% Senior Secured Notes due 2013 (the "Senior Secured Notes"). Interest on the Senior Secured Notes is payable semi-annually on May 1 and November 1 beginning November 1, 2009. The Senior Secured Notes are guaranteed, jointly and severally, on a senior secured basis by certain of our domestic subsidiaries. The Senior Secured Notes are secured by a second-priority lien on substantially all of our and certain of our domestic subsidiaries' assets that secure our domestic revolving credit facility (discussed below) on a first-priority basis.

The Senior Secured Notes were sold at a price of 96.301% of their face value, resulting in $144.5 million of gross proceeds. The $5.5 million original issue discount will be amortized over the life of the notes through interest expense. After deducting the initial purchasers' discount and other fees and expenses associated with the sale, net proceeds were $139.5 million. We used $132.9 million of those net proceeds to repurchase $127.2 million aggregate principal amount of our 10.375% Senior Notes due 2010 pursuant to a tender offer we conducted. (Included in the $132.9 million used to repurchase the $127.2 million aggregate principal amount of 10.375% Senior Notes was a purchase price premium of $5.7 million). In addition, we used $4.5 million of the net proceeds to pay accrued interest on the $127.2 million aggregate principal amount of the 10.375% Senior Notes due 2010 that we repurchased. The remaining $2.1 million of the net proceeds will be used to repay a portion of the 10.375% Senior Notes due 2010 that remain outstanding.

Restructuring Plans

2008 Restructuring Plan

In the fourth quarter of 2008, we committed to a restructuring plan intended to reduce costs across our worldwide operations, and more closely align our operations with reduced demand levels. The reduction of the demand levels is primarily a result of the worldwide recession and the associated delays and reductions in the number of construction projects where our carpet products are used. The plan primarily consists of ceasing manufacturing operations at our facility in Belleville, Canada, and reducing our worldwide employee base by a total of approximately 530 employees in the areas of manufacturing, sales and administration. In connection with the restructuring plan, we recorded a pre-tax restructuring charge in the fourth quarter of 2008 of $11.0 million. We record our restructuring accruals under the provisions of the applicable accounting standards. The restructuring charge is comprised of employee severance expense of $7.8 million, impairment of assets of $2.6 million, and other exit costs of $0.7 million (primarily related to lease exit costs and other closure activities). Approximately $8.3 million of the restructuring charge will be cash expenditures, primarily severance expense. Actions and expenses related to this plan were substantially completed in the first quarter of 2009, and the plan is expected to yield annualized cost savings of approximately $30 million.

2009 Restructuring Plan

In the first quarter of 2009, we adopted a restructuring plan, primarily comprised of a further reduction in our worldwide employee base by a total of approximately 290 employees and continuing actions taken to better align fixed costs with demand for our products on a global level. In connection with the plan, we recorded a pre-tax restructuring charge of $5.7 million, comprised of $4.0 million of employee severance expense and $1.7 million of other exit costs (primarily costs to exit the Canadian manufacturing facilities, lease exit costs and other costs). Approximately $5.2 million of the restructuring charge will involve cash expenditures, primarily severance expense. In the second quarter of 2009, we recorded an additional $1.9 million restructuring charge as a continuation of this plan. The charge in the second quarter of 2009 is due to approximately 80 additional employee reductions, and relates entirely to employee severance expense. The 2009 restructuring plan is expected to yield annualized cost savings of approximately $21 million.

Discontinued Operations

In 2007, we sold our Fabrics Group business segment. In accordance with applicable accounting standards, we have reported the results of operations for the former Fabrics Group business segment for all periods reflected herein, as "discontinued operations." Consequently, our discussion of revenues or sales and other results of operations (except for net income or loss amounts), including percentages derived from or based on such amounts, excludes this discontinued operation unless we indicate otherwise.

Our discontinued operations had no net sales and no income or loss in the three month period ended October 4, 2009, and had no net sales and a loss of $0.7 million in the nine-month period ended October 4, 2009 (these results are included in our statements of operations as part of the "Loss from Discontinued Operations, Net of Taxes"). Our discontinued operations had no net sales in the three-month and nine month periods ended September 28, 2008. Loss from operations of these businesses, net of tax, was $5.2 million in each of the three-month and nine-month periods ended September 28, 2008. Included in this loss from discontinued operations were after-tax charges of $4.2 million and $0.9 million related to a reserve placed on the additional contingent purchase price from the sale of the Fabrics Group business segment and the impairment of certain assets remaining from the segment, respectively.

