The Company has typically grown its business through acquisitions. Growth through acquisitions involves risks, many of which may continue to affect the Company after the acquisition. The Company cannot give assurance that an acquired company will achieve the levels of revenue, profitability and production that the Company may make in the future.

expects. The processcombination of combining the businesses of Unilinan acquired company’s business with the Company'sCompany’s existing businesses involves risks. The Company cannot be assured that reported earnings will meet expectations because of goodwill and intangible asset impairment, increased interest costs and issuance of additional securities or incurrence of debt. The Company may also face challenges in consolidating functions, integrating the Company'sCompany’s organizations, procedures, operations and product lines in a timely and efficient manner and retaining key personnel. These challenges willmay result principally because the two companies currentlyin:

•  maintain

  maintaining executive offices in different locations;

• manufacture

  manufacturing and sellselling different types of products through different distribution channels;

• conduct

  conducting business from various locations;

• maintain

  maintaining different operating systems and software on different computer hardware; and

• have

  providing different employment and compensation arrangements for their employees.

      In addition, the majority of Unilin's operating facilities are located in Europe, where the Company has not previously operated a manufacturing facility. As a result, the integration will be complex and will require additional attention from members of management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company'sCompany’s revenues, level of expenses and operating results. The Company may face similar challenges in combining the Company's businesses with any other businesses that the Company acquires in the future.

Failure to successfully manage and integrate Unilinan acquisition with the Company'sCompany’s existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences that could affect the Company'sCompany’s financial condition and results of operations. Even if integration occurs successfully, failure of the Unilin Acquisition or any future acquisition to achieve levels of anticipated sales growth, profitability or productivity or otherwise not perform as expected, may adversely impact the Company'sCompany’s financial condition and results of operations. The Company has incurred, and will continue to incur, certain liabilities and expenses in connection with the Unilin Acquisition or any future acquisitions.

The Company has not yet completed the testing of the adequacy of Unilin's internal control over financial reporting, and it is possible that the Company's testing or that of the Company's independent auditors in connection with the audit of the Company's financial results for the year ended December 31, 2006, will reveal material weaknesses in Unilin's internal control over financial reporting.

      As part of the integration of Unilin, the Company is in the process of documenting and testing of the Unilin's internal control over financial reporting to allow management and the Company's independent registered public accounting firm to report in 2006 on the effectiveness of the internal control over financial reporting as it pertains to Unilin's operations. The adequacy of Unilin's internal control over financial reporting has not previously been attested to by any independent accounting firm, as no such attestation was required by virtue of Unilin's status as a foreign, privately-held company. The Company anticipates completing the testing of Unilin's internal control over financial reporting by the end of 2006. The Company's testing, or the subsequent testing by the Company's independent registered public accounting firm, may reveal deficiencies in the Company's internal control over financial reporting. In that event, the Company's management may not be able to report that the Company's internal control over financial reporting is effective, and the Company's auditors will not be able to express an opinion on the Company's internal control over financial reporting, which could have a material adverse effect on the Company's business.

A failure to identify suitable acquisition candidates and to complete acquisitions could have a material adverse effect on the Company'sCompany’s business.

As part of the Company'sCompany’s business strategy, the Company intends to continue to pursue acquisitions of complementary businesses. Although the Company regularly evaluates acquisition opportunities, the Company may not be able successfully to identify suitable acquisition candidates; to obtain sufficient financing on acceptable terms to fund acquisitions; to complete acquisitions;acquisitions and integrate acquired businesses with the Company’s existing businesses; or to manage profitably acquired businesses.

The Company may be unable to obtain raw materials on a timely basis, which could have a material adverse effect on the Company's business.

      The principal raw materials used in the Company's manufacturing operations include nylon, polyester and polypropylene resins and fibers and carpet backings, which are used primarily in the Company's carpet and rugs business; talc, clay, nepheline syenite and various glazes, including frit (ground glass), zircon and stains, which are used exclusively in the Company's ceramic tile business; wood, paper, and resins which are used primarily in the Company's laminate flooring business; and other materials. An extended interruption in the supply of these or other raw materials used in the Company's business or in the supply of suitable substitute materials would disrupt the Company's operations, which could have a material adverse effect on the Company's business.

The Company has been, and in the future may be, subject to claims and liabilities under environmental, health and safety laws and regulations, which could be significant.

The Company'sCompany’s operations are subject to various environmental, health and safety laws and regulations, including those governing air emissions, wastewater discharges, and the use, storage, treatment and disposal of

Index to Financial Statements

hazardous materials. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties.

The nature of the Company'sCompany’s operations, including the potential discovery of presently unknown environmental conditions, exposes it to the risk of claims under environmental, health and safety laws and regulations. The Company could incur material costs or liabilities in connection with such claims.

Changes in international trade laws and in the business, political and regulatory environment in Mexico and Europe could have a material adverse effect on the Company'sCompany’s business.

The Company's Monterrey, Mexico manufacturing facility and the Company'sCompany’s manufacturing facilities in Mexico and Europe represent a significant portion of the Company's total manufacturingCompany’s capacity for ceramic tile and laminate flooring, respectively.  In addition, as a result of the Unilin Acquisition, the Company now has more significant general operations abroad, particularly in Europe. Accordingly, an event that has a material adverse impact on the Company's Mexicaneither of these operations could have a material adverse effect on the Company's tile operations as a whole.  Similarly, an event that has a material adverse impact on the Company's European operations could have a material adverse effect on the Company's laminate flooring operations, as a whole.Company. The business, regulatory and political environments in Mexico and in Europe differ from those in the United States,U.S., and the Company'sCompany’s Mexican and European operations are exposed to legal, currency, tax, political, and economic risks specific to the countries in which they occur, particularly with respect to labor regulations, which tend to be more stringent in Europe and, to a lesser extent, Mexico. The Company cannot assure investors that the Company will succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where the Company does business and therefore that the foregoing factors will not have a material adverse effect on the Company'sCompany’s operations or upon the Company'sCompany’s financial condition and results of operations.

The Company could face increased competition as a result of the General Agreement on Tariffs and Trade ("GATT") and the North American Free Trade Agreement ("NAFTA").

      The Company is uncertain what effect reduced import duties under GATT may have on the Company's operations, although these reduced rates may stimulate additional competition from manufacturers that export ceramic tile to the United States.

      Although NAFTA lowers the tariffs imposed on the Company's ceramic tile manufactured in Mexico and sold in the United States and will eliminate such tariffs entirely on January 1, 2008, it may also stimulate competition in the United States and Canada from manufacturers located in Mexico.

Fluctuations in currency exchange rates may impact the Company's financial condition and results of operations and may affect the comparability of results between the Company's financial periods.

      The results of the Company's foreign subsidiaries reported in the local currency are translated into U.S. dollars for balance sheet accounts using exchange rates in effect at the balance sheet date and for the statement of earnings accounts using the Company's weighted average rates during the period.  The exchange rates between some of these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. Although the Company has not yet experienced material losses due to foreign currency fluctuation, the Company may not be able to manage effectively the Company's currency translation risks, and volatility in currency exchange rates may have a material adverse effect on the carrying value of the Company's debt and results of operations and affect comparability of the Company's results between financial periods.

