10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

[X]	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the quarterly period ended   March 27, 2004
	or
[   ]	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the transition period from ____________________  to  ____________________

Commission File Number:      0-2585     

THE DIXIE GROUP, INC.

(Exact name of registrant as specified in its charter)

Tennessee	62-0183370
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
345-B Nowlin Lane Chattanooga, TN	37421
(Address of principal executive offices)	(Zip code)

(423) 510-7010

(Registrant's telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [  ] No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

[   ] Yes [X] No

The number of shares outstanding of each of the issuer's classes of Common Stock as of the latest practicable date.

Class	Outstanding as of April 30, 2004
Common Stock, $3 Par Value Class B Common Stock, $3 Par Value Class C Common Stock, $3 Par Value	11,472,741 shares 636,230 shares 0 shares

THE DIXIE GROUP, INC.
INDEX TO QUARTERLY FINANCIAL REPORT
Table of Contents

PART I. FINANCIAL INFORMATION		Page
Item 1 -- Financial Statements
	Consolidated Condensed Balance Sheets - March 27, 2004 and December 27, 2003	3 - 4
	Consolidated Condensed Statements of Operations - Three Months Ended March 27, 2004 and March 29, 2003	5
	Consolidated Condensed Statements of Cash Flows - Three Months Ended March 27, 2004 and March 29, 2003	6
	Consolidated Condensed Statement of Stockholders' Equity - Three Months Ended March 27, 2004	7
	Notes to Consolidated Condensed Financial Statements	8 - 15
Item 2 -- Management's Discussion and Analysis of Results of Operations and Financial    Condition		16 - 19
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk		20
Item 4 -- Controls and Procedures		20
PART II. -- OTHER INFORMATION
	Item 1 -- Legal Proceedings	21
	Item 2 -- Changes in Securities, Use of Proceeds and Issuer Purchases of    Company Securities
	Item 3 -- Defaults Upon Senior Securities
	Item 4 -- Submission of Matters to a Vote of Security Holders
	Item 5 -- Other Information
	Item 6 -- Exhibits and Reports on Form 8-K
	Signatures	23

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (dollars in thousands)
				(Unaudited)
				March 27,  2004		December 27, 2003
ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	3,402	$	11,058
	Accounts receivable (less allowance for doubtful
		accounts of $1,444 for 2004 and $1,309 for 2003)		31,238		26,197
	Inventories			56,525		50,772
	Assets held for sale			---		5,593
	Other			17,660		17,146
		TOTAL CURRENT ASSETS		108,825		110,766
PROPERTY, PLANT AND EQUIPMENT
	Land and improvements			1,047		1,047
	Buildings and improvements			23,750		23,750
	Machinery and equipment			83,022		79,688
				107,819		104,485
	Less accumulated amortization and depreciation			(52,560)		(51,858)
		NET PROPERTY, PLANT AND EQUIPMENT		55,259		52,627
GOODWILL				52,598		52,598
INVESTMENT IN AFFILIATE				11,722		11,949
OTHER ASSETS				11,108		11,014
TOTAL ASSETS			$	239,512	$	238,954
See accompanying notes to the consolidated condensed financial statements.

THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (dollars in thousands)
				(Unaudited)
				March 27,  2004		December 27, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
	Accounts payable		$	22,140	$	11,368
	Accrued expenses			20,207		36,010
	Current portion of long-term debt			8,914		13,670
		TOTAL CURRENT LIABILITIES		51,261		61,048
LONG-TERM DEBT
	Senior indebtedness			29,525		22,174
	Capital lease obligations			6,810		5,837
	Convertible subordinated debentures			27,237		27,237
		TOTAL LONG-TERM DEBT		63,572		55,248
OTHER LIABILITIES				14,184		15,056
DEFERRED INCOME TAXES				11,695		11,521
STOCKHOLDERS' EQUITY
	Common Stock ($3 par value per share): Authorized
		80,000,000 shares, issued - 14,823,951 shares
		for 2004 and 14,509,617 shares for 2003		44,472		43,529
	Class B Common Stock ($3 par value per share):
		Authorized 16,000,000 shares, issued - 636,230
		shares for 2004 and 795,970 shares for 2003		1,909		2,388
	Common Stock subscribed - 104,653 shares for
		2004 and 127,694 shares for 2003		314		383
	Additional paid-in capital			131,126		130,862
	Stock subscriptions receivable			(929)		(1,131)
	Unearned stock compensation			(47)		(54)
	Accumulated deficit			(22,140)		(23,857)
	Accumulated other comprehensive loss			(1,861)		(1,995)
				152,844		150,125
	Less Common Stock in treasury at cost - 3,395,390
		shares for 2004 and 2003		(54,044)		(54,044)
		TOTAL STOCKHOLDERS' EQUITY		98,800		96,081
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	239,512	$	238,954
See accompanying notes to the consolidated condensed financial statements.

THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (dollars in thousands, except per share data)
							Three Months Ended
									March 27, 2004			March 29, 2003
NET SALES							$		64,404		$	51,885
		Cost of sales							42,882			33,756
GROSS PROFIT									21,522			18,129
		Selling and administrative expenses							17,586			15,232
		Other (income) expenses - net							(736)			(93)
INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST AND TAXES									4,672			2,990
		Interest expense							1,494			1,575
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES									3,178			1,415
		Income tax provision							1,202			538
INCOME FROM CONTINUING OPERATIONS									1,976			877
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX									(338)			(1,213)
INCOME ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF TAX									79			---
NET INCOME (LOSS)							$		1,717		$	(336)
BASIC EARNINGS (LOSS) PER SHARE:
		Continuing operations					$		0.16		$	0.07
		Discontinued operations							(0.03)			(0.10)
		Disposal of discontinued operations							0.01			---
		Net income (loss)					$		0.14		$	(0.03)
WEIGHTED-AVERAGE SHARES OUTSTANDING									11,960			11,749
DILUTED EARNINGS (LOSS) PER SHARE:
		Continuing operations					$		0.16		$	0.07
		Discontinued operations							(0.03)			(0.10)
		Disposal of discontinued operations							0.01			---
		Net income (loss)					$		0.14		$	(0.03)
WEIGHTED-AVERAGE SHARES OUTSTANDING									12,421			11,750
DIVIDENDS PER SHARE:
		Common Stock							---			---
		Class B Common Stock							---			---
See accompanying notes to the consolidated condensed financial statements.
THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands)
						Three Months Ended
								March 27, 2004				March 29, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
	Income from continuing operations					$		1,976		$		877
	Loss from discontinued operations							(338)				(1,213)
	Income on disposal of discontinued operations							79				---
	Net income (loss)							1,717				(336)
	Adjustments to reconcile net income (loss) to net
			cash used in operating activities:
				Depreciation and amortization -
					Continuing operations			2,182				2,336
					Discontinued operations			---				2,998
				Provision for deferred income taxes				563				1,409
				Net gain on property, plant and equipment disposals				(127)				(67)
				Changes in operating assets and liabilities:
					Accounts receivable			(5,041)				(6,360)
					Inventories			(5,753)				(15,794)
					Accounts payable and accrued expenses			8,550				13,993
					Accrued income taxes related to sale of business			(10,230)				---
					Accrued purchase price consideration related to sale of business			(3,351)				---
					Other operating assets and liabilities			(2,494)				(5,953)
NET CASH USED IN OPERATING ACTIVITIES								(13,984)				(7,774)
CASH FLOWS FROM INVESTING ACTIVITIES
	Net proceeds from sales of property, plant and equipment							6,424				54
	Purchase of property, plant and equipment -
			Continuing operations					(4,686)				(557)
			Discontinued operations					---				(389)
	Investment in affiliate							161				1,640
	Additional cash paid in business combination							---				(50,266)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES								1,899				(49,518)
CASH FLOWS FROM FINANCING ACTIVITIES
	Net borrowings on credit facility							8,830				18,365
	Borrowings on term loan							---				4,551
	Payments on term loan							(6,479)				(1,461)
	Borrowings under capitalized leases							1,579				---
	Payments on capitalized leases							(362)				(5)
	Senior notes issued							---				37,000
	Payments on subordinated indebtedness							---				(2,381)
	Common stock issued under stock option plans							861				---
	Other							---				(182)
NET CASH PROVIDED BY FINANCING ACTIVITIES								4,429				55,887
DECREASE IN CASH AND CASH EQUIVALENTS								(7,656)				(1,405)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD								11,058				2,440
CASH AND CASH EQUIVALENTS AT END OF PERIOD						$		3,402		$		1,035
Interest paid						$		852		$		3,764
Income taxes paid, net of tax refunds received								10,349				1,736
See accompanying notes to the consolidated condensed financial statements.

THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)

		Common Stock and Class B Common Stock		Common Stock Subscribed		Additional Paid-In Capital		Other		Retained Earnings (Deficit)		Accumulated Other Comprehensive Loss		Common Stock in Treasury		Total Stockholders' Equity
Balance at December 27, 2003	$	45,917	$	383	$	130,862	$	(1,185)	$	(23,857)	$	(1,995)	$	(54,044)	$	96,081
Stock subscriptions settled - 23,041 shares		19		(69)		(152)		202								---
Common Stock sold under stock option plan -148,226 shares		445				416										861
Amortization of restricted stock grants								7								7
Other comprehensive income												134				134
Net income for the year										1,717						1,717
Balance at March 27, 2004	$	46,381	$	314	$	131,126	$	(976)	$	(22,140)	$	(1,861)	$	(54,044)	$	98,800
See accompanying notes to the consolidated condensed financial statements.