General

During the quarter ended October 4, 2009, we had net sales of $218.4 million, compared with net sales of $278.4 million in the third quarter last year. Fluctuations in currency exchange rates negatively impacted 2009 third quarter sales by 3% (approximately $8.0 million), compared with the prior year period. During the first nine months of fiscal 2009, we had net sales of $629.0 million, compared with net sales of $835.2 million in the first nine months of last year. Fluctuations in currency exchange rates negatively impacted sales in the first nine months of 2009 by 6% (approximately $50 million), compared with the prior year period.

Included in our results for the nine-month period ended October 4, 2009 is $6.1 million of costs related to the tender offer for our 10.375% Senior Notes in the second quarter of 2009. In addition, this nine-month period also includes income of $5.9 million related to settlements of litigation. The $5.9 million of income from litigation settlements is the net amount after deducting all legal fees and related expenses. The Company received $16.0 million of gross proceeds from these settlements.

During the third quarter of 2009, we had net income attributable to Interface, Inc. of $5.5 million, or $0.09 per diluted share, compared with net income attributable to Interface, Inc. of $8.4 million, or $0.13 per diluted share, in the third quarter last year. Income from continuing operations in the third quarter of 2009 was $5.7 million, or $0.09 per diluted share, compared with income from continuing operations of $13.8 million, or $0.21 per diluted share, in the third quarter of 2008.

During the nine months ended October 4, 2009, we had net income attributable to Interface, Inc. of $5.0 million, or $0.08 per diluted share, compared with net income attributable to Interface, Inc. of $38.4 million, or $0.61 per diluted share, in the first nine months of last year. Income from continuing operations was $6.1 million, or $0.09 per diluted share, in the nine months ended October 4, 2009, compared with income from continuing operations of $44.4 million, or $0.69 per diluted share, in the first nine months of 2008.

Results of Operations

The following table presents, as a percentage of net sales, certain items
included in our Consolidated Condensed Statements of Operations for the
three-month and nine-month periods ended October 4, 2009, and September 28,
2008, respectively:

                                                    Three Months Ended                       Nine Months Ended
                                            Oct. 4, 2009        Sept. 28, 2008       Oct. 4, 2009       Sept. 28, 2008

Net sales                                           100.0 %               100.0 %            100.0 %              100.0 %
Cost of sales                                        66.8                  65.9               67.5                 64.7
Gross profit on sales                                33.2                  34.1               32.5                 35.3
Selling, general and administrative
expenses                                             24.5                  22.9               25.5                 23.8
Income from litigation settlements                     --                    --               (0.9 )                 --
Restructuring charge                                   --                    --                1.2                   --
Operating income                                      8.7                  11.1                6.8                 11.4
Bond retirement expenses                               --                    --                1.0                   --
Interest/Other expenses                               4.4                   3.1                4.0                  3.0
Income from continuing operations before
tax expense                                           4.2                   8.0                1.9                  8.5
Income tax expense                                    1.6                   3.0                0.9                  3.2
Income from continuing operations                     2.6                   5.0                1.0                  5.3
Discontinued operations, net of tax                    --                   1.9                0.1                  0.6
Net income                                            2.6                   3.1                0.9                  4.7
Net income (loss) attributable to
Interface, Inc.                                       2.5                   3.0                0.8                  4.6

Below we provide information regarding net sales for each of our operating segments, and analyze those results for the three-month and nine-month periods ended October 4, 2009, and September 28, 2008, respectively.

Net Sales by Business Segment

Net sales by operating segment and for our Company as a whole were as follows
for the three-month and nine-month periods ended October 4, 2009, and September
28, 2008, respectively:

                                Three Months Ended               Percentage
Net Sales By Segment     Oct. 4, 2009       Sept. 28, 2008         Change
                                  (In thousands)
Modular Carpet          $      194,107     $        242,986            (20.1 %)
Bentley Prince Street           24,257               35,437            (31.5 %)
Total                   $      218,364     $        278,423            (21.6 %)



                                 Nine Months Ended               Percentage
Net Sales By Segment     Oct. 4, 2009       Sept. 28, 2008         Change
                                  (In thousands)
Modular Carpet          $      557,127     $        728,372            (23.5 %)
Bentley Prince Street           71,842              106,792            (32.7 %)
Total                   $      628,969     $        835,164            (24.7 %)

Modular Carpet Segment. For the quarter ended October 4, 2009, net sales for the modular carpet segment decreased $48.9 million (20.1%) versus the comparable period in 2008. This decline is primarily attributable to the reduced order activity for renovation and construction projects as a result of the worldwide financial and credit crisis. On a geographic basis, sales in the Americas and Asia-Pacific were down 9% and 20%, respectively. Sales in Europe were down 32% in local currency and 35% as reported in U.S. dollars as a result of the continued strengthening of the U.S. dollar versus the Euro and British Pound Sterling on a year-over-year basis. The decline in the corporate office segment (down 31%) was the primary driver of the decrease in sales. The impact of this decline was somewhat mitigated as a result of our market diversification strategy, as we saw increases in our retail (up 11%) and government (up 9%) segments.