If the Company is unable to protect the Company'sCompany’s intellectual property rights, particularly with respect to the Company'sCompany’s patented laminate flooring technology and the Company'sCompany’s registered trademarks, the Company'sCompany’s business and prospects could be harmed.

The future success and competitive position of certain of the Company'sCompany’s businesses, particularly the Company'sCompany’s laminate flooring business, depend in part upon the Company'sCompany’s ability to obtain and maintain proprietary technology used in the Company'sCompany’s principal product families. The Company relies, in part, on the patent, trade secret and trademark laws of the United StatesU.S. and countries in Europe, as well as confidentiality agreements with some of the Company'sCompany’s employees, to protect that technology.

The Company has obtained a number of patents relating to the Company'sCompany’s products and associated methods and has filed applications for additional patents, including the UNICLIC^® family of patents, which protects Unilin'sUnilin’s interlocking laminate flooring panel technology. The Company cannot assure investors that any patents owned by or issued to it will provide the Company with competitive advantages, that third parties will not challenge these patents, or that the Company'sCompany’s pending patent applications will be approved. In addition, patent filings by third parties, whether made before or after the date of the Company'sCompany’s filings, could render the Company'sCompany’s intellectual property less valuable.

Furthermore, despite the Company'sCompany’s efforts, the Company may be unable to prevent competitors and/or third parties from using the Company'sCompany’s technology without the Company'sCompany’s authorization, independently developing technology that is similar to that of the Company or designing around the Company'sCompany’s patents. The use of the Company'sCompany’s technology or similar technology by others could reduce or eliminate any competitive advantage the Company has developed, cause usthe Company to lose sales or otherwise harm the Company'sCompany’s business. In addition, if the Company does not obtain sufficient protection for the Company'sCompany’s intellectual property, the Company'sCompany’s competitiveness in the markets it serves could be significantly impaired, which would limit the Company'sCompany’s growth and future revenue.

The Company has obtained and applied for numerous U.S. and foreign serviceForeign Service marks and trademark registrations and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any of the Company'sCompany’s pending or future applications will be

Index to Financial Statements

approved by the applicable governmental authorities. Moreover, even if such applications are approved, third parties may seek to oppose or otherwise challenge the registrations. A failure to obtain trademark registrations in the United StatesU.S. and in other countries could limit the Company'sCompany’s ability to protect the Company'sCompany’s trademarks and impede the Company'sCompany’s marketing efforts in those jurisdictions.

The Company generally requires third parties with access to the Company'sCompany’s trade secrets to agree to keep such information confidential. While such measures are intended to protect the Company'sCompany’s trade secrets, there can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company'sCompany’s confidential and proprietary information and technology will not be independently developed by or become otherwise known to third parties. In any of these circumstances, the Company'sCompany’s competitiveness could be significantly impaired, which would limit the Company'sCompany’s growth and future revenue.

Companies may claim that the Company infringed their intellectual property or proprietary rights, which could cause it to incur significant expenses or prevent it from selling the Company'sCompany’s products.

      The Company has inIn the past, had companies claimhave claimed that certain technologies incorporated in the Company'sCompany’s products infringe their patent rights. There can be no assurance that the Company will not receive notices in the future from parties asserting that the Company'sCompany’s products infringe, or may infringe, those parties'parties’ intellectual property rights. The Company cannot be certain that the Company'sCompany’s products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United StatesU.S. and some foreign countries have not been publicly disclosed until the patent is issued (or, in some recent cases, until 18 months following submission), and the Company may not be aware of currently filed patent applications that relate to the Company'sCompany’s products or processes. If patents are later issued on these applications, the Company may be liable for infringement.

Furthermore, the Company may initiate claims or litigation against parties for infringement of the Company'sCompany’s proprietary rights or to establish the invalidity, noninfringement, or unenforceability of the proprietary rights of others. Likewise, the Company may have similar claims brought against it by competitors. Litigation, either as plaintiff or defendant, could result in significant expense to the Company and divert the efforts of the Company'sCompany’s technical and management personnel from operations, whether or not such litigation is resolved in the Company'sCompany’s favor. In the event of an adverse ruling in any such litigation, the Company might be required to pay substantial damages (including punitive damages and attorneysattorney’s fees), discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. There can be no assurance that licenses to disputed technology or intellectual property rights would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company along with failure to develop or license a substitute technology, the Company'sCompany’s business, financial condition and results of operations would be materially and adversely affected.

The Company is subject to changing regulation of corporate governance and public disclosure that have increased both costs and the risk of noncompliance.

The Company’s stock is publicly traded. As a result, the Company is subject to the rules and regulations of federal and state agencies and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NYSE, have in recent years issued new requirements and regulations, most notably the Sarbanes-Oxley Act of 2002. From time to time since the adoption of the Sarbanes-Oxley Act of 2002, these authorities have continued to develop additional regulations or interpretations of existing regulations. The Company’s efforts to comply with the regulations and interpretations have resulted in, and are likely to continue to result in, increased general and administrative costs and diversion of management’s time and attention from revenue generating activities to compliance activities.

Index to Financial Statements

Declines in the Company’s business conditions may result in an impairment of the Company’s tangible and intangible assets which could result in a material non-cash charge.

A decrease in the Company’s market capitalization, including a short-term decline in stock price, or a negative long-term performance outlook, could result in an impairment of its tangible and intangible assets which results when the carrying value of the Company’s assets exceed their fair value. In 2008, the Company’s goodwill and other intangible assets suffered an impairment and additional impairment charges could occur in future periods.

Forward-Looking Information

Certain of the statements in this Annual Report on Form 10-K, particularly those anticipating future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words "believes," "anticipates," "forecast," "estimates"“believes,” “anticipates,” “forecast,” “estimates” or similar expressions constitute "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in industry conditions; competition; raw material prices; energy costs; timing and level of capital expenditures; integration of acquisitions; introduction of new products; rationalization of operations; litigation; and other risks identified in Mohawk'sMohawk’s SEC reports and public announcements.

Item 1b. Unresolved Staff CommentsNone.

 None

Item 2. Properties

The Company owns a 47,500 square foot headquarters office in Calhoun, Georgia on an eight-acre site. The Company also owns a 2,089,000 square foot manufacturing facility located in Dalton, Georgia, used by the Mohawk segment, a 1,773,1451,744,072 and 974,900 square foot manufacturing facilityfacilities located in Monterey, Mexico and Muskogee, Oklahoma, respectively, used by the Dal-Tile segment, and a 1,128,535 square foot manufacturing facility located in Wielsbeke, Belgium used by the Unilin segment.

The following table summarizes the Company'sCompany’s facilities both owned and leased for each segment in square feet:

The Company'sCompany’s properties are in good condition and adequate for its requirements. The Company believes its principal plants are generally adequate to meet its production plans pursuant to the Company'sCompany’s long-term sales goals. In the ordinary course of business, the Company monitors the condition of its facilities to ensure that they remain adequate to meet long-term sales goals and production plans.