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)

NOTE A - BASIS OF PRESENTATION

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements, which do not include all the information and footnotes required by such principles for complete annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 2003 annual report filed on Form 10-K with the Securities and Exchange Commission, which includes consolidated financial statements for the fiscal year ended December 27, 2003. Operating results for the three-month period ended March 27, 2004 are not necessarily indicative of the results that may be expected for the entire 2004 year.

The financial statements separately report discontinued operations and the results of continuing operations (See Note F). Disclosures included herein pertain to the Company's continuing operations unless noted otherwise.

Certain prior period financial statement balances have been restated to conform to the current period's presentation.

NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. FIN 46 is effective for variable interest entities created after January 31, 2003 and to any variable interest entities in which the Company obtains an interest after that date. In December 2003, the FASB issued modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective dates based on the nature as well as the creation date of the variable interest entities ("VIE's"). VIE's created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied by the first quarter of 2004. VIE' s created after January 1, 2004 must be accounted for under the Revised Interpretations. Non-Special Purpose Entities created prior to February 1, 2003, should be accounted for under the Revised Interpretation's provisions by the first quarter of fiscal 2004. The provisions of FIN 46 were effective for the Company during the first quarter of 2004 and did not have a material impact on its financial statements.

The Company has a 50% interest in the ownership, profits and losses of Chroma Systems Partners, which operates a carpet dyeing and finishing plant. The Company accounts for the partnership under the equity method of accounting. The Company's maximum exposure to loss as a result of its involvement with the partnership is limited to its initial investment in the partnership and its undistributed share of the partnership's earnings.

NOTE C - STOCK COMPENSATION

The following pro forma summary presents the Company's net income (loss) and earnings (loss) per share which would have been reported had the Company determined stock compensation cost using the alternative fair value method of accounting set forth under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". The pro forma impact on net income (loss) shown below may not be representative of future effects.

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)
CONTINUED

	Three Months Ended
		March 27, 2004		March 29, 2003
Net income (loss), as reported	$	1,717	$	(336)
Stock compensation expense, net of taxes		(40)		(41)
Adjusted net income (loss)	$	1,677	$	(377)
Basic earnings (loss) per share, as reported		0.16		(0.03)
Stock compensation expense, net of taxes		---		---
Adjusted basic earnings (loss) per share	$	0.16	$	(0.03)
Diluted earnings (loss) per share, as reported		0.16		(0.03)
Stock compensation expense, net of taxes		---		---
Adjusted diluted earnings (loss) per share	$	0.16	$	(0.03)

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions:

	Three Months Ended
	March 27, 2004	March 29, 2003
Expected life	5 years	5 years
Expected volatility	63.40%	54.00%
Risk-free interest rate	3.07%	3.02%
Dividend yield	0.00%	0.00%

NOTE D - RECEIVABLES
Receivables are summarized as follows:

		March 27, 2004		December 27, 2003
Customers, trade	$	30,045	$	26,361
Other		2,637		1,145
		32,682		27,506
Less allowance for doubtful accounts		1,444		1,309
Net receivables	$	31,238	$	26,197

The Company had notes receivables in the amount of $3,364 and $3,381 at March 27, 2004 and December 27, 2003, respectively.
NOTE E - INVENTORIES
Inventories are stated at the lower of cost or market. The last-in, first-out (LIFO) cost method was used to determine cost for substantially all inventories at March 27, 2004 and December 27, 2003:

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)
CONTINUED

Inventories are summarized as follows:

		March 27, 2004		December 27, 2003
Raw materials	$	17,841	$	14,266
Work-in-process		13,342		9,373
Finished goods		26,464		29,448
Supplies, repair parts and other		452		456
LIFO reserve		(1,574)		(2,771)
Total inventories	$	56,525	$	50,772

During the quarter ended March 27, 2004, certain inventories in the Company's carpet yarn LIFO inventory pool were permanently reduced which resulted in a LIFO tier liquidation, the effect of which reduced cost of sales by approximately $1,000.

NOTE F - DISCONTINUED OPERATIONS

On November 12, 2003, the Company sold the businesses and assets of its factory-built housing, needlebond and carpet recycling operations. In early fiscal 2004, the Company sold a spun yarn production facility whose production was substantially directed toward the operations sold on November 12, 2003. Net proceeds from the sale of the spun yarn production facility, net of amounts to purchase leased assets and pay certain expenses of the transaction were $6,424. In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", operating results associated with the businesses sold have been classified as discontinued operations for all periods presented and the assets associated with the spun yarn production facility were classified as assets held for sale at December 27, 2003.

Interest expense in the amount of $2,247 was allocated to discontinued operations during the three-month period ended March 29, 2003 based on the relationship of net assets in discontinued operations to the total net assets of the Company.

Following is a summary of the financial information for the Company's discontinued operations:

		Three Months Ended
			March 27, 2004		March 29, 2003
Net sales		$	---	$	60,079
Loss from discontinued operations:
	Before income taxes		(546)		(1,956)
	Income tax benefit		(208)		(743)
Loss from discontinued operations, net of tax		$	(338)	$	(1,213)
Income on disposal of discontinued operations:
	Before income taxes	$	127	$	---
	Income tax provision		48		---
Income on disposal of discontinued operations, net of tax		$	79	$	---

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)
CONTINUED

Assets held for sale are as follows:

		March 27, 2004		December 27, 2003
Inventories	$	---	$	999
Property, Plant & Equipment - net		---		4,594
Assets held for sale	$	---	$	5,593

NOTE G - ACCRUED EXPENSES

Accrued expenses are summarized as follows:

		March 27, 2004		December 27, 2003
Compensation and benefits	$	8,934	$	12,511
Accrued income taxes		808		10,695
Provision for customer rebates, claims and allowances		3,591		3,881
Accrued purchase price consideration		587		3,791
Other		6,287		5,132
Total accrued expenses	$	20,207	$	36,010

NOTE H - PRODUCT WARRANTY RESERVES

The Company warrants its products generally against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded. The reserve for such warranty liabilities is based primarily on historical claims, the nature of claims and changes in the Company's warranty policies. There have been no changes in the Company's warranty policies during the periods presented.

Following is a summary of the Company's product warranty activity:

		Three Months Ended
		March 27, 2004		March 29, 2003
Reserve balance at beginning of period	$	608	$	806
Warranty liabilities accrued		406		543
Warranty liabilities settled		(407)		(551)
Changes for pre-existing warranty liabilities		16		(98)
Reserve balance at end of period	$	623	$	700

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)
CONTINUED

NOTE I - LONG-TERM DEBT AND CREDIT ARRANGEMENTS

Long-term debt consists of the following:

			March 27, 2004		December 27, 2003
Senior indebtedness
	Credit line borrowings	$	15,830	$	7,000
	Term loans		18,521		25,000
	Capital lease obligations		8,398		7,181
Total senior indebtedness			42,749		39,181
Convertible subordinated debentures			29,737		29,737
Total long-term debt			72,486		68,918
Less current portion of long-term debt			(7,326)		(12,326)
Less current portion of capital lease obligations			(1,588)		(1,344)
Total long-term debt, less current portions		$	63,572	$	55,248

On April 14, 2004, the Company amended and restated its May 12, 2002 loan and security agreement with Fleet Capital Corporation, as Agent. The amended agreement reduced interest rates and certain fees applicable to the credit facility, modified financial covenants and provides the Company with $60,000 of credit, consisting of $40,000 of revolving credit through May 11, 2007 and a $20,000 term loan. The term loan is payable in quarterly installments of $715 beginning June 1, 2004 and is due in May 2007. Interest rates available under the facility may be selected from a number of options that effectively allow for borrowing at rates ranging from the lender's prime rate to the lender's prime rate plus 1.00% for base rate loans, or at rates ranging from LIBOR plus 2.0% to LIBOR plus 3.75% for LIBOR loans. Commitment fees of 0.375% per annum are payable on the average daily unused balance of the revolving credit facility. The level of the Company's accounts receivable and inventory limits borrowing availabil ity under the revolving credit facility. The facility is secured by a first priority lien in substantially all of the Company's assets.

The credit facility contains financial covenants relating to fixed charges and debt coverage that apply if borrowings under the revolving credit facility exceed certain levels, as well as covenants that limit future acquisitions, capital expenditures, and the payment of dividends. The unused borrowing capacity under this credit facility on April 30, 2004 was approximately $22,549.

NOTE J - FINANCIAL INSTRUMENTS

The Company has market risk exposure for potential fluctuations in its variable rate long-term debt instruments. From time to time, the Company has used derivative instruments to minimize interest rate volatility. The Company is party to an interest rate swap agreement which expires March 11, 2005. Under the agreement, the Company pays a fixed rate of 3.24% times a notional amount of $70,000, and receives in return an amount equal to a specified variable rate of interest times the same notional amount.

The swap agreement was deemed highly effective as a cash flow hedge by the Company until a significant portion of the related debt was retired in 2003. At such time, the Company de-designated the swap and charged off as interest expense the portion of Accumulated Other Comprehensive Income ("AOCI") in proportion to the debt retired. Future changes in the fair value of the current swap are being marked to market through interest expense. Amounts that remained in AOCI at the time of the de-designation are being amortized against earnings as interest expense over the remaining life of the swap.