For the nine months ended October 4, 2009, net sales for the modular carpet segment decreased $171.2 million (23.5%) versus the comparable period in 2008. This decline is primarily attributable to the reduced order activity for renovation and construction projects as a result of the worldwide financial and credit crisis. On a geographic basis, sales in the Americas and Asia-Pacific were down 15% and 26%, respectively. Sales in Europe were down 25% in local currency and 33% as reported in U.S. dollars as a result of the continued strengthening of the U.S. dollar versus the Euro and British Pound Sterling on a year-over-year basis. The decline in the corporate office segment (down 33%) was the primary driver of the decrease in sales. The impact of this decline was somewhat mitigated as a result of our market diversification strategy, as we saw lesser declines in government (1% decline) and education (14% decline) segments.

Bentley Prince Street Segment. In our Bentley Prince Street segment, net sales for the quarter ended October 4, 2009 decreased $11.2 million (31.5%) versus the comparable period in 2008. This decrease is primarily attributable to the reduced order activity for renovation and construction projects as a result of the worldwide financial and credit crisis, as well as the general market movement away from broadloom carpet and toward carpet tile. The sales decrease at Bentley Prince Street occurred in corporate (10% decline) and non-corporate segments, particularly in the hospitality (79% decline) and residential (79% decline) segments.

For the nine months ended October 4, 2009, net sales in our Bentley Prince Street segment decreased $35.0 million (32.7%) versus the comparable period in 2008. This decrease is primarily attributable to the downturn in demand in response to the worldwide financial and credit crisis, as well as the general market movement away from broadloom carpet and toward carpet tile. This decrease at Bentley Prince Street occurred across all market segments, particularly in the corporate (down 25%), hospitality (down 76%) and residential (down 68%) market segments.

Cost and Expenses

Company Consolidated. The following table presents, on a consolidated basis for
our operations, our overall cost of sales and selling, general and
administrative expenses for the three-month and nine-month periods ended October
4, 2009, and September 28, 2008, respectively:

                                                          Three Months Ended            Percentage
                                                                        Sept. 28,
  Cost and Expenses                                   Oct. 4, 2009         2008           Change
                                                            (In thousands)
Cost of sales                                        $      145,952     $  183,506            (20.5 %)
Selling, general and
administrative
expenses                                                     53,487         63,895            (16.3 %)
Total                                                $      199,439     $  247,401            (19.4 %)



                                                           Nine Months Ended            Percentage
                                                                        Sept. 28,
  Cost and Expenses                                   Oct. 4, 2009         2008           Change
                                                            (In thousands)
Cost of sales                                        $      424,282     $  540,688            (21.5 %)
Selling, general and
administrative
expenses                                                    160,122        199,047            (19.6 %)
Total                                                $      584,404     $  739,735            (21.0 %)

For the quarter ended October 4, 2009, our cost of sales decreased $37.5 million (20.5%) versus the comparable period in 2008. Fluctuations in currency exchange rates accounted for approximately 3% ($5 million) of the decrease. The primary components of the $37.5 million decrease in cost of sales were reductions in raw materials costs (approximately $25 million decrease) and labor costs (approximately $4 million decrease) due mostly to lower production volumes in the third quarter of 2009. Our raw materials prices in the third quarter of 2009 were approximately 3-5% lower than those in the third quarter of 2008. As a percentage of net sales, cost of sales increased to 66.8% for the quarter ended October 4, 2009, versus 65.9% in the comparable period in 2008. This percentage increase was due to under-absorption of fixed overhead costs associated with the lower production volumes. However, as a result of our restructuring initiatives discussed above, our cost of sales as a percentage of net sales in the third quarter of 2009 (66.8%) improved when compared with the second quarter of 2009 (67.3%).

For the nine months ended October 4, 2009, our cost of sales decreased $116.4 million (21.5%) versus the comparable period in 2008. Fluctuations in currency exchange rates accounted for approximately 5% ($31 million) of the decrease. The primary components of the $116.4 million decrease in cost of sales were reductions in raw materials costs (approximately $78 million decrease) and labor costs (approximately $12 million decrease) due mostly to lower production volumes in the first nine months of 2009. Our raw materials prices in the first nine months of 2009 were approximately 3-5% lower than those in the first nine months of 2008. As a percentage of net sales, cost of sales increased to 67.5% for the nine months ended October 4, 2009, from 64.7% in the comparable period in 2008. This percentage increase was due to under-absorption of fixed overhead costs associated with the lower production volumes.