Index to Financial Statements

Item 3. Legal Proceedings

The Company is involved in litigation from time to time in the regular course of its business. Except as noted below or under the section "-Environmental Matters," there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

In Shirley Williams et al vs.al. v. Mohawk Industries, Inc., four plaintiffs filed a purportedputative class action lawsuit in January 2004 in the United States District Court for the Northern District of Georgia (Rome Division), alleging that they are former and current employees of the Company and that the actions and conduct of the Company, including the employment of persons who are not permittedauthorized to work in this country,the United States, have damaged them and the other members of the purportedputative class by suppressing the wages of the Company'sCompany’s hourly employees in Georgia. The plaintiffs seek a variety of relief, including (a) treble damages; (b) return of any allegedly unlawful profits; and (c) attorney'sattorney’s fees and costs of litigation. In February 2004, the Company filed a Motion to Dismiss the Complaint, which was denied by the Northern District Court in April 2004. Following appellate review of this decision, the case was returned to the District Court for further proceedings. On December 18, 2007, the plaintiffs filed a motion for class certification. On March 3, 2008, the District Court denied the plaintiffs motion for class certification. The Companyplaintiffs then sought and obtained permission to file an immediate appeal ofappealed the Northern District's decision to the United States Court of Appeals for the 11th Circuit. Circuit on March 17, 2008, where the matter is currently pending. Discovery has been stayed at the District Court while the appeal is pending. The Company will continue to vigorously defend itself against this action.

In Collins & Aikman Floorcoverings, Inc., et. al. v. Interface, Inc., United States District Court for the Northern District of Georgia (Rome Division), Mohawk Industries, Inc. joined Collins & Aikman Floorcoverings, Inc. (“CAF”) and Shaw Industries Group, Inc. (“Shaw”) in suing Interface, Inc. (“Interface”) for declaratory judgments that United States Patent 6,908,656 (the “Patent”), assigned to Interface and relating to certain styles of carpet tiles, is not infringed and is invalid. Also in June 2005, the 11th Circuit reversed in part and affirmed in part the lower court's decision (WilliamsInterface, Inc., et el. v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir. 2005)). In June 2005,et al. United States District Court for the Company filed a motion requesting review byNorthern District of Georgia (Atlanta Division), Interface sued Mohawk Industries, Inc., Mohawk Carpet Corporation, and Mohawk Commercial, Inc. for allegedly infringing the full 11th Circuit, which was deniedPatent. Interface brought similar suits against entities affiliated with CAF and Shaw. Interface is seeking monetary damages as well as injunctive relief. The cases have been consolidated in August 2005. In October 2005, the Company filed a petition for certiorari with the United States SupremeDistrict Court which petitionfor the Northern District of Georgia (Rome Division). In January 2008, the Company joined CAF and Shaw in filing summary judgment motions seeking to establish as a matter of law before trial that the Patent was invalid, that it was not willfully infringed, and that Interface could not obtain damages for lost profits. On February 25, 2009, the District Court (i) denied the Company, CAF’s and Shaw’s motions that the patent was invalid (ii) granted their motions that should infringement be found that any such infringement would not be willful, and (iii) granted in December of 2005.part and denied in part their motions that Interface could not obtain damages for lost profits. The Company believes it has meritorious defensesis vigorously pursuing its declaratory judgment claims of invalidity and intendsnon-infringement with respect to continue vigorouslythe Patent and defending itself against this action.the claims brought by Interface for infringement of the Patent. A trial date is anticipated to be set for later in 2009.

The Company believes that adequate provisions for resolution of all contingencies, claims and pending litigation have been made for all pending litigation for probable losses with respect to the resolution of all claims and pending litigation and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material adverse effect on its results of operations in a given quarter or annual period.

Index to Financial Statements

Environmental Matters

The Company is subject to various federal, state, local and foreign environmental health and safety laws and regulations, including those governing air emissions, wastewater discharges, the use, storage, treatment and disposal of solid and hazardous materials, and the cleanup of contamination associated therewith. Because of the nature of the Company'sCompany’s business, the Company has incurred, and will continue to incur, costs relating to compliance with such laws and regulations. The Company is involved in various proceedings relating to environmental matters and is currently engaged in environmental investigation, remediation and post-closure care programs at certain sites. The Company has provided accruals for such activities that it has determined to be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities will have a material adverse effect on its operations, but may have an effect on the results of operations for a given quarter or annual period.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders of the Company during the fourth quarter ended December 31, 2005.2008.

Operating (loss) income

Operating loss for 20052008 was $627.3$1,124.1 million (9.5%reflecting a decrease of net sales)$1,874.2 million compared to $635.6operating income of $750.1 million (10.8%(9.9% of net sales) in 2004. Operating income attributable2007. The decrease was primarily driven by the recognition of impairment of goodwill and other intangibles of $1,543.4 million, a decline in sales volumes of approximately $285 million and rising costs for raw materials and energy of approximately $116 million, net of cost savings initiatives, partially offset by a benefit of approximately $130 million due to the net effect of price increases and product mix.

Index to Financial Statements

Mohawk segmentSegment—Operating loss was $381.7$216.2 million (8.1%in 2008 reflecting a decrease of $471.1 million compared to operating income of $254.9 million (6.1% of segment net sales) in 20052007. The decrease was primarily due to the impairment of goodwill and other intangibles of $276.8 million, a decline in sales volumes of approximately $142 million and rising costs for raw materials and energy of approximately $82 million, net of cost savings initiatives, partially offset by a benefit of approximately $82 million due to the net effect of price increases and product mix.

Dal-Tile Segment—Operating loss was $323.4 million in 2008 reflecting a decrease of $582.1 million, compared to $424.3operating income of $258.7 million (9.7%(13.4% of segment net sales) in 2004.2007. The percentage decrease was primarily due to the impairment of goodwill of $531.9 million, rising costs for raw materials and energy of approximately $31 million, net of cost savings initiatives, and a decline in sales volumes of approximately $56 million, partially offset by a benefit of approximately $41 million due to the net effect of price increases and product mix.

Unilin Segment—Operating loss was $564.9 million in 2008, reflecting a decrease of $837.2 million compared to operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $260.2of $272.3 million (15.0%(18.3% of segment net sales) in 2005, compared2007. The decrease was primarily due to $219.8the impairment of goodwill and other intangibles of $734.7 million, (14.5%a decline in sales volumes of segmentapproximately $88 million and rising costs for raw materials and energy of approximately $19 million, net sales) in 2004. The increase in operating income asof cost savings initiatives, partially offset by a percentagebenefit of approximately $7 million due to the net sales is primarily attributable toeffect of price increases and product mix shift and implementing increased pricing to help offset increased raw material, energy, transportation, and higher import costs.mix.

Interest expense

Interest expense for 20052008 was $66.8$127.1 million compared to $53.4$154.5 million in 2004.2007. The increasedecrease in interest expense for 2008 as compared to 2007 was attributable to thelower average debt raised to fund the Unilin Acquisition.and lower average interest rates on outstanding revolving debt.