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)
CONTINUED

NOTE K - PENSION AND POSTRETIREMENT BENEFIT PLANS

The Company sponsors two defined benefit retirement plans, one that covers a limited number of the Company's active associates and another that has been frozen since 1993 as to new benefits earned under the plan. The Company intends to terminate the frozen defined benefit plan.

Costs charged to continuing operations for all pension plans are summarized as follows:

			Three Months Ended
				March 27, 2004		March 29, 2003
Components of net periodic benefit costs:
	Defined benefit retirement plans
		Service cost	$	65	$	32
		Interest cost		61		27
		Expected return on plan assets		(38)		(19)
		Recognized net actuarial loss		34		15
	Net periodic benefit cost		$	122	$	55

The Company sponsors a postretirement benefit plan (acquired as a result of an acquisition) that provides life insurance to a limited number of associates. Additionally, the Company sponsors a postretirement benefit plan that provides medical and life insurance for a limited number of associates. Benefits under this plan are no longer provided for associates that retired subsequent to January 1, 2003.

Costs charged to continuing operations for all postretirement plans are summarized as follows:

			Three Months Ended
				March 27, 2004		March 29, 2003
Components of net periodic benefit costs:
	Postretirement benefit plans
		Service cost	$	10	$	10
		Interest cost		20		19
		Amortization of prior service costs		(10)		(10)
	Net periodic benefit cost		$	20	$	19

Amounts contributed or expected to be contributed by the Company during the current fiscal year to its pension and postretirement plans are not anticipated to be significantly different from amounts disclosed in the Company's 2003 annual report filed on Form 10-K.

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)
CONTINUED

NOTE L - COMMON STOCK AND EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share from continuing operations:

		Three Months Ended
				March 27, 2004		March 29, 2003
Income from continuing operations (1)			$	1,976	$	877
Denominator for calculation of basic earnings per share - weighted-average shares (2)				11,960		11,749
Effect of dilutive securities:
	Stock options (3)			419		---
	Stock subscriptions (3)			16		---
	Restricted stock grants (3)			11		1
	Directors' stock performance units (3)			15		---
Denominator for calculation of diluted earnings per share - weighted-average shares    adjusted for potential dilution (2)(3)				12,421		11,750
Earnings per share:
	Basic		$	0.16	$	0.07
	Diluted		$	0.16	$	0.07
(1)	No adjustments needed in the numerator for diluted calculations.
(2)	Includes Common and Class B Common shares in thousands.
(3)	Because their effects are anti-dilutive, excludes shares under restricted stock plans and shares issuable under stock option and stock subscription plans, whose grant price is greater than the average market price of Common Shares outstanding at the end of the relevant period, and excludes shares issuable on conversion of subordinated debentures into shares of Common Stock. Aggregate shares excluded were 937 in 2004 and 3,094 in 2003.

NOTE M - COMPREHENSIVE INCOME

Comprehensive income (loss) is as follows:

		Three Months Ended
				March 27, 2004		March 29, 2003
Net income (loss)			$	1,717	$	(336)
Other comprehensive income:
	Unrealized gains on interest rate swap agreements, net of tax of $82    in 2004 and $146 in 2003			134		174
Comprehensive income (loss)			$	1,851	$	(162)

THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, except per share data)
CONTINUED

Components of accumulated other comprehensive loss, net of tax, are as follows:

			Minimum		Interest
			Pension		Rate
			Liability		Swap		Total
Balance at December 27, 2003		$	(1,632)	$	(363)	$	(1,995)
	Unrealized gain on interest rate swap agreement, net of tax of $38		---		62		62
	Ineffective portion of interest rate swap agreement, net of tax of $44		---		72		72
Balance at March 27, 2004		$	(1,632)	$	(229)	$	(1,861)

NOTE N - SEGMENT INFORMATION

The Company is now a single operating segment, Carpet Manufacturing. In fiscal 2003, the Company reported its operations as two segments; Carpet Manufacturing and Floorcovering Base Materials (Carpet Yarns). The Company has sold substantially all of its carpet yarn manufacturing facilities and subsequently integrated the operations of its remaining carpet yarn facility into its carpet manufacturing business. The Company measures the operations of its carpet yarn manufacturing facility as a cost center and considers it principally as a raw material source for its carpet businesses.

Item 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL                CONDITION

The following is presented to update the discussion of results of operations and financial condition included in our 2003 annual report.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies were outlined in the Management's Discussion and Analysis of Results of Operations and Financial Condition in our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Subsequent to the date of that report, there have been no changes to those critical accounting policies.

RESULTS OF OPERATIONS

In fiscal 2003, we reported our operations as two segments; Carpet Manufacturing and Floorcovering Base Materials (Carpet Yarns). We sold substantially all of our carpet yarn manufacturing facilities and subsequently integrated the operations of our remaining carpet yarn facility into our carpet manufacturing businesses. Accordingly, we are now a single operating segment, Carpet Manufacturing.

The following table sets forth certain elements of our results from continuing operations as a percentage of net sales for the periods indicated:

	Quarter Ended
	March 27, 2004	March 29, 2003
Net sales	100.0 %	100.0 %
Cost of sales	66.6 %	65.1 %
Gross profit	33.4 %	34.9 %
Selling and administrative expenses	27.3 %	29.3 %
Other (income) expense - net	(1.2)%	(0.2)%
Operating income	7.3 %	5.8 %

Net Sales. Net sales for the quarter ended March 27, 2004 were $64.4 million, an increase of 24.1% from $51.9 million for the quarter ended March 29, 2003. The improved revenue was driven by a 31% year-over-year increase in sales of residential carpet products and a 9% increase in sales of commercial carpet products. Approximately one half of the total revenue growth was the result of organic growth at Fabrica and Masland, where sales of residential carpeting improved approximately 15% and sales of Masland's commercial carpeting increased over 9%. Approximately 41% of the revenue growth was attributable to our Dixie Home brand of carpet products, which was introduced in early 2003.

Cost of Sales and Gross Profit. Cost of sales was 66.6% of sales in the quarter ended March 27, 2004 and 65.1% for the corresponding period in 2003. During the period, gross profit improved $3.4 million. Gross profit was negatively affected by significant increases in raw material, energy, medical and other costs and product mix. These cost increases were more than offset by the effect of increased sales volume, a $1.0 million reduction in cost of sales due to a LIFO inventory liquidation and better manufacturing efficiencies. The LIFO liquidation occurred because inventories in our carpet yarn inventory pool were permanently reduced during the quarter.

Selling and Administrative Expenses. Selling and administrative expenses as a percent of sales were 27.3% in the quarter ended March 27, 2004, compared with 29.3% in the quarter ended March 29, 2003. The decrease in these expenses as a percent of sales reflects the effect of the higher sales volume in the 2004 reporting periods and our efforts to control cost.

Other (Income) Expense - Net. Other (income) expense improved $0.6 million during the quarter ended March 27, 2004, compared with the comparable period in 2003 due to higher earnings from our investment in Chroma System Partners, interest earned on short-term investments and other miscellaneous items.

Interest Expense. Interest expense was $1.5 million for the quarter ended March 27, 2004 compared with $1.6 million for the quarter ended March 29, 2003. Interest expense in 2003 was allocated to continuing operations based on the relationship of the net asset value of the assets in our continuing operations to the net asset value of our total assets.

Income Tax Provision. Our effective income tax rate was 37.8% for the first three months of 2004 compared with 38.0% for the corresponding period in 2003. Changes in the effective income tax rate were principally due to the relationship of non-deductible costs to pre-tax earnings in each of these reporting periods.

Income From Continuing Operations. Income from continuing operations was $2.0 million, or $0.16 per diluted share, for the quarter ended March 27, 2004, compared with $0.9 million, or $0.07 per diluted share, for the quarter ended March 29, 2003.

Net Income (Loss). Including the effect of discontinued operations, net income for the quarter ended March 27, 2004 was $1.7 million, or $0.14 per diluted share, compared with a net loss of $0.3 million, or $(0.03) per diluted share, for the quarter ended March 29, 2003.

LIQUIDITY AND CAPITAL RESOURCESDuring the three-month period ended March 27, 2004, we generated $6.4 million of proceeds from sales of property, plant and equipment, utilized $7.7 million of cash held in short-term investments and increased net borrowings by $3.6 million. These funds were used to finance our operations, including $10.2 million of funds used to pay income taxes and a $4.0 million purchase price adjustment related to businesses sold in fiscal 2003, and for capital expenditures.
Capital expenditures for the three-month period ended March 27, 2004 were $4.7 million while depreciation and amortization was $2.2 million. We expect capital expenditures to be approximately $12.0 million for the fiscal year 2004 while depreciation and amortization is expected to be approximately $8.0 million in the same period.
The Fabrica asset purchase agreement provides for an additional contingent amount of up to $2.5 million to be paid in April 2005 if Fabrica's cumulative earnings before interest and taxes for the five-year period beginning January 2000 exceed certain levels. Any contingent payments that may become due under the cumulative earnings test would be treated as additional costs of the acquisition.