For the quarter ended October 4, 2009, our selling, general and administrative expenses decreased $10.4 million (16.3%) versus the comparable period in 2008. Fluctuations in currency exchange rates accounted for approximately 4% ($3 million) of the decrease. The primary components of the $10.4 million decrease in selling, general and administrative expenses were (1) a $6.3 million reduction in selling costs associated with the decline in sales volume, and (2) a $4.1 million reduction in marketing expense as programs were cut or reduced to better match anticipated demand. Due to our lower sales volumes in the current year period, as a percentage of net sales, selling, general and administrative expenses increased to 24.5% for the three months ended October 4, 2009, versus 22.9% for the comparable period in 2008.

For the nine months ended October 4, 2009, our selling, general and administrative expenses decreased $38.9 million (19.6%) versus the comparable period in 2008. Fluctuations in currency exchange rates accounted for approximately 7% ($15 million) of the decrease. The primary components of the $38.9 million decrease in selling, general and administrative expenses were (1) an $18.8 million reduction in selling costs associated with the decline in sales volume, (2) a $12.2 million reduction in marketing expense as programs were cut or reduced to better match anticipated demand, and (3) a $1.6 million reduction in incentive compensation as performance goals were not achieved to the same degree as they were in the comparable period in 2008. Due to our lower sales volumes in the current year period, as a percentage of net sales, selling, general and administrative expenses increased to 25.5% for the nine months ended October 4, 2009, versus 23.8% for the comparable period in 2008.

Cost and Expenses by Segment. The following table presents the combined cost of sales and selling, general and administrative expenses for each of our operating segments:

Cost of Sales and
Selling, General and                                       Three Months Ended            Percentage
Administrative                                                           Sept. 28,
Expenses (Combined)                                    Oct. 4, 2009         2008           Change
                                                             (In thousands)
Modular Carpet                                        $      173,815     $  212,689            (18.3 %)
Bentley Prince
Street                                                        25,281         34,712            (27.2 %)
Corporate Expenses
and Eliminations                                                 343             --                *
Total                                                 $      199,439     $  247,401            (19.4 %)

Cost of Sales and
Selling, General and                                        Nine Months Ended            Percentage
Administrative                                                           Sept. 28,
Expenses (Combined)                                    Oct. 4, 2009         2008           Change
                                                             (In thousands)
Modular Carpet                                        $      505,819     $  631,842            (19.9 %)
Bentley Prince
Street                                                        77,061        104,278            (26.1 %)
Corporate Expenses
and Eliminations                                               1,524          3,615            (57.8 %)
Total                                                 $      584,404     $  739,735            (21.0 %)

Interest Expenses

For the three-month period ended October 4, 2009, interest expense increased $1.3 million to $9.5 million, versus $8.2 million in the comparable period in 2008. For the nine-month period ended September 28, 2008, interest expense increased $0.8 million to $24.9 million, versus $24.1 million in the comparable period in 2008. These increases were due primarily to the issuance of our $150 million aggregate principal amount of 11 3/8% Senior Secured Notes in June 2009, because (1) the 11 3/8% Senior Secured Notes bear interest at a higher rate than the 10.375% Senior Notes, of which $138.0 million were repurchased in the first nine months of 2009, and (2) the 11 3/8% Senior Secured Notes were sold at a discount, which is being amortized into interest expense over the life of the notes.

Liquidity and Capital Resources

General

At October 4, 2009, we had $105.9 million in cash. At that date, we had no borrowings and $8.8 million in letters of credit outstanding under our domestic revolving credit facility, and no borrowings outstanding under our European credit facility. As of October 4, 2009, we could have incurred $54.0 million of additional borrowings under our domestic revolving credit facility and €26.0 million (approximately $38.1 million) of additional borrowings under our European credit facility. In addition, we could have incurred an additional $10.4 million of borrowings under our other credit facilities in place at other non-U.S. subsidiaries.

Analysis of Cash Flows

Our primary sources of cash during the nine-month period ended October 4, 2009, were (1) $144.5 million from the issuance of our $150 million aggregate principal amount of 11 3/8% Senior Secured Notes due 2013, (2) $27.5 million from a reduction of accounts receivable, and (3) $16.0 million from settlements of litigation. Our primary uses of cash during this period were (1) $138.0 million used to repurchase a portion of our 10.375% Senior Notes ($127.2 million aggregate principal amount of these notes were repurchased pursuant to a tender offer conducted in connection with the issuance of the new 11 3/8% Senior Secured Notes described above), (2) $20.4 million as a reduction in accounts payable and accruals, (3) $9.9 million for capital expenditures, (4) $6.2 million for debt issuance costs in connection with the 11 3/8% Senior Secured Notes described above, and (5) $5.3 million for premiums paid in connection with the repurchase of our 10.375% Senior Notes.