Income tax (benefit) expense

The 2008 provision for income tax was $198.8$180.1 million, or 35.7% of earnings before income taxes for 2005as compared to $208.8an income tax benefit of $102.7 million or 36.2%for 2007. The effective tax rate for 2008 was (14.1%) as compared to an effective tax rate benefit of earnings before income taxes17.0% for 2004.2007. The improvedchange in the tax rate was primarily attributabledue to the utilizationimpact on pre-tax earnings of tax creditsthe impairment charge on non-deductible goodwill, the 2008 business restructurings, and the one-time effectrecognition of statea valuation allowance of $253 million, which is described below, against certain deferred tax law changes.assets that the Company believes is no longer more likely than not to be realized. Without the impact of these three items, the Company would have reflected a 2008 provision for income tax of $70.5 million, as compared to a provision of $168.9 million for 2007, which excludes a tax benefit of approximately $272 million from the European restructuring described below.

In the fourth quarter of 2007, the Company moved the intellectual property and treasury operations of an indirectly owned European entity to a new office in another jurisdiction in Europe. The Company also indirectly owned a holding company in the new jurisdiction that provided certain treasury functions to Unilin, and the move allowed for the consolidation of the historical intellectual property and treasury operations to be combined with those of the holding company’s treasury operations in a single jurisdiction in order to integrate and streamline the operations, to facilitate international acquisitions and to improve tax and cost efficiencies. This restructuring resulted in a step up in the subsidiary’s taxable basis of its intellectual property. The step up relates primarily to intangible assets which will be amortized over 10 years for tax purposes. During the fourth quarter of 2007, the Company evaluated the evidence for recognition of the deferred tax asset created through the restructuring and determined that, based on the available evidence, the deferred tax asset would more likely than not be realized. The deferred tax asset recognized at December 31, 2007 was approximately $245 million and the related income tax benefit recognized in the financial statements was approximately $272 million.

Index to Financial Statements

During the third quarter of 2008, the Company reassessed the need for a valuation allowance against its deferred tax assets. Actual cash flows have been less than those projected as of December 31, 2007, primarily due to the slowing worldwide economy and declining sales volume. The Company determined that, given the current and expected economic conditions and the corresponding reductions in cash flows, its ability to realize the benefit of the deferred tax asset related to the European restructuring transaction described above, as well as tax losses generated in the same jurisdiction was not more likely than not. Accordingly during the third quarter of 2008, the Company recorded a $253 million valuation allowance against the deferred tax asset created as a result of the European restructuring.

Year Ended December 31, 2004,2007, as Compared with Year Ended December 31, 20032006

Net sales for the year ended December 31, 2004,2007, were $5,880.4$7,586.0 million, reflecting an increasea decrease of $881.0$319.8 million, or approximately 17.6%4.0%, overfrom the $4,999.4$7,905.8 million reported for the year ended December 31, 2003.2006. The increased netdecrease primarily occurred in the Company’s U.S. residential new construction and replacement channels, which the Company believes was caused by the slowing U.S. housing industry offset by stronger sales are primarily attributable to strong internal sales growth from bothwithin the Mohawk and Dal-Tile segments. The Mohawk segment recorded net sales of $4,368.8 million in 2004 compared to $3,730.8 million in 2003, representing an increase of $638.0 million or approximately 17.1%. The increase was attributable to strong internal growth in allEuropean product categories and the Lees Carpet acquisition. The Dal-Tile segment recorded netimpact of the Wood Acquisition.

Mohawk Segment—Net sales of $1,511.5decreased $536.4 million, or 11.3%, to $4,205.7 million in 2004, reflecting an increase of $243.02007 compared to $4,742.1 million in 2006. The decrease was due to lower demand in its residential new construction and replacement channels, which the Company believes resulted primarily from the slowing U.S. housing industry.

Dal-Tile Segment—Net sales decreased $4.1 million, or 19.2%0.2%, over the $1,268.5to $1,937.7 million in 2007 compared to $1,941.8 million reported in 2006. The decrease was primarily attributable to lower sales within its residential channel, which the year ended December 31, 2003.Company believes was due to the slowing U.S. housing industry.

Unilin Segment—Net sales increased $250.7 million, or 20.3%, to $1,487.6 million in 2007 compared to $1,236.9 million in 2006. The increase in sales was mostly attributable to strong internal growthdriven by an increase in all product categories with stoneselling prices, higher demand in Europe, favorable Euro exchange rates, the Wood Acquisition and floor tile reflecting the strongest growth.an increase in patent revenues.

Quarterly net sales and the percentage changes in net sales by quarter for 20042007 versus 20032006 were as follows (dollars in thousands):

      Sales in the first and fourth quarters of 2004 were impacted by a shift of four days from the fourth to the first quarter when compared to 2003.

Gross Profit

Gross profit was $1,620.8 million (27.6% of net sales) for 2004 and $1,393.8$2,114.8 million (27.9% of net sales) for 2003. The reduction2007 and represented a decrease of $116.5 million, or 5.2%, compared to gross profit of $2,231.3 million (28.2% of net sales) for 2006. Gross profit as a percentage of net sales for 2007 was unfavorably impacted by lower sales volume in percentage was primarily attributable to increasedthe U.S., higher raw material costs energy costs, transportation costsand plant shutdowns in the U.S. offset by price increases and higher import costs.demand in Europe.

Selling, general and administrative expenses

Selling, general and administrative expenses for 20042007 were $985.3$1,364.7 million (16.8%(18.0% of net sales), reflecting a decrease of $27.6 million, or 2.0%, compared to $1,392.3 million (17.6% of net sales) for 2006. The increase in the selling, general and administrative expenses as a percentage of net sales was primarily attributable to lower sales in proportion to selling, general and administrative expenses.

Index to Financial Statements

Operating (loss) income

Operating income for 2007 was $750.1 million (9.9% of net sales) compared to $851.8$839.1 million (17.0% of net sales) for 2003. The reduction in percentage was attributable to better leveraging of selling, general and administrative expenses.

      Operating income for 2004 was $635.6 million (10.8% of net sales) compared to $542.0 million (10.9%(10.6% of net sales) in 2003.2006. Operating income attributable to the Mohawk segment was $424.3 million (9.7% of segment net sales) in 2004 compared to $364.0 million (9.8% of segment net sales) in 2003. The percentage decrease in operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $219.8 million (14.5% of segment net sales) in 2004, compared to $187.2 million (14.8% of segment net sales) in 2003. The decrease in operating income as a percentage of net sales isin 2007 was unfavorably impacted by lower sales volume, which the Company believes was primarily attributable to the slowing U.S. housing industry, and plant shutdowns partially offset by higher energysales in Europe.

Mohawk Segment—Operating income was $254.9 million (6.1% of segment net sales) in 2007 reflecting a decrease of $132.5 million compared to $387.4 million (8.2% of segment net sales) in 2006. Operating income as a percentage of the Mohawk segment net sales was unfavorably impacted by its residential new construction and replacement channels, which the Company believes resulted from the slowing U.S. housing industry, increased manufacturing costs importresulting from lower production volume, higher raw material costs and transportation costs.plant shutdowns.

Interest expense for 20042007 was $53.4$154.5 million compared to $55.6$173.7 million in 2003.2006. The decrease in interest expense for 2007 as compared to 2006 was attributable to a larger benefit from a fair value adjustment related to anlower average debt, partially offset by higher interest rate swap during 2004rates in 2007 when compared to 2003.2006.