On April 14, 2004, we amended and restated our May 12, 2002 loan and security agreement with Fleet Capital Corporation, as Agent. The amended agreement reduced interest rates and certain fees applicable to the credit facility, modified financial covenants and provides us with $60.0 million of credit, consisting of $40.0 million of revolving credit through May 11, 2007and a $20.0 million term loan. The term loan is payable in quarterly installments of $715,000 beginning June 1, 2004 and is due in May 2007. Interest rates available under the facility may be selected from a number of options that effectively allow for borrowing at rates ranging from the lender's prime rate to the lender's prime rate plus 1.00% for base rate loans, or at rates ranging from LIBOR plus 2.0% to LIBOR plus 3.75% for LIBOR loans. Commitment fees of 0.375% per annum are payable on the average daily unused balance of the revolving credit facility. The level of our accounts receivable and inventory limits borrowing availability und er the revolving credit facility. The facility is secured by a first priority lien in substantially all of our assets.

The credit facility contains financial covenants relating to fixed charges and debt coverage if borrowings under the revolving credit facility exceed certain levels, as well as covenants that limit future acquisitions, capital expenditures, and the payment of dividends. The unused borrowing capacity under this credit facility on April 30, 2004 was approximately $22.5 million. We believe our operating cash flows and credit availability under the amended senior credit facility are adequate to finance our anticipated liquidity requirements.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN 46 requires the consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. FIN 46 is effective for variable interest entities created after January 31, 2003 and to any variable interest entities in which the Company obtains an interest after that date. In December 2003, the FASB issued modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective dates based on the nature as well as the creation date of the variable interest entities ("VIE's"). VIE's created after January 31, 2003, but prior to January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied by the first quarter of 2004. VIE's c reated after January 1, 2004 must be accounted for under the Revised Interpretations. Non-Special Purpose Entities created prior to February 1, 2003, should be accounted for under the Revised Interpretation's provisions by the first quarter of fiscal 2004. The provisions of FIN 46 were effective for the first quarter of 2004 and did not have a material impact on our financial statements.

CERTAIN FACTORS AFFECTING THE COMPANY'S PERFORMANCE

In addition to the other information provided in this Report, the following risk factors should be considered when evaluating results of our operations, future prospects and an investment in shares of our Common Stock. Any of these factors could cause our actual financial results during any period to differ materially from our historical results, and could give rise to events that might have a material adverse effect on our business, financial condition and results of operations.

The floorcovering industry is cyclical and prolonged declines in residential or commercial construction activity, or corporate remodeling and refurbishment could have a material adverse effect on our business.

The U.S. floorcovering industry is cyclical and is influenced by a number of general economic factors. The floorcovering industry in general is dependent on residential and commercial construction activity, including new construction as well as remodeling. New construction activity is cyclical in nature. To a somewhat lesser degree, this also is true with residential and commercial remodeling. A prolonged decline in construction activity or any of these industries could have a material adverse effect on our business, financial condition and results of operations. The level of activity in these industries is significantly affected by numerous factors, all of which are beyond our control, including:

· consumer confidence;
· housing demand;
· financing availability;
· national and local economic conditions;
· interest rates;
· employment levels;
· changes in disposable income;
· commercial rental vacancy rates; and
· federal and state income tax policies.

We face intense competition in our industry, which could decrease demand for our products and could have a material adverse effect on our profitability.

The floorcovering industry is highly competitive. We face competition from a number of domestic manufacturers and independent distributors of floorcovering products and, in certain product areas, foreign manufacturers. There has been a significant consolidation within the floorcovering industry during recent years that has caused a number of our existing and potential competitors to be larger and have greater resources and access to capital than we do. Maintaining our competitive position may require us to make substantial investments in our product development efforts, manufacturing facilities, distribution network and sales and marketing activities, which may be limited by restrictions set forth in our credit facilities. Competitive pressures may also result in decreased demand for our products and in the loss of market share. In addition, we face, and will continue to face, pressure on sales prices of our products from competitors. As a result of any of these factors, there could be a materi al adverse effect on our sales and profitability.

Raw material prices may increase.
The cost of raw materials has a significant impact on our profitability. In particular our business requires the purchase of large volumes of nylon filament yarn, synthetic backing, wool yarn, latex, dyes, and other raw materials. Increases in the cost of these raw materials could materially adversely affect our business, results of operations and financial condition if we are unable to pass these increases through to our customers.
Unanticipated termination or interruption of our arrangements with third-party suppliers of nylon yarn could have a material adverse effect on us.

Nylon yarn is the principal raw material used in our floorcovering products. The unanticipated termination or interruption of our supply arrangements could have a material adverse effect on us.
We may be responsible for environmental cleanup costs.
Various federal, state and local environmental laws govern the use of our facilities. These laws govern such matters as:

• Discharges to air and water;
• Handling and disposal of solid and hazardous substances and waste; and
• Remediation of contamination from releases of hazardous substances in our facilities and off-site disposal locations.

Our operations also are governed by laws relating to workplace safety and worker health, which, among other things, establish noise standards and regulate the use of hazardous materials and chemicals in the workplace. We have taken and will continue to take steps to comply with these laws. If we fail to comply with present or future environmental or safety regulations, we could be subject to future liabilities. However, we cannot ensure that complying with these environmental or health and safety laws and requirements will not adversely affect our business, results of operations and financial condition. Future laws, ordinances or regulations could give rise to additional compliance or remediation costs, which could have a material adverse effect on our business, results of operations and financial condition.
Acts of Terrorism.Our business could be materially adversely affected as a result of international conflicts or acts of terrorism. Terrorist acts or acts of war may cause damage or disruption to our facilities, employees, customers, suppliers, and distributors, which could have a material adverse effect on our business, results of operations or financial condition. Such conflicts also may cause damage or disruption to transportation and communication systems and to our ability to manage logistics in such an environment, including receipt of supplies and distribution of products.
FORWARD-LOOKING INFORMATION
This Report contains statements that may be considered 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. These statements include the use of terms or phrases that include such terms as "expects," "estimated," "projects," "believes," "anticipates," "intends," and similar terms and phrases. Such terms or phrases relate to, among other matters, our future financial performance, business prospects, growth strategies or liquidity. The following important factors may affect our future results and could cause those results to differ materially from our historical results. These risks include, in addition to those detailed above under the heading "Certain Factors Affecting the Company's Performance", the cost and availability of capital and raw materials, transportation costs related to petroleum price levels, the cost and availability of energy supplies, the l oss of a significant customer or group of customers, materially adverse changes in economic conditions generally in carpet, rug and floorcovering markets we serve and other risks detailed from time to time in our filings with the Securities and Exchange Commission.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk (dollars in thousands)
As of March 27, 2004, the Company had an interest rate swap agreement with a notional amount of $70,000 which expires on March 11, 2005. Under the agreement, the Company pays a fixed rate of 3.24% times the notional amount, and receives in return an amount equal to a specified variable rate of interest times the same notional amount. Any rate differential realized is recognized as an adjustment to interest expense during the life of the swap agreement. Based upon the Company's $70,000 interest rate swap agreement, a 10% fluctuation in the variable rate would result in an annual after-tax economic impact of approximately $47.

Item 4 - Controls and Procedures

As of March 27, 2004, our management, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management concluded that disclosure controls and procedures were effective. Further, no change in our internal control over financial reporting occurred during the quarter covered by this report that materially affected, or is reasonably likely to affect, our internal control over financial reporting.

PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
	None.
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Company Securities
	On February 23, 2004, one participant in the Company's Stock Ownership Plan settled his outstanding subscriptions under such plan covering a total of 20,000 shares, with an aggregate subscription price of $177,500.00, through the surrender to the Company of 14,489 shares of Common Stock, valued at the market price of $12.25 per share, and payment of $9.75 cash (resulting in the net delivery of 5,511 new shares of unregistered Common Stock). Additionally, on February 24, 2004, one participant in the Company's Core Leadership Team Stock Ownership Plan settled his outstanding subscriptions under such plan covering a total of 3,041 shares, with an aggregate subscription price of $24,993.37, through the surrender to the Company of 2,184 shares of Common Stock, valued at the market price of $11.44 per share, and payment of $8.41 cash (resulting in the net delivery of 1,399 new shares of registered Common Stock and 1,642 new shares of unregistered Class B Common Stock). We believe tha t each issuance of unregistered securities was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof because each such issuance did not involve a public offering or sale. No underwriters, brokers or finders were involved in these transactions.
	Effective as of February 20, 2004 the Company issued 125,139 shares of Common Stock to one holder of the Company's Class B Common Stock, upon such holder's election to convert Class B Common Stock pursuant to the one-for-one conversion ratio of the of Class B Common Stock. Effective as of March 9, 2004, the Company issued an aggregate of 36,000 shares of Common Stock to two additional holders of the Company's Class B Common Stock, upon such holders' election to convert Class B Common Stock pursuant to the one-for-one conversion ratio of the of Class B Common Stock. Each such issuance of shares of Common Stock upon conversion was made pursuant to an exemption from registration contained in Section 3(a)(9) of the Securities Act.
Item 3 - Defaults Upon Senior Securities
	None.
Item 4 - Submission of Matters to a Vote of Security Holders
	None.
Item 5 - Other Information
	None.
Item 6 - Exhibits and Reports on Form 8-K
	(a)	Exhibits
		(i)	Exhibits Incorporated by Reference
			4.12 Seventh Amendment to Loan and Security Agreement dated January 22, 2004.
			4.13 Amended and Restated Loan and Security Agreement dated April 14, 2004.
		(ii)	Exhibits Filed with this Report
			10.31 Employment Agreement between Fabrica International (a wholly-owned subsidiary of The Dixie Group, Inc.) and Royce R. Renfroe dated July 1, 2000.
			31.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
			31.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
			32.1 CEO Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
			32.2 CFO Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	(b)	Reports on Form 8-K
		(i)	A Current Report on Form 8-K dated December 29, 2003 was filed to report the issuance of a press release dated December 29, 2003, announcing the completion of the sale of the Company's Ringgold, Georgia spun carpet yarn production facility.
			A Current Report on Form 8-K dated February 17, 2004 was filed to report the issuance of a press release dated February 17, 2004, announcing the Company's results for the quarter and year ended December 27, 2003.
			A Current Report on Form 8-K dated February 20, 2004 was filed to report the execution of a sale plan under SEC rule 10b5-1 of the Securities and Exchange Act of 1934 regarding shares of the Company's Stock held by the estate of Rowena K. Frierson.

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE DIXIE GROUP, INC.
	(Registrant)
Date: May 11, 2004	By: /s/ GARY A. HARMON
	Gary A. Harmon Vice President and Chief Financial Officer
Date: May 11, 2004	By: /s/ D. EUGENE LASATER
	D. Eugene Lasater Controller

EX-10

EXHIBIT 10.31

EMPLOYMENT AGREEMENT

ROYCE R. RENFROE

THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of the 1st day of July, 2000, is by and between FABRICA INTERNATIONAL, a California corporation ("Fabrica"), and ROYCE R. RENFROE ("Employee").

W I T N E S S E T H:

WHEREAS, Fabrica has determined that it is in its best interest that Fabrica retain the services of Employee as President of Fabrica; and

WHEREAS, Employee has agreed that upon the execution of this Agreement by the parties hereto, he shall assume the responsibilities of President of Fabrica, subject to the terms and conditions contained herein.

NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

1. Definitions. Capitalized terms used herein shall have the meanings ascribed to them in that certain Stock Purchase Agreement dated as of June 30, 2000 by and among The Dixie Group, Inc. ("Dixie"), Scott D. Guenther and the Albert A. Frink and Denise Frink Charitable Remainder Unitrust and the Albert A. Frink Loving Trust (the "Stock Purchase Agreement").

2. Term. Subject to the terms and provisions of this Agreement, Fabrica hereby agrees to employ Employee, and Employee hereby agrees to become employed by Fabrica for a period of five (5) years, commencing on July 1, 2000 (the "Commencement Date") and ending on June 30, 2005 (the "Term"). Notwithstanding the foregoing sentence, this Agreement shall be subject to earlier termination, but only as set forth in Sections 4 and 5 below.

3. Terms of Employment.

(a) Position and Duties.

(i) During the Term, Employee shall be employed as President of Fabrica with the authority, duties and responsibilities customarily assigned to presidents of similarly situated companies, together with such other reasonable duties and responsibilities in connection therewith as may be assigned from time to time by the Board of Directors of Fabrica. Fabrica agrees that Employee shall perform his duties principally within the City of Santa Ana, California; provided, however, that Fabrica may require Employee to perform his duties under this Agreement principally from a location not farther than fifty (50) miles from the city limits of Santa Ana, California in the event Fabrica's business operations are moved from their present premises (1) due to any taking under the power of eminent domain or to a sale of those premises under the threat of the exercise of said power, or (2) due to force majeure.

(ii) During the Term, Employee agrees that he will devote substantially all of his business attention and time to the business and affairs of Fabrica and perform his duties hereunder to the best of his ability and in a diligent and proper manner and that he will not, during the Term, actively or inactively, directly or indirectly, (A) take any action that would directly or indirectly promote any competitor of Fabrica or any competitor of The Dixie Group, Inc. ("Dixie") or injure Fabrica's or Dixie's business (it being understood that Employee's enforcement of his rights under this Agreement shall not be considered as action that is injurious to Fabrica's or Dixie's business), or (B) enter into the employment of or render services to or hold any other investment or other interest in or otherwise become associated with any other person, business, partnership, association, corporation or other entity without Fabrica's prior written consent, except as follows:

1. Employee shall have the right to make investments in public companies (such investments not to exceed 4.9% of the issued and outstanding capital stock of any one such public company);

2. Employee shall have the right to make passive investments in non-public companies that are not competitors of Dixie or Fabrica so long as Employee discloses such investments to Dixie or Fabrica when so requested;

3. Employee shall have the right to serve as a member of the Management Committee of Chroma Systems Partners, a California general partnership, if selected by Choma Technologies, Inc., a California corporation, to serve in that capacity.

(b) Compensation and Benefits.

(i) Base Salary. During the Term, Employee shall be paid a base salary of two hundred thousand dollars ($200,000.00) per year ("Annual Base Salary"), installments of which shall be paid at least as frequently as monthly until such time as Annual Base Salary may be increased (but not decreased) in accordance with the desires of the Board of Directors of Fabrica.

(ii) Annual Bonus. In addition to the Annual Base Salary, Employee shall be eligible to receive a bonus in an amount up to seventy five percent (75%) of his Annual Base Salary as determined on an annual basis based upon certain specified performance criteria. All such bonuses shall be paid in accordance with the terms of Dixie's 2000 Leadership and Performance Incentive Award Plan ("Annual Bonus").

(iii) Stock Options; Stock Purchase Rights. Employee is hereby granted stock options pursuant to the terms of Dixie's Stock Incentive Plan for 30,000 shares of Common Stock, $3.00 par value per share, of Dixie ("Dixie Common Stock"), exercisable at the closing market price of Dixie Common Stock on June 30, 2000 (the "Closing Price"). In addition, Employee is hereby granted the right to subscribe for the purchase of shares of Dixie Common Stock having an aggregate market value of four hundred thousand dollars ($400,000.00) based on the Closing Price under the applicable officers' stock ownership plan.

(iv) Employee Benefits. In addition to Annual Base Salary, Annual Bonus and stock option and stock purchase rights as hereinabove provided, Employee shall be entitled to such employee health, hospitalization, retirement, disability, life and other benefits as may be generally available from time to time to key employees of Dixie. Employee shall be credited with his years of service at Fabrica prior to the date of this Agreement for purposes of this Agreement. Employee shall be eligible to participate in Dixie's 401(k) plan beginning December 31, 2000. Until June 30, 2003, Fabrica shall provide Employee with (A) a car allowance in the amount of two thousand dollars ($2,000) per month; and (B) supplementary healthcare benefits that are the same as or comparable to those available to Employee as of the date of this Agreement under Fabrica's "Execu-Care Plan".

(v) Expenses. During the Term, Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Employee in the performance of his duties as President, such reimbursement to be made following the submission by Employee of signed, itemized expense reports in accordance with the travel and business expense reimbursement policies as in effect from time to time and applicable to executives of Fabrica.

4. Termination of Employment.

(a) Death or Disability.

Employee's employment shall terminate automatically upon Employee's death. If during the Term, Employee should suffer from a Disability (pursuant to the definition of "Disability" set forth below), Fabrica may immediately terminate this Agreement upon notice to Employee. Fabrica's obligation to pay any Accrued Obligations (as defined below) to Employee shall survive such termination. For purposes of this Agreement, "Disability" means the absence of Employee from (or the inability of Employee to perform) his duties with Fabrica on a full-time basis due to ill heath, whether mental or physical, for a period of 120 consecutive days, or (ii) for a total of 150 days during any 12-month period.

(b) Cause.

Fabrica may terminate Employee's employment during the Term for "Cause." For purposes of this Agreement, "Cause" means:

(i) Employee has committed an act or has failed to act, where such act or failure to act constitutes intentional misconduct (including, without limitation, dishonesty, fraud or embezzlement), a reckless disregard of the consequences of such act or failure to act, or gross negligence by Employee, and in each case the foreseeable consequences of such act or failure to act are damage or harm to Fabrica or Dixie;

(ii) a material breach of Sections 7 or 8 of this Agreement;

(iii) a conviction of, or the entering of a guilty or no contest plea to, any felony or any crime involving moral turpitude;

(iv) a failure to cease or correct a material failure to discharge his duties and responsibilities hereunder within thirty (30) days following written notice of such failure, which notice shall state with reasonable particularity the specific acts or omissions constituting such failure; provided, however, that Fabrica shall not be obligated to provide such notice, and may, subject to subsection (d) below, terminate Employee's employment immediately for cause without first giving such notice and allowing Employee thirty (30) days to cease or correct such material failure, if its has previously given notice of a similar material failure of Employee to discharge his duties and responsibilities hereunder.

(c) Good Reason.

Employee's employment may be terminated during the Term by Employee, at his election, for Good Reason. For purposes of this Agreement, "Good Reason" means:

(i) the assignment to Employee by Fabrica of duties which are a significant adverse alteration in the nature or status of Employee's position, responsibilities, duties or conditions of employment under this Agreement or any other action by Fabrica that results in a material diminution in Employee's position, authority, duties or responsibilities under this Agreement;

(ii) any failure by Fabrica to comply with any of the provisions of Section 3(b) of this Agreement within thirty (30) days (or, in the case of any failure to make payment of Annual Base Salary or Annual Bonus when due, five (5) Business Days following Fabrica's receipt of written notice of such failure from Employee, which notice shall state with reasonable particularity the specific acts or omissions constituting such failure; or

(iii) the relocation Fabrica's corporate offices to a location outside Santa Ana, California other than in accordance with the provision of Section 3(a)(i).

(d) Notice of Termination.

Any termination by Fabrica for Cause or by Employee for Good Reason shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Employee's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than fifteen (15) days after the giving of such notice). The failure by Employee or by Fabrica, as the case may be, to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Cause or Good Reason, as the case may be, shall not waive any right of Fabrica or E mployee hereunder or preclude Fabrica or Employee from asserting such fact or circumstance in any subsequent action to enforce their respective rights hereunder.

(e) Date of Termination.

"Date of Termination" means the date of receipt of the Notice of Termination or any later date specified therein, as the case may be; provided, however, (i) if Employee's employment is terminated by Fabrica, the Date of Termination shall be the earlier of the date on which Fabrica gives Employee actual notice of such termination or the date of receipt of the Notice of Termination, and (ii) if Employee's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Employee or the date Fabrica terminates Employee's employment due to Disability, as the case may be.

(f) Change of Control.

In the event of a Change of Control (as defined below)

(i) Employee shall have the option, exercisable within 90 days of the Change of Control, either of continuing his employment with the entity resulting from the Change of Control on the same terms and conditions of this Agreement or terminating his employment immediately and receiving payment of the following obligations (the "Accrued Obligations") upon such termination:

(A) the portion of Annual Base Salary accrued through the Date of Termination to the extent not theretofore paid;

(B) if a Change of Control occurs before June 30, 2003, a pro rata portion of Employee's Annual Bonus for the fiscal year in which the Date of Termination occurs in an amount equal to (1)(a) if the Annual Bonus has been determined (i.e., performance criteria for the fiscal year in which the Date of Termination occurs have been satisfied), the Annual Bonus for such year, or (b) if the Annual Bonus has not been determined (i.e., performance criteria for the fiscal year in which the Date of Termination occurs have not yet been satisfied), the Annual Bonus for the preceding fiscal year (which for purposes of fiscal year 1999 shall be ($150,000), multiplied by (2) a fraction, the numerator of which is the number of days elapsed in the fiscal year in which the Date of Termination occurs through and including the Date of Termination, and the denominator is 365.

(C) accrued and unpaid vacation pay through and including the Date of Termination;

(D) unreimbursed business expenses through and including the Date of Termination; and

(E) any compensation previously deferred by Employee (together with any accrued interest thereon) and not yet paid by Fabrica.

(ii) In the event Employee elects to terminate his employment as a result of a Change of Control, the non-competition period specified in Subsection 8(a) of this Agreement shall be for three (3) years from the date of termination of Employee's employment.

For purposes of this Subsection 4(f), "Change of Control" means (a) the failure of Dixie (or a wholly owned entity thereof) to own, legally and beneficially, 100% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Fabrica or (b) the occurrence of any event or the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that any "person" or "group" (within the meaning of section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, other than the Frierson Family, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of more than 30% of the voting st ock of Dixie (measured by voting power rather than number of shares) unless the Frierson Family continues to own and control more than 50% of the voting stock of Dixie (measured by voting power rather than number of shares) following such event or the consummation of such transaction. For purposes of this Section, "Frierson family" means the descendants of J.B. Frierson and their spouses.

5. Obligation of Fabrica upon Termination.

(a) Death.

If Employee's employment is terminated by reason of Employee's death during the Term, Employee shall be entitled to receive the Accrued Obligations, and this Agreement shall terminate subject to Fabrica's obligation to pay such Accrued Obligations. All such Accrued Obligations shall be paid to Employee's personal representative or to Employee's designated beneficiary in the case of Accrued Obligations that will pass other than under Employee's will or the laws of intestacy. Accrued Obligations shall be paid in a lump sum in cash within thirty (30) days of the Date of Termination in the case of Accrued Obligations payable to a designated beneficiary and promptly after the personal representative's appointment in the case of Accrued Obligations payable to Employee's personal representative. Any stock options or stock purchase rights (including those described in Section 3(b)(iii) hereof) previously granted to Employee under stock option plans, stock purchase agreements and/or stock option agr eements shall be exercisable only in accordance with the respective terms and conditions thereof. For a period of one (1) year immediately following the Date of Termination as a result of Employee's death, Fabrica shall continue all benefits to Employee's family provided on the Date of Termination; provided, however that Employee's family shall be responsible for any additional expense incurred by Fabrica in providing such benefits.

(b) Disability.

If Employee's employment is terminated by reason of Employee's Disability during the Term, Employee shall be entitled to receive the Accrued Obligations, and this Agreement shall terminate subject to Fabrica's obligation to pay such Accrued Obligations. All Accrued Obligations shall be paid to Employee in a lump sum in cash within 30 days of the Date of Termination, and any stock options or stock purchase rights (including those described in Section 3(b)(iii) hereof) previously granted to Employee under stock option plans, stock purchase agreements and/or stock option agreements shall be exercisable only in accordance with the respective terms and conditions thereof. For a period of one (1) year immediately following the Date of Termination as a result of Employee's death, Fabrica shall continue all benefits to Employee's family provided on the Date of Termination; provided, however that Employee's family shall be responsible for any additional expense incurred by Fabrica in providing such b enefits.

(c) Cause; Other Than for Good Reason.

If Employee's employment shall be terminated for Cause during the Term, this Agreement shall terminate without further obligations to Employee other than the obligation to pay to Employee Accrued Obligations. If Employee terminates employment during the Term other than for Good Reason, this Agreement shall terminate without further obligations to Employee, other than for Accrued Obligations. All such Accrued Obligations shall be paid to Employee in a lump sum in cash within 30 days of the Date of Termination. Any stock options or stock purchase rights (including those described in Section 3(b)(iii) hereof) previously granted to Employee under stock option plans, stock purchase agreements and/or stock option agreements shall be exercisable only in accordance with the respective terms and conditions thereof.

(d) Good Reason; Other Than for Cause, Death or Disability.

If, prior to the expiration of the Term, Fabrica should terminate Employee's employment other than for Cause, death or Disability, or if Employee should terminate his employment under this Agreement for Good Reason:

(i) Fabrica shall pay to Employee the following severance payments and benefits amounts:

(A) all Accrued Obligations in a lump sum in cash within 30 days after the Date of Termination; and

(B) an amount equal to the Annual Base Salary in effect on the Date of Termination times the number of years remaining in the Term as of the Date of Termination, which sum shall be payable to Employee following the Date of Termination and over the balance of the Term in equal installments as base salaries are paid to executives of Fabrica.

(ii) For a period of one (1) year immediately following the Date of Termination, Fabrica shall continue all benefits to Employee and Employee's family provided on the Date of Termination.

The severance payments and benefits described in this Subsection 5(d) shall be Employee's exclusive remedy in the event Fabrica terminates his employment prior to the expiration of the Term other than for Cause or in the event his employment is terminated because of his death or disability or by Employee for Good Reason. Employee shall not be obligated to mitigate any payments owed under this Agreement.

(e) Execution of Release. Fabrica's obligation to pay severance benefits and payments under Subsection 5(d) is expressly conditioned upon Employee's execution and delivery to Fabrica of a release and agreement, as drafted at the time of Employee's termination of employment, which shall include, but not be limited to:

(i) a mutual unconditional release of all rights to any claims, charges, complaints, grievances, whether known or unknown to one party, against the other, its officers, directors, employees, attorneys, affiliates, agents or assigns, through the date of Employee's termination from employment; provided that any rights or claims under any other written agreement between Employee and Fabrica or Employee and Dixie from time to time shall not be subject to this release;

(ii) a representation and warranty from each party to the other that the party has not filed or assigned any claims, charges, complaints or grievances against the other, its affiliates or assigns;

(iii) an agreement not to use, disclose or make copies of any confidential information of Fabrica or its affiliates or assigns and to return any such confidential information and property to Fabrica upon execution of the release;

(iv) an agreement to maintain the confidentiality of the existence and terms of the release;

(v) an agreement to indemnify Fabrica, its affiliates and assigns against the claims of third parties arising from Employee's breach of any portion of the agreements contained in the release; and

(vi) an acknowledgement and agreement that the release and agreement shall not be construed as an admission by the releasee of any wrongdoing whatsoever against either party, and that all of the releasees specifically deny any such wrongdoing.

6. Arbitration. Any dispute between the parties concerning this Agreement shall be submitted to binding arbitration before a single arbitrator in accordance with the following provisions:

(a) If a dispute arises concerning this Agreement, the disputed shall be resolved through binding and non-appealable arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the "Rules"), except where the Rules conflict with the provisions of this Section 6, in which event the provisions of this Section 6 shall prevail. The arbitration shall be before one (1) arbitrator selected by the parties, or if the parties cannot agree upon a single arbitrator within thirty (30) days of a party giving notice to the other of a proposed choice for an arbitrator, then by a single arbitrator selected by the New York City office of the American Arbitration Association, who shall be a person (i) who is admitted to practice law in the State of New York, (ii) who is a partner in a law firm having at least one hundred attorneys, and (iii) who is familiar with the terms of employment agreements entered into in the context of acquisitions. Any arbitrator so appointed s hall be neutral and subject to disqualification for the reasons specified in Section 19 of the Rules.

(b) Each party shall pay the fees of his or its own attorneys, expenses of witnesses and all other expenses connected with the preparation and presentation of such party's case. The cost of the arbitration, including the cost of the record or transcripts thereof, if any, administrative fees, and all other fees involved, shall be shared equally, unless the arbitrators otherwise direct.

(c) The parties agree to request that the arbitrator appointed pursuant to the procedure agreed upon above shall, as soon as reasonably practicable after his or her appointment, and after consultation with the parties, set an arbitration date of no later than thirty (30) days after his or her appointment. If that arbitrator is unable to conduct the arbitration during such 30-day period then the parties shall select a new arbitrator in accordance with Section 6(a).

(d) The arbitration shall be conducted pursuant to the Rules, as then in effect. Without limitation of the arbitrator's general authority, the arbitrator shall have the right to order reasonable discovery in accordance with the Tennessee Rules of Civil Procedure. Conformity to the legal rules of evidence shall not be required in the arbitration. At any oral hearing of evidence in connection with the arbitration, each party thereto or its legal counsel shall have the right to examine its witnesses and to cross-examine the witnesses of any opposing party. No evidence of any witness shall be presented in written form unless the opposing party shall have the opportunity to cross-examine such witness, except as the parties to the dispute otherwise agree in writing or except under extraordinary circumstances where the interests of justice require a different procedure.

(e) The decision of the arbitrator shall be binding upon all parties and no appeal may be taken therefrom; provided, however, that no decision by such arbitrator shall include the award of punitive damages. The decision of the arbitrator shall be enforced and honored by the parties hereto without the necessity of confirmation by a court. The parties hereby waive, to the extent permitted by law, any rights to appeal or to review of any such decision by any court or tribunal.

(f) This arbitration shall be conducted in New York, New York. In the event a party desires to obtain judicial confirmation of an arbitration award, the parties consent to the exclusive jurisdiction of the appropriate state court in New York, New York for the entry and enforcement of a judgment upon any arbitration award rendered in connection with any state law, and of the United States District Court for the Southern District of New York, for the entry and enforcement of judgment upon any arbitration award rendered in connection with any federal law, and the parties agree to both subject matter and in personam jurisdiction for those purposes.

(g) Notwithstanding any provision of this Section, the requirement to arbitrate disputes under this Section shall not apply to any application for interim injunctive or other equitable relief from any court of competent jurisdiction with respect to this Agreement or any matter it contemplates.

7. Confidentiality.

(a) Receipt of Confidential Information. Employee acknowledges that Employee either has been or will be exposed to certain confidential or proprietary information about Fabrica and Dixie, and their respective suppliers, vendors, customers, potential customers and competition. All advertising, sales, manufacturers' and other materials or articles or information, including without limitation documents, drawings, records, data bases, computer programs, data processing reports, customer sales analyses, invoices, price lists or information, samples, supplier and vendor terms, the identities and terms of prior contacted prospects, or any other materials or data of any kind furnished to Employee by Fabrica or Dixie or developed by Employee on behalf of Fabrica or Dixie or at Fabrica or Dixie's direction or for Fabrica's or Dixie's use or otherwise in connection with Employee's performance of services for Fabrica or Dixie are and shall remain the sole and confidential property of Fabrica or Dixie, as th e case may be.

(b) Non-Disclosure. Employee shall not use for his personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or entity other than Fabrica or Dixie, any material or information referred to in Subsection 7(a) above, or any material or information regarding the business methods, business policies, procedures, techniques, research or development projects or results, trade secrets or other knowledge or processes of or developed by Fabrica or Dixie or any names or addresses of customers, prior contacted prospects, or clients or any data on or relating to past, present or prospective customers or clients or any other confidential information relating to or dealing with the business operations or activities of Fabrica or Dixie, made known to Employee or learned or acquired by Employee prior to or during Employee's employment with Fabrica or Dixie. Upon request of Fabrica or Dixie, Employee shall immediately deliver to Fab rica or Dixie all documents containing such material or information, and Employee shall not retain any copies, summaries, analyses, extracts or other reproductions thereof in whole or in part. The term "documents" as used in this Agreement means all writings, drawings, graphs, charts, photographs, video tapes, disks, computer memory and data in any form recorded or stored from which information can be obtained, and all reproductions thereof.

(c) Unless otherwise agreed by Fabrica and Employee in writing, the obligations described in this Section 7 shall survive any termination of this Agreement or any termination of the employment relationship created hereunder.

8. Non-Inducement, Non-Competition, Trade Secrets, Etc. In exchange for the "Non-Competition Consideration" (as defined below), Employee agrees as follows with respect to his actions during the Term (and, as may be provided below, after the Term):

(a) Covenants. Employee shall never directly or indirectly induce or attempt to influence any person known to be an employee or representative of Fabrica or Dixie to terminate his employment or relationship with Fabrica or Dixie without the prior written consent of the president of Dixie. Without the prior written consent of the President of Dixie, during the existence of Employee's employment with Fabrica and for the later of (i) June 30, 2003, or (ii) two (2) years following the termination of Employee's employment with Fabrica for any reason, and within any city or county of the United States where Dixie or Fabrica carries on business, Employee shall not engage in (as a principal, partner, director, officer, agent, employee, consultant, independent contractor or otherwise) or be financially interested in (i) any business (other than Fabrica or Dixie) that is involved in business activities which are the same as, similar to or in competition with any of the business activities carried on by Fabrica or Dixie at any time, or being planned by Fabrica or Dixie at the time of the termination of Employee's employment with Fabrica, or (ii) any business operated by any of Fabrica or Dixie's customers, suppliers, vendors or prior contacted prospects.

(b) Fabrica and Dixie Materials. Any and all writings, ideas, inventions, improvements, processes, procedures and/or techniques which Employee may make, conceive, reduce to practice, discover or develop, either solely or jointly with any other person or persons, at any time during Employee's employment with Fabrica, whether during working hours or at any other time and whether at the request or upon the suggestion of Fabrica or Dixie or otherwise, and whether or not protectible by patent, trademark, copyright or other intellectual property law, that relate in any way to, or are useful in any manner in, any business now or hereafter carried on or contemplated by Fabrica or Dixie, including developments or expansions of their respective current or then current fields of operations, shall be the sole and exclusive property of Fabrica or Dixie (as the case may be), and Employee hereby unconditionally assigns his right, title, and interest therein to Fabrica or Dixie (as the case may be). Emp loyee shall not be entitled to any additional or special compensation or reimbursement regarding any and all such writings, ideas, inventions, improvements, processes, procedures and techniques.

(c) Restrictive Time Period and Geographic Area. If the period of time or the geographic area specified in Subsection 8(a) above should be adjudged unreasonable in any proceeding, then the period of time shall be reduced by such number of months or the area shall be reduced by the elimination of such portion thereof, or both, so that such restrictions may be enforced in such area and for such time as is adjudged to be reasonable. If Employee violates any of the restrictions contained in the foregoing Subsection 8(a), the restrictive period shall not run in favor of Employee (but shall run in favor of Fabrica or Dixie (as the case may be)), and the restrictive period shall be extended from the time of the commencement of any such violation until such time as such violation shall be cured by Employee to the satisfaction of Fabrica or Dixie (as the case may be), and it shall begin to run anew at the time of such cure.

(d) "Non-Competition Consideration." The "Non-Competition Consideration" is included within the consideration set forth in this Agreement.

(e) Acknowledgments. Employee agrees, acknowledges, covenants, represents and warrants as follows:

(i) That he has read and fully understands the foregoing restrictions and that he has consulted with a competent attorney regarding the uses and enforceability of restrictive covenants in the described geographic area or has elected not to do so, at his own risk;

(ii) That he is aware that there may be defenses to the enforceability of the foregoing restrictive covenants, based on time or territory considerations, and that he knowingly, consciously, intentionally and entirely voluntarily, irrevocably waives any and all such defenses relating to time or territory considerations and will not assert the same in any action or other proceeding brought by Fabrica or Dixie for the purpose of enforcing the restrictive covenants or in any other action or proceeding involving Employee, on the one hand, and Fabrica or Dixie, on the other hand;

(iii) That the provisions of this Agreement do not impose an extreme hardship on him and that the provisions of this Agreement are reasonable under the circumstances (in particular considering his exposure to the highest level information due to his prior and current status with Fabrica and the fact that he has been and will continue to be entrusted with many significant aspects of Fabrica); that any restrictions contained in the Agreement are necessary to protect the legitimate business interests of Fabrica and Dixie; that restrictions in the Agreement have been reasonably tailored as to time and place, and are not overly broad as to the activities proscribed (after taking into consideration the interests of the Employee in gaining and pursuing a livelihood, and Fabrica's and Dixie's legitimate business interests and concerns in protecting their property, their confidential information, their relationships, their goodwill and their economic advantage); and that because of payments being made in consider ation of, under or in connection with this Agreement and the Stock Purchase Agreement, the restrictions of this Agreement are agreed to be reasonable in all respects; and

(iv) That he is fully and completely aware that, and further understands that, the foregoing restrictive covenants are an essential part of the consideration for Employer and Fabrica entering into this Agreement and the Stock Purchase Agreement, and that Employer and Fabrica are entering into this Agreement and the Stock Purchase Agreement in full reliance on these acknowledgments, covenants, representations and warranties.

(f) Unless otherwise agreed by Fabrica and Employee in writing, the obligations described in this Section 8 shall survive any termination of this Agreement or any termination of the employment relationship created hereunder.

9. Equitable Relief.

(a) Irreparable Harm. Employee acknowledges that the covenants and restrictions contained in the foregoing Sections 7 and 8, in view of the nature of the business in which Fabrica or Dixie is engaged, are reasonable and necessary in order to protect the legitimate interests of Fabrica or Dixie, and that any violation thereof would result in immediate and irreparable injuries to Fabrica or Dixie. Employee acknowledges that the covenants of Employee herein and the restrictions applicable to him are special, unique and extraordinary, and are of peculiar value, the loss or breach of which cannot be fully compensated by damages in an action at law. Employee therefore acknowledges that, in the event of a breach or threat of a breach by Employee of any of the covenants or agreements of Section 7 or Subsections 8(a) or 8(b), and not withstanding any other provision of this Agreement:

(i) Fabrica and Dixie shall be entitled to a restraining order, order of specific performance or other injunctive relief, without showing actual damage and without bond or other security, as well as damages and an equitable accounting of all earnings, profits and other benefits arising from such violation; and

(ii) If a restraining order, order of specific performance or other injunctive relief is issued, then Fabrica's obligation to make any payment or provide any benefit under this Agreement, including without limitation any severance benefit or payment, shall immediately cease.

(b) Remedies Not Exclusive. Fabrica's and Dixie's remedies under this Section 9 are not exclusive, and shall not prejudice or prohibit any other rights or remedies under this Agreement or otherwise.

10. Successors and Permitted Assigns.

(a) This Agreement is personal to Employee and without the prior written consent of Fabrica shall not be assignable by Employee. This Agreement shall inure to the benefit of and be enforceable by Employee's legal representatives.

(b) This Agreement shall inure to the benefit of and be binding upon Fabrica and its successors and permitted assigns.

(c) Fabrica will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Fabrica to assume expressly and agree to perform this Agreement in the same manner and to the same extent that Fabrica would be required to perform it if no such succession had taken place. As used in this Agreement, "Fabrica" shall mean Fabrica International and any successor to its business and/or assets.

11. Miscellaneous.

(a) Governing Law; Submission to Jurisdiction; Appointment of Agent for Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee, without regard to principles of conflict of laws. The parties hereto hereby declare that it is their intention that this Agreement shall be regarded as made under the laws of the State of Tennessee and that the laws of said State shall be applied in interpreting its provisions in all cases where legal interpretation shall be required. Each of the parties hereto hereby irrevocably and unconditionally agrees (a) to be subject to, and hereby irrevocably and unconditionally submits, to the exclusive jurisdiction of the courts of the State of Tennessee and of the federal courts sitting in the State of Tennessee for the purposes of any action, suit or proceeding (including appeals to their respective appellate courts) arising out of this Agreement or the transactions contemplated hereby (and agrees not to commence any action or proceeding except in such courts) that is not first subject to binding arbitration as provided in this Agreement, and (b)(1) to the extent such party is not otherwise subject to service of process in the State of Tennessee, to appoint and maintain an agent in the State of Tennessee as such party's agent for acceptance of legal process, and (2) to the fullest extent permitted by law, that service of process may also be made on such party by prepaid certified mail with a proof of mailing receipt validated by the United States Postal Service constituting evidence of valid service, and that service made pursuant to (b)(1) or (2) above shall have the same legal force and effect as if served upon such party personally within the State of Tennessee. Each party irrevocably and unconditionally waives any objections to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in (i) the courts of the State of Tennessee or (ii) any United States District Court in the State of Tennessee (including appeals to their respective appellate courts), and hereby further irrevocably and unconditionally to the fullest extent permitted by law waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. Nothing contained in this Subsection shall affect the right of any party hereto to serve legal process in any other matter permitted by law or affect the right of any party hereto to bring any action or proceeding against any other party hereto or any party's property in the courts in any other jurisdiction.

(b) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party; overnight courier; registered or certified mail, return receipt requested, postage prepaid; or facsimile transmission addressed as follows:

If to Employee:

Mr. Royce R. Renfroe

2801 Pullman Street

Santa Ana, California 92705

with a copy to:

White and Case, LLP

633 West Fifth Street

Los Angeles, California 90071-2007

Attention: Neil W. Rust, Esq.

Telecopier No.: (213) 687-0758

If to Fabrica:

c/o The Dixie Group, Inc.

185 S. Industrial Blvd. SW

Calhoun, Georgia 30701

Attention: Mr. Gary A. Harmon

Telecopier No.: (706) 625-0782

with a copy to:

Witt, Gaither & Whitaker, P.C.

1100 SunTrust Bank Bldg.

Chattanooga, Tennessee 37402

Attention: Ralph M. Killebrew, Jr., Esq.

Telecopier No.: (423) 266-4138

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

(c) Severability. If any provision of this Agreement is found in binding arbitration or by a court or other tribunal of competent jurisdiction to be invalid or unenforceable, the attempt shall first be made to read the provision in such a way as to make it valid and enforceable in light of the parties' apparent intent as evidenced by this Agreement. If such reading is impossible, the tribunal having jurisdiction may revise the provision in any reasonable manner, to the extent necessary to make it binding and enforceable. If no such revision is possible, the offending provision shall be deemed stricken from the Agreement, and every other provision shall remain in full force and effect; provided, however, that if Section 3(b) or Section 5 is deemed stricken from this Agreement, then Employee shall be relieved of his obligations under this Agreement (other than his obligations under Sections 7 and 8 of this Agreement).

(d) Taxes. Fabrica may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. Employee shall be liable for the payment, if any, of any federal, state or local taxes incurred by him as a result of any benefits or payments made to him under this Agreement.

(e) Waivers. Employee's or Fabrica's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. Any waiver of any provision of this Agreement, including specifically the provisions of this Subsection, shall be valid only if set forth in an instrument in writing signed on behalf of the party making the waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall much waiver constitute a continuing waiver unless otherwise expressly provided.

(f) Additional Documents and Actions. Each of the parties hereto shall execute and deliver any and all additional papers, documents and other assurances and shall do any and all acts and things reasonably necessary in connection with the performance of their obligations hereunder to carry out the intent of the parties hereto.

(g) Entire Agreement; Modification. This Agreement contains the entire understanding of Fabrica and Employee with respect to the subject matter hereof. This Agreement, including specifically the provisions of this Subsection, may be modified only in a writing signed by both parties.

(h) Binding Effect; No Third Party Beneficiaries. This Agreement shall bind and benefit the parties and their respective heirs, devisees, beneficiaries, grantees, donees, legal representatives, successors and permitted assigns. Nothing in this Agreement shall be construed to confer any rights or benefits on third-party beneficiaries.

(i) Construction. The parties have participated jointly in negotiating and drafting this Agreement. If a question concerning intent or interpretation arises, no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of authorship. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all related rules and regulations unless the context requires otherwise. Words importing the singular number only shall include the plural and vice versa; words importing the masculine gender shall include the feminine and neuter genders and vice versa.

(j) Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. In proving this Agreement in any proceeding, it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom such enforcement is sought. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto.

IN WITNESS WHEREOF, Employee has hereunto set his hand and Fabrica has caused these presents to be executed in their names on their behalf, all as of the day and year first above written.

EMPLOYEE:

/s/ Royce R. Renfroe                 

Royce R. Renfroe

FABRICA:

FABRICA INTERNATIONAL

By: /s/ Scott D. Guenther              

Title: CFO                              

Attest: ___________________________

EX-31

EXHIBIT 31.1 - Sarbanes-Oxley Section 302(a) Certification

I, Daniel K. Frierson, Chief Executive Officer of The Dixie Group, Inc. certify that:

1.   I have reviewed this quarterly report on Form 10-Q of The Dixie Group, Inc.;

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.   The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c. disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 11, 2004   /s/ Daniel K. Frierson                        
Daniel K. Frierson
Chief Executive Officer
The Dixie Group, Inc.

EX-31

Exhibit 31.2 - Sarbanes-Oxley Section 302(a) Certification

I, Gary A. Harmon, Chief Financial Officer of The Dixie Group, Inc. certify that:

1.   I have reviewed this quarterly report on Form 10-Q of The Dixie Group, Inc.;

2.   Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.   The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

c. disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: May 11, 2004 /s/ Gary A. Harmon                          
Gary A. Harmon
Chief Financial Officer
The Dixie Group, Inc.

EX-32

EXHIBIT 32.1 - CHIEF EXECUTIVE OFFICER CERTIFICATION


CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of The Dixie Group, Inc. (the "Company") on Form 10-Q for the period ending March 27, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) that he is the Chief Executive Officer of the Company and that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

/s/ DANIEL K. FRIERSON                                 
Daniel K. Frierson, Chief Executive Officer
Date: May 11, 2004

A signed original of this written statement required by Section 906 has been provided to The Dixie Group, Inc. and will be retained by The Dixie Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32

EXHIBIT 32.2 - CHIEF FINANCIAL OFFICER CERTIFICATION



CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the Quarterly Report of The Dixie Group, Inc. (the "Company") on Form 10-Q for the period ending March 27, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) that he is the Chief Financial Officer of the Company and that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

/s/ GARY A. HARMON                              
Gary A. Harmon, Chief Financial Officer
Date: May 11, 2004

A signed original of this written statement required by Section 906 has been provided to The Dixie Group, Inc. and will be retained by The Dixie Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.