Income tax (benefit) expense was $208.8

The Company had an income tax benefit of $102.7 million, or 36.2%(17.0)% of earnings before income taxes for 20042007, compared to $178.3an income tax expense of $220.5 million, or 36.5%32.6% of earnings before income taxes for 2003.2006. During the fourth quarter of 2007, the Company implemented a change in residency of one of its foreign subsidiaries. The improved rate wasCompany moved the intellectual property and treasury operations of an indirectly owned European entity to a resultnew office in another jurisdiction in Europe. The Company also indirectly owned a holding company in the new jurisdiction that provided certain treasury functions to Unilin and the move allowed for the consolidation of the utilizationhistorical intellectual property and treasury operations to be combined with those of the holding company’s treasury operations in a single jurisdiction in order to integrate and streamline the operations, to facilitate international acquisitions and to improve tax credits.and cost efficiencies. This restructuring resulted in a step up in the subsidiary’s taxable basis of its intellectual property. The step up relates primarily to intangible assets which will be amortized over 10 years for tax purposes. During the fourth quarter of 2007, the Company evaluated the evidence for recognition of the deferred tax asset created through the restructuring and determined that, based on the available evidence, the deferred tax asset would more likely than not be realized. The deferred tax asset recognized at December 31, 2007 was approximately $245 million and the related income tax benefit recognized in the financial statements was approximately $272 million. The recognition of the deferred tax asset resulted in a reduction in the Company’s effective tax rate for the year. In addition the tax rate also decreased due to a greater percentage of income in lower taxed jurisdictions and changes implemented in the third quarter of 2007, which resulted in higher interest deductions outside the U.S.

Liquidity and Capital Resources

The Company'sCompany’s primary capital requirements are for working capital, capital expenditures and acquisitions. The Company'sCompany’s capital needs are met primarily through a combination of internally generated funds, bank credit lines, term and senior notes, the sale of trade receivables and credit terms from suppliers.

Index to Financial Statements

Cash flows generated by operations for 20052008 were $561.5$570.0 million compared to $242.8$875.1 million for 2004.2007. The increase wasdecrease in operating cash flows for 2008 as compared to 2007 is primarily attributable to an increaselower earnings as a result of declining business conditions, the timing of receipts due to a calendar shift in the fourth quarter of 2007 as compared to 2006, a change in customer mix and lower accounts payable and accrued expenses, which increased from $623.1 million at the beginning of 2005accruals due to $998.1 million at December 31, 2005.  In addition,lower volumes, partially offset by lower inventory turnover increased during 2005. The increases were primarily attributable to sales growth within both the Mohawk and Dal-Tile segments and the Unilin Acquisition.levels.

Net cash used in investing activities in 20052008 was $2.9 billion$226.1 million compared to $121.6$310.2 million for 2004.2007. The increase was primarily attributabledecrease is due to the Unilin Acquisition andlower acquisition investments during 2008 as compared to 2007 partially offset by higher capital expenditures. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment.spending. Capital expenditures, including $3.0 billion$226.3 million for acquisitions, have totaled $3.5 billion$772.9 million over the past three years. Capital spending during 20052009 for the Mohawk, Dal-Tile and Unilin segments combined,Company, excluding acquisitions, is expectedestimated to range from $290$120 million to $310$130 million, andwhich will be used primarily to purchase equipment and maintenance capital expenditures to add manufacturingimprove efficiency and distribution capacity.reduce costs.

Net cash provided byused in financing activities for 20052008 was $2,440.7$342.9 million compared to cash provided$540.0 million in 2004 of $121.2 million.2007. The primary reason for the change was an increaselower repayment of certain indebtedness of approximately $333 million due to declining business conditions, and lower borrowings in debt levels2008 as a result of the Unilin Acquisition in 2005 when compared to 2004.repayments of approximately $534 million in 2007.

On October 28, 2005, the Company entered into a $1.5 billion 364-day senior, unsecured, bridge term loan facility, which is referred to as the bridge credit facility, and a $1.5 billion five-year, senior, unsecured, revolving credit and term loan facility which is referred to as the new senior(the “senior unsecured credit facilities.facilities”). The new senior unsecured credit facilities replaced a then-existing credit facility and various uncommitted credit lines. The Company entered into both the bridge credit facility and the new senior unsecured credit facilities to finance the Unilin Acquisition and to provide for working capital requirements.

      The senior multi-currency unsecured credit facility consistsconsist of (i) a $750multi-currency $750.0 million revolving credit facility, which matures on October 28, 2010, (ii) a $389.2 million term loan facility, which was repaid in 2006, and (iii) a Euro 300300.0 million term loan facility, allwhich was repaid in 2008. During the third quarter of which mature on October 28, 2010. Availability2008 the $750 million revolving credit facility was impacted by the bankruptcy of Lehman Brothers Holdings Inc. (“Lehman”). On December 31, 2008, the Company reduced the $750 million revolving credit facility to $650 million by eliminating the credit commitment of Lehman under the defaulting lender provision of the senior unsecured credit facilities. The Company believes the remaining banks in its revolving credit facility are stable and that the remaining availability is adequate to meet its liquidity requirements.

At December 31, 2008, the amount used under the revolving credit facility of the senior unsecured credit facilities was $171.7 million leaving a total of approximately $478.3 million available under the revolving credit facility. The amount used under the revolving credit facility is reduced by the amountcomposed of $55.3 million borrowings, $55.6 million standby letters of credit issuedguaranteeing the Company’s industrial revenue bonds and $60.8 million standby letters of credit related to various insurance contracts and foreign vendor commitments.

On November 8, 2005, one of the Company’s subsidiaries entered into a Euro 130.0 million, five-year unsecured, revolving credit facility, maturing on November 8, 2010 (the “Euro revolving credit facility”). This agreement bears interest at EURIBOR plus an indexed amount based on the Company’s senior, unsecured, long-term debt rating. The Company guaranteed the obligations of that subsidiary under thisthe Euro revolving credit facility and any of the Company’s other subsidiaries that become borrowers under the Euro revolving credit facility. At December 31, 2005,2008, the amount of these letters of credit was $78.3 million.  At the Company's election, both the creditCompany had no borrowings outstanding under this facility and a total of $183 million (USD equivalent) was available to its European operations under the newCompany’s €130 million Euro revolving credit facility.

Borrowings outstanding under the senior unsecured credit facilities bearbears interest, at the Company’s option, at (i) the greater of (x) prime rate or (y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR plus an indexed amount based on the Company'sCompany’s senior, unsecured, long-term debt rating.

      On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130 million , or approximately $156 million (based on the then prevailing exchange rate), five-year unsecured, revolving credit facility, maturing on November 8, 2010, which is referred

Index to as the Euro revolving credit facility. This revolving credit facility bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. Financial Statements

The Company guaranteed the obligations of that subsidiary under this revolving credit facility and of any of the Company's other subsidiaries that become borrowers under this credit facility. As of December 31, 2005, the Company had no borrowings outstanding under this facility.

      The Company's newCompany’s senior unsecured credit facilities and the Euro revolving credit facility both contain debt to capital ratio requirements and other customary covenants. The Company was in compliance with these covenants at December 31, 2005.2008. Under both of these credit facilities, the Company must pay an annual facility fee ranging from 0.06% to 0.25%, depending upon the Company'sCompany’s senior, unsecured long-term debt rating as determined by certain credit rating agencies.rating.

      At December 31, 2005, a total of approximately $507.9 million was available under the new senior unsecured credit facilities, and the Euro revolving credit facility, compared to $234.1 million available under both the then-existing credit facility and uncommitted credit lines at December 31, 2004. The amount used under the new senior unsecured credit facilities at December 31, 2005, was $1.1 billion. The amount used under the unsecured credit facilities is composed of $1.1 billion in borrowings, $55.6 million in letters of credit guaranteeing the Company's industrial revenue bonds and $22.7 million in standby letters of credit related to various insurance contracts and foreign vendor commitments.

      On January 17, 2006, the Company issued $500 million aggregate principal amount of 5.750% notes due 2011 and $900 million aggregate principal amount of 6.125% notes due 2016. The net proceeds from the issuance of these notes were used to pay off the outstanding balance of the bridge credit facility and accordingly the Company reclassified the bridge credit facility as long-term debt. Interest payable on each series of notes will be increased in the event of a downgrade in the Company's debt rating determined by certain rating agencies. The maximum increase in the event of a downgrade is 2%. If the Company's debt rating subsequently improves, then the interest rates would be reduced accordingly.

The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"(“Securitization Facility”). At December 31, 2008, the Company had $47 million outstanding secured by trade receivables. The Securitization Facility allows the Company to borrow up to $350$250.0 million based on available accounts receivable. At December 31, 2005,On July 28, 2008, the Company had $40 million outstanding compared to $90 million at December 31, 2004. Theamended and restated the Securitization Facility, is secured with trade receivables. During the third quarter of 2005, the Companyreduced total availability from $350.0 million to $250.0 million due to its adequate liquidity position and extended the term until July 27, 2009.

On January 17, 2006, the Company issued $500.0 million aggregate principal amount of 5.750% notes due 2011 and $900.0 million aggregate principal amount of 6.125% notes due 2016. Interest payable on each series of the notes is subject to adjustment if either Moody’s Investors Service, Inc. or Standard & Poor’s Ratings Services, or both, downgrades the rating they have assigned to the notes. Each rating agency downgrade results in a 0.25% increase in the interest rate, subject to a maximum increase of 1% per rating agency. If later the rating of these notes improves, then the interest rates would be reduced accordingly. Each 0.25% increase in the interest rate of these notes would increase the Company’s interest expense by approximately $3.5 million per year. On November 7, 2008, Moody’s Investors Service, Inc. announced that it placed the Company’s Baa3 long term rating on review for possible downgrade. On February 25, 2009, Moody’s Investors Service, Inc. announced that it had downgraded its ratings on the Company’s senior unsecured notes to Ba1 from Baa3 and was maintaining a negative rating outlook, following the completion of its Securitization Facility until August 2006.rating review. This downgrade will increase the Company’s interest expense by approximately $3.5 million per year and could adversely affect the cost of and ability to obtain additional credit in the future. Additional downgrades in the Company’s credit rating could further increase the cost of its existing credit and adversely affect the cost of and ability to obtain additional credit in the future.

In 2002, the Company issued $400.0 million aggregate principal amount of its senior 7.2% notes due 2012.

The Company'sCompany believes that cash generated from operations in 2009 and availability under its existing revolving credit facility will be sufficient to meet its capital expenditures and working capital requirements in 2009.

The Company’s Board of Directors has authorized the repurchase of up to 15 million shares of the Company'sCompany’s outstanding common stock. For the year ended December 31, 2005, a total of approximately 186,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $14.5 million. Since the inception of the program in 1999, a total of approximately 11.411.5 million shares have been repurchased at an aggregate cost of approximately $326.1$334.7 million. All of these repurchases have been financed through the Company'sCompany’s operations and banking arrangements. The Company has not repurchased any of its shares since the third quarter of 2006.

On October 31, 2005, the Company entered into a Discounted Stock Purchase Agreement (the “DSPA”) with certain members of the Unilin management team (the “Unilin Management”). Under the terms of the DSPA, the Company will be obligated to make cash payments to the Unilin Management in the event that certain performance goals are satisfied. In each of the years in the five-year period ended December 31, 2010, the remaining members of Unilin Management can earn amounts, in the aggregate, equal to the average value of 30,671 shares of the Company’s common stock over the 20 trading day period ending on December 31 of the prior year. Any failure in a given year to reach the performance goals may be rectified, and consequently the amounts payable with respect to achieving such criteria may be made, in any of the other years. The amount of the liability is measured each period and recognized as compensation expense in the statement of operations. The Company did not recognize any expense under the DSPA for the fiscal year ended December 31, 2008.

The outstanding checks in excess of cash represent trade payables checks that have not yet cleared the bank. When the checks clear the bank, they are funded by the revolving credit facility. This policy does not impact any liquid assets on the consolidated balance sheets.

Index to Financial Statements

The following is a summary of the Company'sCompany’s future minimum payments under contractual obligations as of December 31, 20052008 (in thousands):

(1)    

As of December 31, 2008, the Company calculated interest based onhas accrued income tax liabilities for uncertain tax positions of $91.9 million, of which $51.9 million is current. These liabilities have not been presented in the applicable ratestable above due to uncertainty as to amounts and payment dates. For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect at December 31, 2005 to these balances.
(2)     Includes commitments for natural gas, foreign currency, and raw material purchases.timing regarding future payments.

Critical Accounting Policies

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America,U.S., the Company must make decisions which impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, the Company applies judgment based on its understanding and analysis of the relevant circumstances and historical experience. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared.

The Company'sCompany’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements included elsewhere in this report. Some of those significant accounting policies require the Company to make subjective or complex judgments or estimates. Critical accounting policies are defined as those that are both most important to the portrayal of a company'scompany’s financial condition and results and require management'smanagement’s most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

Index to Financial Statements

The Company believes the following accounting policies require it to use judgments and estimates in preparing its consolidated financial statements and represent critical accounting policies.

• Accounts receivable and revenue recognition. Revenues are recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and collectibilitycollectability can be reasonably assured. The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical bad debt and claims experience and periodic evaluation of specific customer accounts and the aging of accounts receivable. If the financial condition of the Company'sCompany’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

• Inventories are stated at the lower of cost or market (net realizable value). Cost ishas been determined using the last-in, first-out method (LIFO) for approximately 86% (69% of total consolidated inventory) of the inventory within the Mohawk segment, which matches current costs with current revenues, and the first-in first-out method (FIFO), which(“FIFO”). Costs included in inventory include raw materials, direct and indirect labor and employee benefits, depreciation, general manufacturing overhead and various other costs of manufacturing. Market, with respect to all inventories, is used to value inventory within both the Dal-Tile and Unilin segments and inventory not valued under the LIFO method in the Mohawk segment.replacement cost or net realizable value. Inventories on hand are compared against anticipated future usage, which is a function of historical usage, and anticipated future selling price, expected sales below cost, excessive quantities and an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete inventory, excessive inventory or inventory expected to be sold below cost and additional reserves may be required.

• Goodwill and indefinite life intangible assets are subject to annualother intangibles. Goodwill is tested annually for impairment testing.during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. The Company considers the relationship between its market capitalization and its book value, among other factors, when reviewing for indicators of impairment. The goodwill impairment tests are based on determining the fair value of the specified reporting units and indefinite life intangible assets based on management judgments and assumptions using the discounted cash flows and comparable company market valuation approaches. The Company has identified Mohawk, Dal-Tile, Unilin Flooring, Unilin Chipboard and Melamine, and Unilin Roofing as its reporting units for the purposes of allocating goodwill and intangibles as well as assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about appropriate sales growth rates, operating margins, weighted average cost of capital (“WACC”), and comparable company market multiples. When developing these key judgments and assumptions, the Company considers economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Should a significant or prolonged deterioration in economic conditions occur, such as continued declines in spending for new construction, remodeling and replacement activities; the inability to pass increases in the costs of raw materials and fuel on to customers; or a decline in comparable company market multiples, then key judgments and assumptions could be impacted. Generally, a moderate decline in estimated operating income or a small increase in WACC or a decline in market capitalization could result in an additional indication of impairment.

  The impairment test for intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Significant judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. These judgments and assumptions could materiallyare subject to the variability discussed above. The impairment evaluation for indefinite lived intangible assets, which for the Company are its trademarks, is conducted during the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that an asset might be impaired. The determination of fair value used in the impairment evaluation is based on discounted estimates of future sales projections attributable to ownership of the trademarks. Significant

  Index to Financial Statements

  judgments inherent in this analysis include assumptions about appropriate sales growth rates, royalty rates, WACC and the amount of expected future cash flows. The judgments and assumptions used in the estimate of fair value are generally consistent with past performance and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. The determination of fair value is highly sensitive to differences between estimated and actual cash flows and changes in the related discount rate used to evaluate the fair value of the specified reporting unitstrademarks. Estimated cash flows are sensitive to changes in the economy among other things.

  The Company reviews long-lived assets, including its intangible assets subject to amortization which, for the Company are its patents and customer relationships, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of long-lived assets to future undiscounted net cash flows expected to be generated by these assets. If such assets are considered to be impaired, the impairment recognized is the amount by which the carrying amount of the assets exceeds the fair value of the assets.

  The Company conducted its annual assessment of goodwill and indefinite life intangible assetslived intangibles in the fourth quarter and therefore, could materially impactno impairment was indicated. During the Company's consolidated financial statements. Intangible assets with definite lives are amortized over their useful lives. third and fourth quarters of 2008, the Company conducted interim impairment tests and recorded impairment of goodwill and other intangibles of $1,418.9 million and $124.5 million, respectively.

  The useful life of a definite-lived intangible assetCompany’s effective tax rate is based on assumptionsits income, statutory tax rates and judgments made by management at the time of acquisition. Changes in these judgments and assumptions that could include a loss of customers, a changetax planning opportunities available in the assessment of future operations or a prolonged economic downturn could materially changejurisdictions in which it operates. Tax laws are complex and subject to different interpretations by the value oftaxpayer and respective governmental taxing authorities. Significant judgment is required in determining the definite-lived intangible assetsCompany’s tax expense and therefore, could materially impactin evaluating the Company's financial statements.

• Company’s tax positions. Deferred tax assets and liabilities are recognized for the future tax consequences attributablerepresent amounts available to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply toreduce income taxes payable on taxable income in a future period. The Company evaluates the years in whichrecoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, are expectedforecasted operating earnings and available tax planning strategies. These sources of income inherently rely on estimates, including business forecasts and other projections of financial results over an extended period of time. In the event that the Company does not expect to be recoveredrealize all or settled. The effect ona portion of its deferred tax assets and liabilities of a change in the tax ratesfuture, a valuation allowance is recognized in earningsprovided. The Company would recognize such amounts through a charge to income in the period in which that includesdetermination is made or when tax law changes are enacted.

  In the enactment date. Additionally, taxing jurisdictions could retroactively disagree withordinary course of business there is inherent uncertainty in quantifying the Company's tax treatment of certain items, and some historical transactions haveCompany’s income tax effects going forward.positions. The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon the Company’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the Company has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information, as required by the provisions of the Financial Accounting rules require these future effects toStandards Board (“FASB”) Interpretation No. 48,“Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109.”For those income tax positions where it is not more likely than not that a tax benefit will be evaluated using current laws, rules and regulations, each of which can change at any time andsustained, no tax benefit has been recognized in an unpredictable manner.the consolidated financial statements.

• Environmental and legal accruals are estimates based on judgments made by the Company relating to ongoing environmental and legal proceedings, as disclosed in the Company'sCompany’s consolidated financial statements. In determining whether a liability is probable and reasonably estimable, the Company consults with its internal experts. The Company believes that the amounts recorded in the accompanying financial statements are based on the best estimates and judgments available to it.

Index to Financial Statements

Recent Accounting Pronouncements

In December 2004,September 2006, the FASB issued FASB Staff Position 109-1, ApplicationStatement of FASB StatementFinancial Accounting Standards (“SFAS”) No. 109, "Accounting for Income Taxes" ("157,“Fair Value Measurements” (“SFAS No. 109") to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act"), enacted October 22, 2004, provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is effective prospectively as of January 1, 2005. The adoption of FSP 109-1 did not have a significant impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The adoption of FSP 109-2 did not have a significant impact on the Company's consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"157”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting157 defines fair value, establishes a framework for abnormal amounts of idle facility expense, freight, handling costsmeasuring fair value and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company will adopt SFAS 151 effective January 1, 2006 and does not expect its adoption will have a material impact on the Company's consolidated financial statements.

      In December 2004, the FASB issuedenhanced disclosures about fair value measurements. SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued157 requires companies to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Transition may be accomplished using either the prospective or retrospective method. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25. In April 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R should be no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 after completing its evaluation.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"), which requires an entity to recognize a liability fordisclose the fair value of financial instruments according to a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47hierarchy. Additionally, companies are required to provide certain disclosures regarding instruments within the hierarchy, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. SFAS No. 157 is effective no later thanfor the endCompany’s fiscal year beginning January 1, 2008 for financial assets and liabilities and January 1, 2009 for non-financial assets and liabilities. The adoption of fiscal years ending after December 15, 2005. Effective December 31, 2005, the Company adopted FIN 47 whichSFAS No. 157 for financial assets and liabilities on January 1, 2008 did not have a material impact on the Company'sCompany’s consolidated financial statements. The Company does not expect the adoption of SFAS No. 157 for non-financial assets and liabilities to have a material impact on its consolidated financial statements, but its adoption may impact future acquisitions and impairment assessments.

In May 2005,September 2006, the FASB issued SFAS No. 154, "Accounting Changes158,“Employers’ Accounting for Defined Benefit Pension and Error Corrections-a replacementOther Post Retirement Plans-an amendment of APB OpinionFASB Statements No. 2087, 88, 106 and 132(R)” (“SFAS No. 158”). The Company adopted all provisions of SFAS No. 158 as of December 31, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The adoption of the measurement provisions of SFAS No. 158 on January 1, 2008 did not have any impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 3" ("115” (“SFAS 154"No. 159”). This Statement replaces APB OpinionSFAS No. 20, "Accounting Changes,"159 expands the use of fair value accounting but does not affect existing standards which require assets or liabilities to be carried at fair value. The objective of SFAS No. 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS No. 159, a company may elect to use fair value to measure eligible items at a specified election date and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Eligible items include, but are not limited to, accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and firm commitments. The Company adopted SFAS No. 159 effective January 1, 2008, but did not elect to adjust any of the eligible assets or liabilities to fair value. Therefore, the adoption did not have any impact on its consolidated financial statements.

In December 2007, the FASB Statementissued SFAS No. 3, "Reporting Accounting Changes141 (revised 2007),“Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in Interim Financial Statements." SFAS 154 requires retrospective application to prior periods'its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Once adopted, SFAS 141R will impact the recognition and measurement of future business combinations and certain income tax benefits recognized from prior business combinations.

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in accounting principle, unless ita parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is impracticable to determine eitherdeconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the period-specific effects or the cumulative effectinterests of the change.parent and the interests of the noncontrolling owners. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154No. 160 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.2008. The impactadoption of this standard if any, will depend uponis not expected to have a material impact on the Company’s consolidated financial statements.

Index to Financial Statements

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. The provisions of SFAS No. 161 are effective for the first quarter of 2009. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting changes or errorsprinciples and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411,“The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

In October 2008, the FASB issued Staff Position No. 157-3“Determining Fair Value of a Financial Asset in a Market That Is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 as it relates to the valuation of financial assets in a market that may occur in future periods.is not active for those financial assets. This FSP is effective immediately and includes those periods for which financial statements have not been issued. The Company adopted SFAS 154 effective December 31, 2005.currently does not have any financial assets that are valued using inactive markets, and as such is not impacted by the issuance of FSP 157-3.

Impact of Inflation

Inflation affects the Company'sCompany’s manufacturing costs, distribution costs and operating expenses. The carpet, tile and laminate industry have experienced significant inflation in the prices of raw materials and fuel-related costs beginning in the first quarter of 2004.2004, and the prices increased dramatically during the latter part of 2008, peaking in the late third and early fourth quarters. For the period from 1999 through 2005the beginning of 2004 the carpet and tile industry experienced moderate inflation in the prices of raw materials and fuel-related costs. In the past, the Company has generally been able to pass along these price increases to its customers and has been able to enhance productivity to help offset increases in costs resulting from inflation in its operations. However, the spike in these prices during 2008 was rapid and relatively brief, which will likely limit the Company’s ability to fully recoup these added costs through price increases.

Seasonality

The Company is a calendar year-end company. With respect to its Mohawk and Dal-Tile segments, its results of operations for the first quarter tend to be the weakest. The second, third and fourth quarters typically produce higher net sales and operating income in these segments. These results are primarily due to consumer residential spending patterns for floor covering, which historically have decreased during the first two months of each year following the holiday season. The Unilin segment second and fourth quarters typically produce higher net sales and earnings followed by a moderate first quarter and a weaker third quarter. The third quarter is traditionally the weakest due to the European holiday in late summer,summer. In light of the current extraordinary economic climate, the Company believes that seasonality in 2009 may not be typical as compared to prior years as more consumers delay purchases.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Financial exposures are managed as an integral part of the Company'sCompany’s risk management program, which seeks to reduce the potentially adverse effect that the volatility of the exchange raterates and natural gas markets may have on its operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes.

Index to Financial Statements

Natural Gas Risk Management

The Company uses a combination of natural gas futures contracts and long-term supply agreements to manage unanticipated changes in natural gas prices. The contracts are based on forecasted usage of natural gas measured in Million British Thermal Units ("MMBTU"(“MMBTU”).

The Company has designated the natural gas futures contracts as cash flow hedges. The outstanding contracts are valued at market with the offset applied to other comprehensive income, net of applicable income taxes and any hedge ineffectiveness.

Any gain or loss is reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. At December 31, 2005,2008, the Company had natural gas contracts that mature from January 20062009 to October 2006December 2009 with an aggregate notional amount of approximately 660,000 MMBTU's. The fair value of these contracts was an asset of $1.9 million. At December 31, 2004, the Company had natural gas contracts that matured from January 2005 to March 2005 with an aggregate notional amount of approximately 1 million MMBTU's.2,650 thousand MMBTU’s. The fair value of these contracts was a liability of $1.3 million.$5.9 million at December 31, 2008. At December 31, 2007, the Company had natural gas contracts that mature from January 2008 to March 2008 with an aggregate notional amount of approximately 310 thousand MMBTU’s. The fair value of these contracts was a liability of $0.3 million at December 31, 2007. The offset to these assetsliabilities is recorded in other comprehensive income, net of applicable income taxes. The ineffective portion of the derivative is recognized directly in the cost of goods sold within the consolidated statements of earningsoperations and was not significant for the periods reported. The amount that the Company anticipates will be reclassified out of accumulated other comprehensive income (loss) in the next twelve months is a gainloss of approximately $1.9 million.$3.8 million, net of taxes.

The Company'sCompany’s natural gas long-term supply agreements are accounted for under the normal purchasespurchase provision within SFAS No. 133 and its amendments. At December 31, 2005,2008, the Company had normal purchase commitments of approximately 1.8 million MMBTU's2,026 thousand MMBTU’s for periods maturing from January 20062009 through October 2006.December 2009. The contracted value of these commitments was approximately $17.2 million and the fair value of these commitments was approximately $20.5 million, at December 31, 2005.2008. At December 31, 2004,2007, the Company had normal purchase commitments of approximately 1.9 million MMBTU's303 thousand MMBTU’s for periods maturing from January 20052008 through March 2006.2008. The contracted value of these commitments was approximately $9.9 million and the fair value of these commitments was approximately $11.9$2.8 million at December 31, 2004.2007.

Foreign Currency Rate Management

The Company enters into foreign exchange forward contracts to hedge foreign denominated costs associated with its operations in Mexico. The objective of these transactions is to reduce volatility of exchange rates where these operations are located by fixing a portion of their costs in U.S. currency. Accordingly, these contracts have been designated as cash flow hedges. Gains and losses are reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. The Company had forward contracts to purchase approximately 8269.1 million Mexican pesos at December 31, 2005.2008. The aggregate U.S. dollar value of these contracts at December 31, 20052008 was approximately $0.7$23.9 million and the fair value of these contracts was a liability of approximately $5.2 million. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses for the year ended December 31, 2005 were not significant. The Company had no forward contracts outstandingto purchase approximately 244.0 million Mexican pesos at December 31, 2004.

2007. The Company also had forward exchangeaggregate U.S. dollar value of these contracts to sell the British Pound and Canadian Dollar for a notional amount of $5.6 million at December 31, 2005. The contracts do not qualify for hedge accounting2007 was approximately $21.8 million and are marked to market in other expenses at the end of each reporting period. The change in fair value is recorded in other expense and theof these contracts do not qualify for hedge accounting. The impactwas an asset of the change in fair value on the statements of operations was not significant for the period ended December 31, 2005.approximately $0.2 million.

Index to Financial Statements

Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS