##### Table of Contents

---

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 July 29, 2006



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

Commission File Number 000-22791



---

COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 58-2151061                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)

311 Smith Industrial Boulevard

Dalton, Georgia 30721

(Address of principal executive offices)

(706) 259-9711

(Registrants telephone number, including area code)



---

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.    Yes  x    No ̈

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):    Large accelerated filer ̈Accelerated
filer ̈Non-Accelerated filer  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

The Registrant had 1,000 shares of Common Stock, par value $.01 per share, issued and outstanding as of September 8, 2006.



---



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS



|                                                          |  |                                                                                               |  |                                                                                                                   |  |     
|--------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|                                                          |  |                                                                                               |  |                                                                                                                   |  | Page
|Cautionary Statement Regarding Forward-Looking Statements |  |                                                                                              
|                                                          |  |                                                                                              
|Part I.                                                   |  | Financial Information                                                                         |  |                                                                                                                  
|                                                          |  |                                                                                              
|                                                          |  | Item 1. Financial Statements                                                                  |  |                                                                                                                  
|                                                          |  |                                                                                               | 
|                                                          |  |                                                                                               |  | Consolidated Balance Sheets - As of July 29, 2006 and January 28, 2006                                            |  | 1   
|                                                          |  |                                                                                               | 
|                                                          |  |                                                                                               |  | Consolidated Statements of Operations - Thirteen Weeks and Twenty-six Weeks Ended July 29, 2006 and July 30, 2005 |  | 2   
|                                                          |  |                                                                                               | 
|                                                          |  |                                                                                               |  | Consolidated Statement of Stockholders Equity - Twenty-Six Weeks Ended July 29, 2006                             |  | 3   
|                                                          |  |                                                                                               | 
|                                                          |  |                                                                                               |  | Consolidated Statements of Cash Flows - Twenty-six Weeks Ended July 29, 2006 and July 30, 2005                    |  | 4   
|                                                          |  |                                                                                               | 
|                                                          |  |                                                                                               |  | Notes to Consolidated Financial Statements                                                                        |  | 5   
|                                                          |  |                                                                                              
|                                                          |  | Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 24                                                                                                               
|                                                          |  |                                                                                              
|                                                          |  | Item 3.
Quantitative and Qualitative Disclosures About Market Risk                            |  | 33                                                                                                               
|                                                          |  |                                                                                              
|                                                          |  | Item 4.
Controls and Procedures                                                               |  | 33                                                                                                               
|                                                          |  |                                                                                              
|Part II.                                                  |  | Other Information                                                                             |  |                                                                                                                  
|                                                          |  |                                                                                              
|                                                          |  | Item 1.
Legal Proceedings                                                                     |  | 33                                                                                                               
|                                                          |  |                                                                                              
|                                                          |  | Item 6.
Exhibits                                                                              |  | 34                                                                                                               
|                                                          |  |                                                                                               | 
|Signature                                                 |  |                                                                                               |  |                                                                                                                   |  |     



---

##### Table of Contents

Cautionary Statement Regarding Forward-Looking Statements

Collins & Aikman Floorcoverings, Inc., together with its subsidiaries, unless the context implies otherwise (the Company), has made in this Form 10-Q
and from time to time may make written and oral forward-looking statements. Written forward-looking statements may appear in documents filed with the Securities and Exchange Commission, in press releases and in reports to investors. The Private
Securities Litigation Reform Act of 1995 contains a safe harbor for forward-looking statements. The Company relies on this safe harbor in making such disclosures. All statements contained in this Quarterly Report on Form 10-Q as to future
expectations and financial results including, but not limited to, statements containing the words plans, believes, intends, anticipates, expects, projects, should,
will and similar expressions, should be considered forward-looking statements subject to the safe harbor. The forward-looking statements are based on managements current beliefs and assumptions about expectations, estimates,
strategies and projections for the Company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking statements. The risks, uncertainties and assumptions regarding forward-looking statements include, but are not limited to, product demand and market acceptance risks; product development risks,
such as delays or difficulties in developing, producing and marketing new products; the impact of competitive products, pricing and advertising; constraints resulting from the financial condition of the Company, including the degree to which the
Company is leveraged; cycles in the construction and renovation of commercial and institutional buildings; failure to retain senior executives and other qualified personnel; unanticipated termination or interruption of the Companys arrangement
with its primary third-party supplier of nylon yarn; debt service requirements and restrictions under credit agreements and indentures; continued compliance with the covenants under the Companys Senior Credit Facility; general economic
conditions in the United States and in markets outside of the United States served by the Company; government regulations; risks of loss of material customers; and environmental matters. The Company undertakes no obligation to revise these
statements following the date of the filing of this Form 10-Q for any reason.



---

##### Table of Contents

PART I  FINANCIAL INFORMATION

Item 1. Financial Statements

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)



|                                                                                                                         |  |               |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                         |  | July 29, 2006 |         |   | January 28, 2006 |  
|                                                                                                                         |  | (Unaudited)   |         |   |                  |  
|ASSETS                                                                                                                   |  |               |         |   |                  |   |         |  
|CURRENT ASSETS:                                                                                                          |  |               |         |   |                  |   |         |  
|Cash and Cash Equivalents                                                                                                |  | $             | 5,012   |   |                  | $ | 5,803   |  
|Accounts Receivable, net of allowances of $694 and $579 in fiscal 2006 and 2005, respectively                            |  |               | 60,433  |   |                  |   | 46,691  |  
|Inventories                                                                                                              |  |               | 46,490  |   |                  |   | 39,993  |  
|Deferred Tax Assets                                                                                                      |  |               | 3,953   |   |                  |   | 4,863   |  
|Prepaid Expenses and Other                                                                                               |  |               | 4,226   |   |                  |   | 3,524   |  
|                                                                                                                         |  |               |         |   |                  |   |         |  
|Total Current Assets                                                                                                     |  |               | 120,114 |   |                  |   | 100,874 |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                       |  |               | 66,638  |   |                  |   | 67,697  |  
|GOODWILL                                                                                                                 |  |               | 98,378  |   |                  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                                                                                             |  |               | 27,421  |   |                  |   | 28,650  |  
|OTHER ASSETS                                                                                                             |  |               | 6,419   |   |                  |   | 6,929   |  
|                                                                                                                         |  |               |         |   |                  |   |         |  
|TOTAL ASSETS                                                                                                             |  | $             | 318,970 |   |                  | $ | 302,528 |  
|                                                                                                                         |  |               |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                     |  |               |         |   |                  |   |         |  
|CURRENT LIABILITIES:                                                                                                     |  |               |         |   |                  |   |         |  
|Accounts Payable                                                                                                         |  | $             | 21,246  |   |                  | $ | 16,803  |  
|Accrued Expenses                                                                                                         |  |               | 30,705  |   |                  |   | 25,148  |  
|Current Portion of Long-term Debt                                                                                        |  |               | 12,837  |   |                  |   | 4,648   |  
|                                                                                                                         |  |               |         |   |                  |   |         |  
|Total Current Liabilities                                                                                                |  |               | 64,788  |   |                  |   | 46,599  |  
|OTHER LIABILITIES, including post-retirement benefit obligation                                                          |  |               | 5,570   |   |                  |   | 5,364   |  
|DEFERRED TAX LIABILITIES                                                                                                 |  |               | 4,711   |   |                  |   | 4,441   |  
|LONG-TERM DEBT, net of current portion                                                                                   |  |               | 189,966 |   |                  |   | 197,673 |  
|COMMITMENTS AND CONTINGENCIES (Note 15)                                                                                  |  |               |         |   |                  |   |         |  
|                                                                                                                         |  |              
|STOCKHOLDERS EQUITY:                                                                                                    |  |               |         |   |                  |   |         |  
|Common stock ($0.01 par value per share, 1,000 shares authorized, issued and outstanding in fiscal 2006 and fiscal 2005) |  |               |        |   |                  |   |        |  
|Paid-in Capital                                                                                                          |  |               | 72,648  |   |                  |   | 72,648  |  
|Retained Deficit                                                                                                         |  |               | (17,043 | ) |                  |   | (22,435 | )
|Accumulated other comprehensive income (loss):                                                                           |  |               |         |   |                  |   |         |  
|Gain on cash flow hedges                                                                                                 |  |               | 21      |   |                  |   |        |  
|Foreign currency translation adjustment                                                                                  |  |               | (482    | ) |                  |   | (553    | )
|Minimum pension liability adjustment                                                                                     |  |               | (1,209  | ) |                  |   | (1,209  | )
|                                                                                                                         |  |               |         |   |                  |   |         |  
|Total Stockholders equity                                                                                               |  |               | 53,935  |   |                  |   | 48,451  |  
|                                                                                                                         |  |               |         |   |                  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                               |  | $             | 318,970 |   |                  | $ | 302,528 |  
|                                                                                                                         |  |               |         |   |                  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



1



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited And In Thousands)



|                                           |  |                      |         |                        |              |   |              |  |   |              |   |  |   |         |  
|------------------------------------------ |  | -------------------- | ------- | ---------------------- | ------------ | - | ------------ |  | - | ------------ | - |  | - | ------- | -
|                                           |  | Thirteen Weeks Ended |         | Twenty-six Weeks Ended |             
|                                           |  | July 29,2006         |         |                        | July 30,2005 |   | July 29,2006 |  |   | July 30,2005 |  
|Net Sales                                  |  | $                    | 108,069 |                        |              | $ | 95,074       |  | $ | 188,792      |   |  | $ | 163,388 |  
|                                           |  |                      |         |                        |              |   |              |  |   |              |   |  |   |         |  
|Cost of Goods Sold                         |  |                      | 69,397  |                        |              |   | 63,692       |  |   | 125,485      |   |  |   | 113,010 |  
|Selling, General & Administrative Expenses |  |                      | 20,884  |                        |              |   | 19,810       |  |   | 41,657       |   |  |   | 39,944  |  
|Amortization                               |  |                      | 615     |                        |              |   | 614          |  |   | 1,229        |   |  |   | 1,392   |  
|                                           |  |                      |         |                        |              |   |              |  |   |              |   |  |   |         |  
|Operating Expenses                         |  |                      | 90,896  |                        |              |   | 84,116       |  |   | 168,371      |   |  |   | 154,346 |  
|                                           |  |                      |         |                        |              |   |              |  |   |              |   |  |   |         |  
|Operating Income                           |  |                      | 17,173  |                        |              |   | 10,958       |  |   | 20,421       |   |  |   | 9,042   |  
|Minority Interest in Loss of Subsidiary    |  |                      |        |                        |              |   | 29           |  |   |             |   |  |   | 39      |  
|Gain (Loss) on Sale of Fixed Assets        |  |                      | (62     | )                      |              |   | 23           |  |   | (33          | ) |  |   | (94     | )
|Net Interest Expense                       |  |                      | 5,182   |                        |              |   | 4,917        |  |   | 10,911       |   |  |   | 9,993   |  
|                                           |  |                      |         |                        |              |   |              |  |   |              |   |  |   |         |  
|Income (Loss) Before Income Taxes          |  |                      | 11,929  |                        |              |   | 6,093        |  |   | 9,477        |   |  |   | (1,006  | )
|Income Tax Expense                         |  |                      | 4,923   |                        |              |   | 1,719        |  |   | 4,085        |   |  |   | 403     |  
|                                           |  |                      |         |                        |              |   |              |  |   |              |   |  |   |         |  
|Net Income (Loss)                          |  | $                    | 7,006   |                        |              | $ | 4,374        |  | $ | 5,392        |   |  | $ | (1,409  | )
|                                           |  |                      |         |                        |              |   |              |  |   |              |   |  |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



2



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS
EQUITY

FOR THE TWENTY-SIX WEEKS ENDED JULY 29, 2006

(Unaudited And In Thousands, Except Share Amounts)



|                                                              |  |                      |  |                         |        |                             |   |         |                                               |  |   |       |  |   |      |   |  |   |        |   |  |   |       
|------------------------------------------------------------- |  | -------------------- |  | ----------------------- | ------ | --------------------------- | - | ------- | --------------------------------------------- |  | - | ----- |  | - | ---- | - |  | - | ------ | - |  | - | ------
|                                                              |  | CommonStock (Shares) |  | Paid-inCapital          |        | Retained Deficit            |   |         | Accumulated Other Comprehensive Income (Loss) |  |   | Total
|                                                              |  |                      |  | Gain on CashFlow Hedges |        | Foreign CurrencyTranslation |   |         | MinimumPension Liability                      |  |  
|BALANCE, January 28, 2006                                     |  | 1,000                |  | $                       | 72,648 |                             | $ | (22,435 | )                                             |  | $ |      |  | $ | (553 | ) |  | $ | (1,209 | ) |  | $ | 48,451
|Net income                                                    |  |                     |  |                         |       |                             |   | 5,392   |                                               |  |   |      |  |   |     |   |  |   |       |   |  |   | 5,392 
|Change in gain on cash flow hedges, net of tax                |  |                     |  |                         |       |                             |   |        |                                               |  |   | 21    |  |   |     |   |  |   |       |   |  |   | 21    
|Change in foreign currency translation adjustment, net of tax |  |                     |  |                         |       |                             |   |        |                                               |  |   |      |  |   | 71   |   |  |   |       |   |  |   | 71    
|                                                              |  |                      |  |                         |        |                             |   |         |                                               |  |   |       |  |   |      |   |  |   |        |   |  |   |       
|Total Comprehensive Income                                    |  |                      |  |                         |        |                             |   |         |                                               |  |   |       |  |   |      |   |  |   |        |   |  |   | 5,484 
|                                                              |  |                      |  |                         |        |                             |   |         |                                               |  |   |       |  |   |      |   |  |   |        |   |  |   |       
|BALANCE, July 29, 2006                                        |  | 1,000                |  | $                       | 72,648 |                             | $ | (17,043 | )                                             |  | $ | 21    |  | $ | (482 | ) |  | $ | (1,209 | ) |  | $ | 53,935
|                                                              |  |                      |  |                         |        |                             |   |         |                                               |  |   |       |  |   |      |   |  |   |        |   |  |   |       

The accompanying notes are an integral part of this consolidated financial statement.



3



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited And In Thousands)



|                                                                                                   |  |                        |         |   |              |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                   |  | Twenty-six Weeks Ended |        
|                                                                                                   |  | July 29,2006           |         |   | July 30,2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                        |         |   |              |   |         |  
|Net income (loss)                                                                                  |  | $                      | 5,392   |   |              | $ | (1,409  | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                        |         |   |              |   |         |  
|Depreciation and leasehold amortization                                                            |  |                        | 5,669   |   |              |   | 5,035   |  
|Amortization of intangible assets                                                                  |  |                        | 1,229   |   |              |   | 1,392   |  
|Amortization and write-off of deferred financing fees                                              |  |                        | 645     |   |              |   | 835     |  
|Change in deferred income tax                                                                      |  |                        | 1,015   |   |              |   | 214     |  
|Minority interest in loss of subsidiary                                                            |  |                        |        |   |              |   | (39     | )
|Loss on disposal of fixed assets                                                                   |  |                        | 33      |   |              |   | 94      |  
|Changes in operating assets and liabilities:                                                       |  |                        |         |   |              |   |         |  
|Accounts receivable                                                                                |  |                        | (13,742 | ) |              |   | (11,049 | )
|Inventories                                                                                        |  |                        | (6,497  | ) |              |   | (12,877 | )
|Accounts payable                                                                                   |  |                        | 4,443   |   |              |   | 6,312   |  
|Accrued expenses                                                                                   |  |                        | 5,557   |   |              |   | (4,111  | )
|Other, net                                                                                         |  |                        | (767    | ) |              |   | (2,293  | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Total adjustments                                                                                  |  |                        | (2,415  | ) |              |   | (16,487 | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                        | 2,977   |   |              |   | (17,896 | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                        |         |   |              |   |         |  
|Proceeds from disposition of property, plant and equipment                                         |  |                        | 32      |   |              |   | 130     |  
|Additions to property, plant, and equipment                                                        |  |                        | (4,271  | ) |              |   | (7,241  | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Net cash used in investing activities                                                              |  |                        | (4,239  | ) |              |   | (7,111  | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                        |         |   |              |   |         |  
|Proceeds from revolving credit facilities                                                          |  |                        | 12,752  |   |              |   | 1,923   |  
|Repayments of revolving credit facilities                                                          |  |                        | (12,051 | ) |              |   | (585    | )
|Proceeds from issuance of long-term debt                                                           |  |                        |        |   |              |   | 601     |  
|Repayments of long-term debt                                                                       |  |                        | (263    | ) |              |   | (260    | )
|Financing costs                                                                                    |  |                        |        |   |              |   | (97     | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Net cash provided by financing activities                                                          |  |                        | 438     |   |              |   | 1,582   |  
|                                                                                                   |  |                        |         |   |              |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                       |  |                        | 33      |   |              |   | 910     |  
|                                                                                                   |  |                        |         |   |              |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                            |  |                        | (791    | ) |              |   | (22,515 | )
|                                                                                                   |  |                       
|CASH AND CASH EQUIVALENTS, Beginning of Period                                                     |  |                        | 5,803   |   |              |   | 25,726  |  
|                                                                                                   |  |                        |         |   |              |   |         |  
|CASH AND CASH EQUIVALENTS, End of Period                                                           |  | $                      | 5,012   |   |              | $ | 3,211   |  
|                                                                                                   |  |                        |         |   |              |   |         |  

The accompanying notes are an integral part of these consolidated financial statements.



4



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS

(Unaudited)

1. Organization

Collins & Aikman Floorcoverings, Inc. (the Company), a Delaware Corporation, is a manufacturer of floorcovering products for the
North American specified commercial carpet market. The Companys floorcovering products include (i) vinyl-backed six-foot roll carpet and modular carpet tile, and (ii) high-style tufted and woven broadloom carpets. The Company
designs, manufactures and markets its C&A, Monterey and Crossley brands under the Tandus name for a wide variety of end markets, including corporate offices, education, healthcare, government facilities and retail stores. The ability to provide
a package of product offerings in various forms, coupled with flexible distribution channels, allows the Company to provide a wide array of floorcovering solutions. The Company is headquartered in Georgia, with additional manufacturing
locations in Canada, the United Kingdom and China.

The Company is a wholly-owned subsidiary of Tandus Group, Inc. (Tandus Group). Subsequent
to a recapitalization transaction on January 25, 2001, investment funds managed by Oaktree Capital Management, LLC (Oaktree) and Banc of America Capital Investors (BACI), specifically OCM Principal Opportunities Fund II,
L.P. (the Oaktree Fund) and BancAmerica Capital Investors II, L.P. (the B of A Fund), respectively, control a majority of the outstanding capital stock of Tandus Group.

2. General and Critical Accounting Policies

The accompanying
unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information and the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the Companys Form 10-K for the year ended January 28, 2006. The accompanying unaudited consolidated financial statements, in the opinion of management, include all
adjustments necessary for a fair presentation. All such adjustments are of a normal and recurring nature. Certain prior period amounts have been reclassified to conform to the current periods presentation.

Significant accounting policies are more fully described in Note 2 to the audited consolidated financial statements included in the Companys Form 10-K for the year
ended January 28, 2006. Certain of the accounting policies require the application of significant judgments by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject
to an inherent degree of uncertainty and actual results could differ from these estimates. These judgments are based on historical experience, terms of existing contracts, current economic trends in the industry, information provided by customers,
and information available from outside sources, as appropriate. The Companys significant accounting policies include:

Revenue Recognition.
Revenue is recognized when goods are shipped, which is when legal title passes to the customer. For product installations subject to customer approval, revenue is recognized upon acceptance by the customer. The Company provides certain installation
services to customers utilizing independent third-party contractors. The billings and expenses for these services are included in net sales and cost of goods sold, respectively. These billings and expenses were $7.6 million and $5.9 million for the
twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively, and $4.4 million and $3.1 million for the thirteen weeks ended July 29, 2006 and July 30, 2005, respectively. Freight charged to customers is included in net
sales. Freight fees included in net sales were $3.2 million and $2.6 million for the twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively, and $1.6 million and $1.5 million for the thirteen weeks ended July 29, 2006
and July 30, 2005, respectively.

A customer claims reserve and allowance for product returns is established based upon historical claims experience
as a percent of gross sales as of the balance sheet date. The allowance for customer claims is recorded upon shipment of goods and is recorded as a reduction of sales. While management believes that the customer claims reserve and allowance for
product returns is adequate and that the judgment applied is appropriate based upon historical experience for these items, actual amounts determined to be due and payable could differ and additional allowances may be required.



5



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

Cost of Goods Sold. Cost of goods sold includes raw materials, labor, manufacturing overhead,
freight costs, depreciation and the cost of installation services provided to our customers through independent third-party contractors.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses include compensation and related expenses, selling and marketing expenses, travel expenses, professional services, depreciation and amortization.

Foreign Currency Translation. Effective July 31, 2005, the Companys Canadian subsidiary adopted the U.S. dollar as its functional currency. Prior to
this date, the Canadian dollar had served as the subsidiarys functional currency. The transition to the U.S. dollar as the functional currency is primarily due to the high volume of this subsidiarys transactions that are denominated in
U.S. dollars, the high volume of intercompany transactions and the interrelationship between the Companys U.S. operations and those of the Canadian subsidiary. The financial information of the Companys Canadian subsidiary for the quarter
ended July 30, 2005 and prior periods have been presented in U.S. dollars in accordance with a translation of convenience method using the exchange rate at July 30, 2005 of US$1.00 being equal to CDN$1.2241, the Bank of Canada closing
buying rate at July 30, 2005. For periods subsequent to July 30, 2005, the Canadian dollar amounts are remeasured into the U.S. dollar reporting currency using the temporal method. When the temporal method is used to translate the local
currency of a foreign entity into its functional currency, the resulting translation adjustment is reported in the current periods statement of operations.

Assets and liabilities of the U.K. and Asian subsidiaries are translated to U.S. dollars at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Translation
adjustments are accumulated as a separate component of shareholders equity. Foreign currency gains (losses) are recognized in the statements of operations.

Net foreign currency gains recognized in the consolidated statements of operations were approximately $0.3 million and $0.1 million for the twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively. The Company
recognized net foreign currency gains of $0.1 million for each of the thirteen-week periods ending July 29, 2006 and July 30, 2005.

Cash and
Cash Equivalents. Cash and cash equivalents include all cash balances and investments with an original maturity of three months or less. The Company invests its excess cash in short-term investments and has not experienced any losses on those
investments.

Accounts Receivable Allowances. Allowances are provided for expected cash discounts, returns, claims and doubtful accounts based upon
historical experience and periodic evaluations of the financial condition of the Companys customers and collectability of the Companys accounts receivable. These allowances are maintained at a level which management believes is
sufficient to cover potential credit losses. Accounts receivable balances are aged according to invoice date and applicable terms, and are written off as uncollectible only after all reasonable collection efforts have been made.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Reserves are established based on
percentage markdowns applied to inventories aged for certain time periods and size of lot.

Impairment of Goodwill and Indefinite Lived Intangible
Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the guidance in Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized
for the difference between the fair value and carrying value of the asset.

Goodwill and other intangible assets with an indefinite useful life are tested
for impairment annually in accordance with the guidance in Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. An intangible asset with a finite life is reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount may not be recoverable in accordance with the guidance in SFAS No. 144.

Derivative
Financial Instruments. The Company recognizes its derivative instruments in the consolidated balance sheet and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on whether it has been
designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. To qualify as a hedging instrument, a derivative must pass prescribed effectiveness tests. For those derivatives that are designated and
qualify as hedging instruments, the derivative is designated, based upon the exposure being hedged, as either a fair value, cash flow or foreign currency exposure hedge. For a derivative not designated as a hedging instrument, the change in fair
value is recognized in earnings during the period of change.



6



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

The Companys current derivatives are all classified as cash flow hedges. To the extent effective,
changes in the fair value of these derivatives are reported in other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged item affects earnings. The ineffective portion, if any, is
recognized in current earnings during the period of change in fair value. The gain or loss on the termination of an effective cash flow hedge is reported in other comprehensive income and reclassified into earnings in the same period or periods
during which the hedged item affects earnings.

Gains or losses on the termination of ineffective hedges are reported in current earnings. In the event a
hedged item is disposed of or the anticipated transaction being hedged is no longer likely to occur, the related derivative is terminated and the gain or loss on termination is recognized in current earnings.

Income Taxes. The provision for income taxes includes federal, state, local and foreign taxes. The Company accounts for income taxes under an asset and
liability approach pursuant to Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109). This method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the Companys financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments
of changes in tax laws or rates. The effect on deferred tax assets and liabilities of changes in tax rates will be recognized as income or expense in the period that includes the enactment date. Future tax benefits are recognized to the extent that
realization of those benefits is considered to be more likely than not. A valuation allowance is established for deferred tax assets for which realization is not assured.

3. Inventories

Net inventory balances are summarized below (in thousands):



|                |  |              |        |                 |   |       
|--------------- |  | ------------ | ------ | --------------- | - | ------
|                |  | July 29,2006 |        | January 28,2006
|Raw materials   |  | $            | 24,747 |                 | $ | 17,427
|Work in process |  |              | 7,407  |                 |   | 6,296 
|Finished goods  |  |              | 14,336 |                 |   | 16,270
|                |  |              |        |                 |   |       
|                |  | $            | 46,490 |                 | $ | 39,993
|                |  |              |        |                 |   |       

4. Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of the intangible asset patent that is subject to amortization as of July 29, 2006 and January 28, 2006 are as follows (in thousands):



|                         |  |               |         |   |                  |   |         |  
|------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                         |  | July 29, 2006 |         |   | January 28, 2006 |  
|Patent:                  |  |               |         |   |                  |   |         |  
|Gross Carrying Amount    |  | $             | 27,000  |   |                  | $ | 27,000  |  
|Accumulated Amortization |  |               | (23,319 | ) |                  |   | (22,090 | )
|                         |  |               |         |   |                  |   |         |  
|                         |  | $             | 3,681   |   |                  | $ | 4,910   |  
|                         |  |               |         |   |                  |   |         |  

The patent is being amortized over an eleven-year period using the straight-line
method.



7



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

The Company has an unamortized intangible asset with an indefinite life, other than goodwill. The
carrying amount of the trade name was $23.6 million as of July 29, 2006. The Company also has an unamortized intangible asset related to its defined benefit plans in the amount of $0.1 million as of July 29, 2006. During the thirteen and
twenty-six week periods ended July 29, 2006, there were no changes to the carrying values of these intangible assets.

Actual and estimated
amortization expense is as follows (in thousands):



|                                       |  |                      |       |                        |   |              |  |              |       |  |   |      
|-------------------------------------- |  | -------------------- | ----- | ---------------------- | - | ------------ |  | ------------ | ----- |  | - | -----
|                                       |  | Thirteen Weeks Ended |       | Twenty-six Weeks Ended
|                                       |  | July 29,2006         |       | July 30,2005           |   | July 29,2006 |  | July 30,2005
|Aggregate amortization expense         |  | $                    | 615   |                        | $ | 614          |  | $            | 1,229 |  | $ | 1,392
|                                       |  |                      |       |                       
|Estimated annual amortization expense: |  |                      |       |                        |   |              |  |              |       |  |   |      
|Fiscal 2006                            |  |                      | 2,455 |                        |   |              |  |              |       |  |   |      
|Fiscal 2007                            |  |                      | 2,455 |                        |   |              |  |              |       |  |   |      
|Fiscal 2008                            |  |                      |      |                        |   |              |  |              |       |  |   |      
|Fiscal 2009                            |  |                      |      |                        |   |              |  |              |       |  |   |      
|Fiscal 2010                            |  |                      |      |                        |   |              |  |              |       |  |   |      

During the thirteen and twenty-six week periods ended July 29, 2006, there were no changes to the carrying
value of goodwill.

5. Derivative Instruments

During
the second quarter of 2006, the Company entered into futures contracts to hedge its expected natural gas consumption for certain domestic facilities. The contracts are accounted for as cash flow hedges. During the thirteen weeks ended July 29,
2006, the Company recognized a nominal gain in other comprehensive income. The notional amount of derivatives outstanding was $0.1 million at July 29, 2006.

6. Accrued Expenses

Accrued expenses are summarized below (in thousands):



|                              |  |              |        |                 |   |       
|----------------------------- |  | ------------ | ------ | --------------- | - | ------
|                              |  | July 29,2006 |        | January 28,2006
|Payroll and employee benefits |  | $            | 7,112  |                 | $ | 6,495 
|Customer claims               |  |              | 2,947  |                 |   | 1,798 
|Accrued interest              |  |              | 7,842  |                 |   | 7,796 
|Accrued professional fees     |  |              | 5,920  |                 |   | 3,323 
|Other                         |  |              | 6,884  |                 |   | 5,736 
|                              |  |              |        |                 |   |       
|                              |  | $            | 30,705 |                 | $ | 25,148
|                              |  |              |        |                 |   |       

7. Stock-Based Compensation

Effective January 29, 2006, the Company adopted the fair value recognition provision of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment (SFAS
No. 123(R)), using the prospective transition method. This method allows the application of the provisions of SFAS No. 123(R) to share-based awards granted subsequent to adoption. For stock-based compensation effected prior to
January 28, 2006, the Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). There were no grants of
stock-based compensation during the twenty-six weeks ended July 29, 2006.

In August 2001, Tandus adopted the 2001 Tandus Group, Inc., Executive and
Management Stock Option Plan (the 2001 Plan) under which 57,061.64 shares of Tandus Group, Inc. common stock were authorized and reserved for use in the 2001 Plan. The 2001 Plan allows the issuance of non-qualified stock options at an
exercise price determined by Tandus board of directors. The options granted under the 2001 Plan become exercisable over five years and expire ten years from the date of



8



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

grant. These options vest only upon the achievement of certain earnings targets, as defined.
Accelerated vesting could occur due to a change in control. The Company will account for these options as variable options and will record expenses based on increases and decreases in the fair market value of the Companys common stock at the
end of each reporting period. As of July 29, 2006, the Company has not recorded any expense as the Company has not achieved the targets established under the program and all options granted under the 2001 Plan had an exercise price equal to the
market value of the underlying common stock on the date of grant of $35.70. During the thirteen-weeks and twenty-six weeks ended July 29, 2006, 870 and 1,041 options were canceled leaving 32,968 options outstanding as of July 29, 2006. At
July 29, 2006, no shares were exercisable and the weighted average contractual life of the options outstanding was five years.

8. Recent
Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with SFAS No. 109. Unlike SFAS No. 109, FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The guidance is effective for fiscal years
beginning after December 15, 2006. The Company has not yet determined the effect of the adoption of FIN 48 on its financial position or results of operations.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of Statement of Financial Accounting Standards Nos. 133 (SFAS
No. 133) and 140 (SFAS No. 155). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which
interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, eliminates restrictions on a
qualifying special-purpose entitys ability to hold passive derivative financial instruments that pertain to beneficial interests that are, or contain, a derivative financial instrument. The guidance is effective for all financial instruments
acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will not have a material effect on the Companys financial position or results of
operations.

In October 2005, the FASB issued FASB Staff Position Financial Accounting Standard 123(R)-2, Practical Accommodation to the Application
of Grant Date as Defined in FASB Statement No. 123(R) (FSP 123(R)-2). FSP 123(R)-2 provides an exception to the application of the concept of mutual understanding as expressed in Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment, regarding the determination of whether a grant date or measurement date, as applicable, has occurred. The exception permits companies to measure compensation cost for equity awards to
employees on the Board approval date if certain conditions are met, provided that the communication to the employees occurs within a relatively short period of time from the approval date. The guidance in FSP 123(R)-2 is to be applied
upon initial adoption of SFAS No. 123(R), or to the first reporting period after October 18, 2005, for which financial statements or interim reports have not been issued should an entity have previously adopted the provisions of SFAS
No. 123(R). The Company adopted the provisions of FSP 123(R)-2 effective January 29, 2006. The adoption did not have a material impact on the Companys consolidated financial statements.

In October 2005, the FASB issued FASB Staff Position Financial Accounting Standard 13-1, Accounting for Rental Costs Incurred during a Construction Period
(FSP 13-1). FSP 13-1 states that rental costs associated with ground or building operating leases that are incurred during a construction period should be recognized as rental expense and included in income from continuing operations.
The guidance is to be applied to the first reporting period beginning after December 15, 2005. The Company adopted the provisions of FSP 13-1 effective January 29, 2006. The adoption did not have a material impact on the Companys
consolidated financial statements.

In August 2005, the FASB issued FASB Staff Position Financial Accounting Standard 123(R)-1, Classification and
Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R) (FSP 123(R)-1). FSP 123(R)-1 defers indefinitely the requirement of SFAS No. 123(R)
that a share-based payment to an employee subject to SFAS No. 123(R) becomes subject to the recognition and measurement requirements of other applicable GAAP when the rights conveyed by the instrument are no longer dependent on the holder



9



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

being an employee. A freestanding instrument issued to an employee in exchange for past or future
employee services that is subject to SFAS No. 123(R) or was subject to SFAS No. 123(R) upon initial adoption shall continue to be subject to the recognition and measurement provisions of SFAS No. 123(R) throughout the life of the
instrument, unless its terms are modified when the holder is no longer an employee. The deferral excludes awards exchanged for non-employee services or a combination of employee and non-employee services. The deferral does not have a material impact
on the Companys consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154,
Accounting Changes and Error Corrections-A Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires retrospective application to prior periods financial statements for changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted
for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted the
provisions of SFAS No. 154 effective January 29, 2006. The adoption did not have a material impact on the Companys consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. This statement is a revision to Statement of Financial Accounting Standards No. 123 and supersedes APB No. 25. This
statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in
share-based payment transactions. Companies are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is
recognized over the period during which an employee is required to provide service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments is
estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original
award immediately before the modification. SFAS No. 123(R) is effective for fiscal years beginning after June 15, 2005, due to the Securities and Exchange Commissions Rule 2005-57, which amended the initial effective date of SFAS
No. 123(R). The Company adopted the provisions of SFAS No. 123(R) effective January 29, 2006. The adoption did not have a material impact on the Companys consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets (SFAS No. 153).
SFAS No. 153 amends the guidance in Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions, to eliminate certain exceptions to the principle that exchanges of nonmonetary assets be measured based on
the fair value of the assets exchanged. SFAS No. 153 eliminates the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial
substance. This statement is effective for nonmonetary asset exchanges in fiscal years beginning after June 15, 2005. The Company adopted the provisions of SFAS No. 153 effective January 29, 2006. The adoption did not have a material
impact on the Companys consolidated financial statements.

In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151, Inventory Costs-An Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing
(ARB No. 43), to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense,
excessive spoilage, double freight and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of so abnormal as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the
allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The Company adopted the provisions of SFAS No. 151 effective January 29, 2006. The adoption did not have a
material impact on the Companys consolidated financial statements.



10



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

9. Employee Benefit Plans

Domestic Defined Benefit Plan.The Company maintains a defined benefit program (the U.S. Plan) for its domestic employees, which was frozen during fiscal 2002. Accordingly, no new benefits
are being accrued under the U.S. Plan. Participant accounts are credited with interest at the federally mandated rates. Company contributions are based on computations by independent actuaries, although the Company may decide to make additional
contributions to the U.S. Plan beyond minimum funding requirements as is deemed appropriate by management. The U.S. Plan was funded as of January 28, 2006 such that no minimum contribution is required in the 2006 plan year. U.S. Plan assets at
July 29, 2006 and January 28, 2006 were invested primarily in equity and fixed income debt securities.

Net periodic pension expense for the
thirteen weeks and twenty-six weeks ended July 29, 2006 and July 30, 2005 was comprised of the following components (in thousands):



|                                               |  |                      |     |   |                        |   |     |              |  |   |              |   |  |   |      |  
|---------------------------------------------- |  | -------------------- | --- | - | ---------------------- | - | --- | ------------ |  | - | ------------ | - |  | - | ---- | -
|                                               |  | Thirteen Weeks Ended |     |   | Twenty-six Weeks Ended |  
|                                               |  | July 29,2006         |     |   | July 30,2005           |   |     | July 29,2006 |  |   | July 30,2005 |  
|Interest cost on projected benefit obligations |  | $                    | 61  |   |                        | $ | 60  |              |  | $ | 119          |   |  | $ | 120  |  
|Expected return on plan assets                 |  |                      | (84 | ) |                        |   | (83 | )            |  |   | (163         | ) |  |   | (166 | )
|Recognized net actuarial losses                |  |                      | 27  |   |                        |   | 31  |              |  |   | 54           |   |  |   | 62   |  
|Settlement losses                              |  |                      | 29  |   |                        |   | 113 |              |  |   | 87           |   |  |   | 113  |  
|                                               |  |                      |     |   |                        |   |     |              |  |   |              |   |  |   |      |  
|Net periodic pension expense                   |  | $                    | 33  |   |                        | $ | 121 |              |  | $ | 97           |   |  | $ | 129  |  
|                                               |  |                      |     |   |                        |   |     |              |  |   |              |   |  |   |      |  

Canadian Defined Benefit Plan. Substantially all Canadian employees of Crossley Carpets Ltd. who meet
eligibility requirements can participate in a defined benefit plan (the Canadian Plan) administered by the Company. Canadian Plan benefits are generally based on years of service and employees compensation during their years of
employment. The Company contributes annually an amount that is based on the recommendations of its actuary and is deductible for income tax purposes. Assets of the Canadian plan are held in a trust invested primarily in mutual funds.

Net periodic pension expense for the thirteen weeks and twenty-six weeks ended July 29, 2006 and July 30, 2005 was comprised of the following components (in
thousands):



|                                               |  |                      |      |   |                        |   |      |              |  |   |              |   |  |   |      |  
|---------------------------------------------- |  | -------------------- | ---- | - | ---------------------- | - | ---- | ------------ |  | - | ------------ | - |  | - | ---- | -
|                                               |  | Thirteen Weeks Ended |      |   | Twenty-six Weeks Ended |  
|                                               |  | July 29,2006         |      |   | July 30,2005           |   |      | July 29,2006 |  |   | July 30,2005 |  
|Service costbenefits earned during the period |  | $                    | 250  |   |                        | $ | 262  |              |  | $ | 573          |   |  | $ | 525  |  
|Interest cost on projected benefit obligations |  |                      | 115  |   |                        |   | 115  |              |  |   | 263          |   |  |   | 231  |  
|Expected return on plan assets                 |  |                      | (139 | ) |                        |   | (133 | )            |  |   | (319         | ) |  |   | (267 | )
|Recognized net actuarial losses                |  |                      | 11   |   |                        |   | 2    |              |  |   | 11           |   |  |   | 2    |  
|                                               |  |                      |      |   |                        |   |      |              |  |   |              |   |  |   |      |  
|Net periodic pension expense                   |  | $                    | 237  |   |                        | $ | 246  |              |  | $ | 528          |   |  | $ | 491  |  
|                                               |  |                      |      |   |                        |   |      |              |  |   |              |   |  |   |      |  

Postretirement Benefit Plan. The Company provides a fixed dollar reimbursement for life and medical
coverage for certain of the Companys retirees (over age 65 with 10 years of service or more) under the postretirement benefit plan (the Postretirement Plan) currently in effect. The Postretirement Plan is unfunded. Effective
May 18, 2006, the Postretirement Plan was closed to new participants.

Net periodic post-retirement benefits expense for the thirteen weeks and
twenty-six weeks ended July 29, 2006 and July 30, 2005 was comprised of the following components (in thousands):



|                                               |  |                      |    |              |                        |     |              |  |              |     |  |   |     |  
|---------------------------------------------- |  | -------------------- | -- | ------------ | ---------------------- | --- | ------------ |  | ------------ | --- |  | - | --- | -
|                                               |  | Thirteen Weeks Ended |    |              | Twenty-six Weeks Ended |    
|                                               |  | July 29,2006         |    | July 30,2005 |                        |     | July 29,2006 |  | July 30,2005 |    
|Service costbenefits earned during the period |  | $                    | 49 |              | $                      | 42  |              |  | $            | 93  |  | $ | 91  |  
|Interest cost on projected benefit obligations |  |                      | 34 |              |                        | 25  |              |  |              | 66  |  |   | 62  |  
|Curtailment gain                               |  |                      |   |              |                        | (77 | )            |  |              |    |  |   | (77 | )
|                                               |  |                      |    |              |                        |     |              |  |              |     |  |   |     |  
|Net periodic post-retirement benefits expense  |  | $                    | 83 |              | $                      | (10 | )            |  | $            | 159 |  | $ | 76  |  
|                                               |  |                      |    |              |                        |     |              |  |              |     |  |   |     |  



11



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

10. Facility Maximization Project

On August 10, 2004, the Company and its parent announced plans to consolidate its broadloom operations by closing its Santa Ana, California production facility and moving equipment and production to its
manufacturing facility in Truro, Nova Scotia (the Facility Maximization). The Facility Maximization was approved by the Companys Board of Directors on August 9, 2004, and was completed during the fourth quarter of fiscal year
2005. The Facility Maximization has increased utilization in the Truro, Nova Scotia facility.

During fiscal 2005, the Company incurred costs associated
with the Facility Maximization, which consisted of temporary production inefficiencies, equipment movement and installation costs, professional fees, severance and other related costs. During the thirteen weeks and twenty-six weeks ended
July 30, 2005, cost of goods sold included $2.3 million and $5.0 million, respectively, and selling, general and administrative expenses included $0.4 million and $0.8 million, respectively, of these expenses in the accompanying consolidated
statements of operations.

As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting
of the remaining $1.1 million of Crossleys outstanding sinking fund bonds over the next four years. See Note 11 Long-Term Debt contained herein for further discussion.

11. Long-Term Debt

Long-term debt consists of the following (in thousands):



|                                          |  |              |         |                 |   |        
|----------------------------------------- |  | ------------ | ------- | --------------- | - | -------
|                                          |  | July 29,2006 |         | January 28,2006
|10% Senior Subordinated Notes, due 2006   |  | $            | 250     |                 | $ | 250    
|9.75% Senior Subordinated Notes, due 2010 |  |              | 165,000 |                 |   | 165,000
|Senior Secured Credit Facility            |  |              | 30,438  |                 |   | 30,598 
|Sinking Fund Bonds                        |  |              | 1,130   |                 |   | 1,335  
|Canadian Revolving Line of Credit         |  |              | 4,342   |                 |   | 3,642  
|Other Debt                                |  |              | 1,643   |                 |   | 1,496  
|                                          |  |              |         |                 |   |        
|Total Debt                                |  |              | 202,803 |                 |   | 202,321
|Less Current Maturities                   |  |              | 12,837  |                 |   | 4,648  
|                                          |  |              |         |                 |   |        
|                                          |  | $            | 189,966 |                 | $ | 197,673
|                                          |  |              |         |                 |   |        

As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the forgiveness of
debt consisting of the remaining $1.1 million of Crossleys outstanding sinking fund bonds over the next four years. The forgiveness will commence during fiscal 2006, will be over the remaining four-year term of the current note, and is based
upon maintaining a defined level of full-time equivalent employees during the year, of which requirement the Company is in full compliance as of July 29, 2006. The debt will also be non-interest bearing.

Net interest expense was $5.2 million and $4.9 million for the thirteen week periods ended July 29, 2006 and July 30, 2005, respectively, which included
nominal interest income. Net interest expense was $10.9 million and $10.0 million for the twenty-six week periods ended July 29, 2006 and July 30, 2005, respectively, which included nominal interest income. Net interest expense for the
twenty-six weeks ended July 29, 2006 includes $0.7 million related to a certain litigation verdict. See Note 15 Commitments and Contingencies for further discussion.

12. Income Taxes

The Company had income tax expense of $4.9 million and $4.1 million for the thirteen weeks and
twenty-six weeks ended July 29, 2006, respectively, compared to $1.7 million and $0.4 million for the thirteen weeks and twenty-six weeks ended July 30, 2005, respectively.



12



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

13. Comprehensive Income

Comprehensive income is as follows (in thousands):



|                                                     |  |                      |       |                        |              |   |              |  |              |       |  |   |        |  
|---------------------------------------------------- |  | -------------------- | ----- | ---------------------- | ------------ | - | ------------ |  | ------------ | ----- |  | - | ------ | -
|                                                     |  | Thirteen Weeks Ended |       | Twenty-six Weeks Ended |             
|                                                     |  | July 29,2006         |       |                        | July 30,2005 |   | July 29,2006 |  | July 30,2005 |      
|Net Income (Loss)                                    |  | $                    | 7,006 |                        |              | $ | 4,374        |  | $            | 5,392 |  | $ | (1,409 | )
|Other Comprehensive Income (Loss):                   |  |                      |       |                        |              |   |              |  |              |       |  |   |        |  
|Foreign currency translation adjustments, net of tax |  |                      | (94   | )                      |              |   | 911          |  |              | 71    |  |   | 1,412  |  
|Gain on cash flow hedges, net of tax                 |  |                      | 21    |                        |              |   |             |  |              | 21    |  |   |       |  
|                                                     |  |                      |       |                        |              |   |              |  |              |       |  |   |        |  
|Total Comprehensive Income                           |  | $                    | 6,933 |                        |              | $ | 5,285        |  | $            | 5,484 |  | $ | 3      |  
|                                                     |  |                      |       |                        |              |   |              |  |              |       |  |   |        |  

14. Segment Information

The Company has adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). This statement
addresses reporting of operating segment information and disclosures about products, services, geographic areas and major customers. Management has reviewed the requirements of SFAS No. 131 concluding that the Company operates its business as
two reportable segments: Floorcoverings and Extrusion.

Accounting policies of the segments are the same as those described in the summary of significant
accounting policies in Note 2 contained herein. Performance of the segments is evaluated on Adjusted EBITDA, which represents earnings before interest, taxes, depreciation, amortization, non-cash charges or expenses (other than the write-down of
current assets), costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, plus Chroma cash dividends and minority interest in income (loss) of subsidiary less equity in earnings of Chroma.

The Floorcoverings segment represents all floorcovering products. These products are six-foot roll carpet, modular carpet tile and tufted and woven broadloom carpet.
The Extrusion segment represents the Companys extrusion plant, which was acquired on May 8, 2002. Products in this segment are nylon or polypropylene extruded yarn.

No single customer represented 10% or more of the Floorcoverings segments sales for any period presented in the accompanying financial statements. The Extrusion segments largest customer accounted for
18.4% and 18.7% of sales and its second largest customer accounted for 17.8% and 17.2% of sales in the thirteen weeks and twenty-six weeks ended July 29, 2006, respectively. This segments third largest customer accounted for 10.7% and
10.6% of sales in the thirteen weeks and twenty-six weeks ended July 29, 2006, respectively. No other customers represented 10.0% or more of this segments sales.

The tables below provide certain unaudited financial information by segment (in thousands):



|                                  |  |                      |         |                        |   |              |  |              |         |  |   |        
|--------------------------------- |  | -------------------- | ------- | ---------------------- | - | ------------ |  | ------------ | ------- |  | - | -------
|                                  |  | Thirteen Weeks Ended |         | Twenty-six Weeks Ended
|                                  |  | July 29,2006         |         | July 30,2005           |   | July 29,2006 |  | July 30,2005
|Net Sales to External Customers:  |  |                      |         |                        |   |              |  |              |         |  |   |        
|Floorcoverings                    |  | $                    | 100,910 |                        | $ | 88,244       |  | $            | 174,050 |  | $ | 150,359
|Extrusion                         |  |                      | 7,159   |                        |   | 6,830        |  |              | 14,742  |  |   | 13,029 
|                                  |  |                      |         |                        |   |              |  |              |         |  |   |        
|Total Sales to External Customers |  | $                    | 108,069 |                        | $ | 95,074       |  | $            | 188,792 |  | $ | 163,388
|                                  |  |                      |         |                        |   |              |  |              |         |  |   |        
|                                  |  |                     
|                                  |  | Thirteen Weeks Ended |         | Twenty-six Weeks Ended
|                                  |  | July 29,2006         |         | July 30,2005           |   | July 29,2006 |  | July 30,2005
|Adjusted EBITDA:                  |  |                      |         |                        |   |              |  |              |         |  |   |        
|Floorcoverings                    |  | $                    | 18,439  |                        | $ | 15,586       |  | $            | 23,057  |  | $ | 18,925 
|Extrusion                         |  |                      | 2,279   |                        |   | 1,115        |  |              | 4,294   |  |   | 2,370  
|                                  |  |                      |         |                        |   |              |  |              |         |  |   |        
|Total Adjusted EBITDA             |  | $                    | 20,718  |                        | $ | 16,701       |  | $            | 27,351  |  | $ | 21,295 
|                                  |  |                      |         |                        |   |              |  |              |         |  |   |        



13



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)



|                          |  |              |         |                 |   |        
|------------------------- |  | ------------ | ------- | --------------- | - | -------
|                          |  | July 29,2006 |         | January 28,2006
|Consolidated Assets:      |  |              |         |                 |   |        
|Floorcoverings            |  | $            | 294,526 |                 | $ | 276,350
|Extrusion                 |  |              | 24,444  |                 |   | 26,178 
|                          |  |              |         |                 |   |        
|Total Consolidated Assets |  | $            | 318,970 |                 | $ | 302,528
|                          |  |              |         |                 |   |        

A reconciliation of net income (loss) as reported in the consolidated statements of operations to Adjusted EBITDA
as shown above is as follows (in thousands):



|                                                        |  |                      |        |              |                        |        |              |  |              |        |  |   |        |  
|------------------------------------------------------- |  | -------------------- | ------ | ------------ | ---------------------- | ------ | ------------ |  | ------------ | ------ |  | - | ------ | -
|                                                        |  | Thirteen Weeks Ended |        |              | Twenty-six Weeks Ended |       
|                                                        |  | July 29,2006         |        | July 30,2005 |                        |        | July 29,2006 |  | July 30,2005 |       
|Reconciliation of Net Income (Loss) to Adjusted EBITDA: |  |                      |        |              |                        |        |              |  |              |        |  |   |        |  
|Net income (loss)                                       |  | $                    | 7,006  |              | $                      | 4,374  |              |  | $            | 5,392  |  | $ | (1,409 | )
|Income tax expense                                      |  |                      | 4,923  |              |                        | 1,719  |              |  |              | 4,085  |  |   | 403    |  
|Net interest expense                                    |  |                      | 5,182  |              |                        | 4,917  |              |  |              | 10,911 |  |   | 9,993  |  
|Depreciation                                            |  |                      | 2,930  |              |                        | 2,471  |              |  |              | 5,669  |  |   | 5,035  |  
|Amortization                                            |  |                      | 615    |              |                        | 614    |              |  |              | 1,229  |  |   | 1,392  |  
|Minority interest in loss of subsidiary                 |  |                      |       |              |                        | (29    | )            |  |              |       |  |   | (39    | )
|Facility maximization costs                             |  |                      |       |              |                        | 2,658  |              |  |              |       |  |   | 5,826  |  
|(Gain) loss on disposal of fixed assets                 |  |                      | 62     |              |                        | (23    | )            |  |              | 65     |  |   | 94     |  
|                                                        |  |                      |        |              |                        |        |              |  |              |        |  |   |        |  
|Adjusted EBITDA                                         |  | $                    | 20,718 |              | $                      | 16,701 |              |  | $            | 27,351 |  | $ | 21,295 |  
|                                                        |  |                      |        |              |                        |        |              |  |              |        |  |   |        |  

Consolidated EBITDA as defined under the Companys Senior Credit Facility provides for additional
adjustments.

15. Commitments and Contingencies

During
the second quarter of fiscal 2006, the Company entered into an agreement to fix the price of natural gas. The agreement states that the Company is fixed on set amounts of natural gas from August 2006 to November 2006, ranging from 4,000 to 6,000
MMBtu per month, at a fixed, predetermined rate. See Note 5 Derivative Instruments for further discussion.

On September 18, 1998, James
Bradley Thomason (Thomason) filed an action in the District Court, 285thJudicial District, Bexar
County, Texas (the Court) against Linda Gomez Whitener, Steve Whitener, and Gomez Floor Covering (the Gomez Defendants), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a
contract with Thomason to pay him certain commissions and had conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services
Commission for State of Texas agencies (the Contract). Thomason settled his claims against the Gomez Defendants and Mannington Commercial. The Court granted the Companys motion for summary judgment and as a result, all of
Thomasons claims against the Company were dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the Appellate Court) affirmed the lower court ruling on all points, except for a claim of
quantum meruit (value of services where no contract exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on February 10, 2006, the jury entered a verdict in favor of the plaintiff in the
amount of $1,050,000. Under Texas law, the plaintiff made a claim for attorneys fees and prejudgment interest, and on May 19, 2006, the Appellate Court entered judgment on the jury verdict in the amount of $1,053,418, awarding
attorneys fees in the amount of $351,136 and prejudgment interest in the amount of $605,189.

Because the Company believes it has meritorious grounds
to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006. The Company intends to vigorously prosecute its appeal of the jury verdict and the award of attorneys fees and prejudgment interest. The
prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys fees or
prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability of approximately $2,010,000 related to this case in its accompanying statements of
financial condition.



14



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

On June 21, 2005, the Company filed in the United States District Court for the Northern District
of Georgia, Rome, Georgia, Division (the Court) a joint lawsuit with Shaw Industries Group, Inc. (Shaw) and Mohawk Industries, Inc. (Mohawk) against Interface, Inc. (Interface), regarding a patent on a
particular pattern of carpet tile that Interface recently received (the Rome Action). The Rome Action asks the Court to declare that the Interface patent is invalid, unenforceable and not infringed. Interface and certain of its
affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers asserting infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the
court in Atlanta, Interfaces suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. To date, no substantive
issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.

From time to time the Company is
subject to claims and suits arising in the ordinary course of business, including workers compensation and product liability claims, which may or may not be covered by insurance. Management believes that the various asserted claims and
litigation in which the Company is currently involved will not have a material adverse effect on its financial position or results of operations.

16.
Seasonality

The Company experiences seasonal fluctuations, with generally lower sales and gross profit in the first and fourth quarters of the fiscal
year and higher sales and gross profit in the second and third quarters of the fiscal year. The seasonality of sales and profitability is primarily a result of disproportionately higher education end market sales during the summer months while
schools generally are closed and floorcoverings can be installed. The interim results reported herein should not be presumed as indicative of the results for the full fiscal year.

17. Condensed Consolidated Financial Statements

The 9.75% Notes of the Company (the Issuer) are
guaranteed by certain of the Companys domestic subsidiaries (the guarantor subsidiaries). The guarantee of the guarantor subsidiaries is full and unconditional and joint and several and arose in conjunction with the Companys
issuance of the 9.75% Notes on February 20, 2002 and the $109.0 million Senior Credit Facility which was amended by the Company on February 20, 2002, May 1, 2004, August 18, 2004 and October 29, 2005. The
guarantees terms match the terms of the 9.75% Notes and the Senior Credit Facility. The maximum amount of future payments the guarantors would be required to make under the guarantees as of July 29, 2006 is $203.2 million. This amount
represents the principal amount outstanding of the Companys Senior Credit Facility, the 9.75% Notes and accrued interest on both obligations. Separate consolidated financial statements of the guarantor subsidiaries have not been presented
because management believes that such information would not be material to investors. However, condensed consolidating financial information as of July 29, 2006 and January 28, 2006, and for each of the thirteen weeks and twenty-six weeks
ended July 29, 2006 and July 30, 2005, is presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:



15



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

July 29, 2006

(In Thousands)



|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------------ |  | - | -------------------------- | - |  | -------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | SubtotalIssuer &Guarantors |   |  | Non- GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal | 
|ASSETS                                                  |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|                                                        |  |        |         |   |                       |   |             
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|                                                        |  |        |         |   |                       |   |             
|Cash and cash equivalents                               |  | $      | 3,032   |   |                       | $ | 1            |  | $ |                           |   |  | $                          | 3,033   |   |              | $ | 1,979  |                   |  | $ |        |   |  | $ | 5,012   |  
|Accounts receivable, net                                |  |        | 200     |   |                       |   | 51,090       |  |   |                           |   |  |                            | 51,290  |   |              |   | 9,143  |                   |  |   |        |   |  |   | 60,433  |  
|Inventories                                             |  |        | 27,158  |   |                       |   | 3,308        |  |   |                           |   |  |                            | 30,466  |   |              |   | 16,024 |                   |  |   |        |   |  |   | 46,490  |  
|Deferred tax assets                                     |  |        | 2,418   |   |                       |   | 136          |  |   |                           |   |  |                            | 2,554   |   |              |   | 1,399  |                   |  |   |        |   |  |   | 3,953   |  
|Prepaid expenses and other                              |  |        | 3,242   |   |                       |   |             |  |   |                           |   |  |                            | 3,242   |   |              |   | 984    |                   |  |   |        |   |  |   | 4,226   |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current assets                                    |  |        | 36,050  |   |                       |   | 54,535       |  |   |                           |   |  |                            | 90,585  |   |              |   | 29,529 |                   |  |   |        |   |  |   | 120,114 |  
|                                                        |  |        |         |   |                       |   |             
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 34,892  |   |                       |   | 11,804       |  |   |                           |   |  |                            | 46,696  |   |              |   | 19,942 |                   |  |   |        |   |  |   | 66,638  |  
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 5,631        |  |   |                           |   |  |                            | 68,017  |   |              |   | 30,361 |                   |  |   |        |   |  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                            |  |        | 27,295  |   |                       |   |             |  |   |                           |   |  |                            | 27,295  |   |              |   | 126    |                   |  |   |        |   |  |   | 27,421  |  
|INVESTMENT IN SUBSIDIARIES                              |  |        | 107,134 |   |                       |   |             |  |   | (46,484                    | ) |  |                            | 60,650  |   |              |   |       |                   |  |   | (60,650 | ) |  |   |        |  
|OTHER ASSETS                                            |  |        | 5,409   |   |                       |   | 93           |  |   |                           |   |  |                            | 5,502   |   |              |   | 3,934  |                   |  |   | (3,017  | ) |  |   | 6,419   |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL ASSETS                                            |  | $      | 273,166 |   |                       | $ | 72,063       |  | $ | (46,484                    | ) |  | $                          | 298,745 |   |              | $ | 83,892 |                   |  | $ | (63,667 | ) |  | $ | 318,970 |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|                                                        |  |        |         |   |                       |   |             
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Accounts payable                                        |  | $      | 11,667  |   |                       | $ | 3,830        |  | $ |                           |   |  | $                          | 15,497  |   |              | $ | 5,749  |                   |  | $ |        |   |  | $ | 21,246  |  
|Accrued expenses                                        |  |        | 23,906  |   |                       |   | 2,982        |  |   |                           |   |  |                            | 26,888  |   |              |   | 3,817  |                   |  |   |        |   |  |   | 30,705  |  
|Current portion of long-term debt                       |  |        | 8,040   |   |                       |   |             |  |   |                           |   |  |                            | 8,040   |   |              |   | 4,797  |                   |  |   |        |   |  |   | 12,837  |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current liabilities                               |  |        | 43,613  |   |                       |   | 6,812        |  |   |                           |   |  |                            | 50,425  |   |              |   | 14,363 |                   |  |   |        |   |  |   | 64,788  |  
|                                                        |  |        |         |   |                       |   |             
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (24,540 | ) |                       |   | 17,523       |  |   |                           |   |  |                            | (7,017  | ) |              |   | 6,497  |                   |  |   | 520     |   |  |   |        |  
|OTHER LIABILITIES, including post-retirement obligation |  |        | 5,506   |   |                       |   |             |  |   |                           |   |  |                            | 5,506   |   |              |   | 64     |                   |  |   |        |   |  |   | 5,570   |  
|DEFERRED TAX LIABILITIES                                |  |        | 6,484   |   |                       |   | 1,244        |  |   |                           |   |  |                            | 7,728   |   |              |   |       |                   |  |   | (3,017  | ) |  |   | 4,711   |  
|LONG-TERM DEBT, net of current portion                  |  |        | 187,648 |   |                       |   |             |  |   |                           |   |  |                            | 187,648 |   |              |   | 2,318  |                   |  |   |        |   |  |   | 189,966 |  
|                                                        |  |        |         |   |                       |   |             
|STOCKHOLDERS EQUITY:                                   |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Preferred stock                                         |  |        |        |   |                       |   |             |  |   |                           |   |  |                            |        |   |              |   | 133    |                   |  |   | (133    | ) |  |   |        |  
|Common stock                                            |  |        |        |   |                       |   |             |  |   |                           |   |  |                            |        |   |              |   | 11,117 |                   |  |   | (11,117 | ) |  |   |        |  
|Paid-in capital                                         |  |        | 72,648  |   |                       |   |             |  |   |                           |   |  |                            | 72,648  |   |              |   | 52,064 |                   |  |   | (52,064 | ) |  |   | 72,648  |  
|Retained earnings (deficit)                             |  |        | (17,043 | ) |                       |   | 46,484       |  |   | (46,484                    | ) |  |                            | (17,043 | ) |              |   | (2,242 | )                 |  |   | 2,242   |   |  |   | (17,043 | )
|Accumulated other comprehensive income                  |  |        | (1,150  | ) |                       |   |             |  |   |                           |   |  |                            | (1,150  | ) |              |   | (422   | )                 |  |   | (98     | ) |  |   | (1,670  | )
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total stockholders equity                              |  |        | 54,455  |   |                       |   | 46,484       |  |   | (46,484                    | ) |  |                            | 54,455  |   |              |   | 60,650 |                   |  |   | (61,170 | ) |  |   | 53,935  |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 273,166 |   |                       | $ | 72,063       |  | $ | (46,484                    | ) |  | $                          | 298,745 |   |              | $ | 83,892 |                   |  | $ | (63,667 | ) |  | $ | 318,970 |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  



16



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 29, 2006

(In Thousands)



|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------------ |  | - | -------------------------- | - |  | -------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | SubtotalIssuer &Guarantors |   |  | Non- GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal | 
|ASSETS                                                  |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|                                                        |  |        |         |   |                       |   |             
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|                                                        |  |        |         |   |                       |   |             
|Cash and cash equivalents                               |  | $      | 2,655   |   |                       | $ | 1            |  | $ |                           |   |  | $                          | 2,656   |   |              | $ | 3,147  |                   |  | $ |        |   |  | $ | 5,803   |  
|Accounts receivable, net                                |  |        | 37      |   |                       |   | 38,508       |  |   |                           |   |  |                            | 38,545  |   |              |   | 8,146  |                   |  |   |        |   |  |   | 46,691  |  
|Inventories                                             |  |        | 20,251  |   |                       |   | 2,906        |  |   |                           |   |  |                            | 23,157  |   |              |   | 16,836 |                   |  |   |        |   |  |   | 39,993  |  
|Deferred tax assets                                     |  |        | 5,451   |   |                       |   | 76           |  |   |                           |   |  |                            | 5,527   |   |              |   |       |                   |  |   | (664    | ) |  |   | 4,863   |  
|Prepaid expenses and other                              |  |        | 2,573   |   |                       |   |             |  |   |                           |   |  |                            | 2,573   |   |              |   | 951    |                   |  |   |        |   |  |   | 3,524   |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current assets                                    |  |        | 30,967  |   |                       |   | 41,491       |  |   |                           |   |  |                            | 72,458  |   |              |   | 29,080 |                   |  |   | (664    | ) |  |   | 100,874 |  
|                                                        |  |        |         |   |                       |   |             
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 34,124  |   |                       |   | 12,744       |  |   |                           |   |  |                            | 46,868  |   |              |   | 20,829 |                   |  |   |        |   |  |   | 67,697  |  
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 5,631        |  |   |                           |   |  |                            | 68,017  |   |              |   | 30,361 |                   |  |   |        |   |  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                            |  |        | 28,524  |   |                       |   |             |  |   |                           |   |  |                            | 28,524  |   |              |   | 126    |                   |  |   |        |   |  |   | 28,650  |  
|INVESTMENT IN SUBSIDIARIES                              |  |        | 91,994  |   |                       |   |             |  |   | (27,540                    | ) |  |                            | 64,454  |   |              |   |       |                   |  |   | (64,454 | ) |  |   |        |  
|OTHER ASSETS                                            |  |        | 6,471   |   |                       |   | 93           |  |   |                           |   |  |                            | 6,564   |   |              |   | 3,382  |                   |  |   | (3,017  | ) |  |   | 6,929   |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL ASSETS                                            |  | $      | 254,466 |   |                       | $ | 59,959       |  | $ | (27,540                    | ) |  | $                          | 286,885 |   |              | $ | 83,778 |                   |  | $ | (68,135 | ) |  | $ | 302,528 |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|                                                        |  |        |         |   |                       |   |             
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Accounts payable                                        |  | $      | 8,485   |   |                       | $ | 2,349        |  | $ |                           |   |  | $                          | 10,834  |   |              | $ | 5,969  |                   |  | $ |        |   |  | $ | 16,803  |  
|Accrued expenses                                        |  |        | 19,077  |   |                       |   | 1,777        |  |   |                           |   |  |                            | 20,854  |   |              |   | 4,294  |                   |  |   |        |   |  |   | 25,148  |  
|Current portion of long-term debt                       |  |        | 571     |   |                       |   |             |  |   |                           |   |  |                            | 571     |   |              |   | 4,077  |                   |  |   |        |   |  |   | 4,648   |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current liabilities                               |  |        | 28,133  |   |                       |   | 4,126        |  |   |                           |   |  |                            | 32,259  |   |              |   | 14,340 |                   |  |   |        |   |  |   | 46,599  |  
|                                                        |  |        |         |   |                       |   |             
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (30,352 | ) |                       |   | 27,237       |  |   |                           |   |  |                            | (3,115  | ) |              |   | 2,525  |                   |  |   | 590     |   |  |   |        |  
|OTHER LIABILITIES, including post-retirement obligation |  |        | 5,301   |   |                       |   |             |  |   |                           |   |  |                            | 5,301   |   |              |   | 63     |                   |  |   |        |   |  |   | 5,364   |  
|DEFERRED TAX LIABILITIES                                |  |        | 7,066   |   |                       |   | 1,056        |  |   |                           |   |  |                            | 8,122   |   |              |   |       |                   |  |   | (3,681  | ) |  |   | 4,441   |  
|LONG-TERM DEBT, net of current portion                  |  |        | 195,277 |   |                       |   |             |  |   |                           |   |  |                            | 195,277 |   |              |   | 2,396  |                   |  |   |        |   |  |   | 197,673 |  
|                                                        |  |        |         |   |                       |   |             
|STOCKHOLDERS EQUITY:                                   |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Preferred stock                                         |  |        |        |   |                       |   |             |  |   |                           |   |  |                            |        |   |              |   | 133    |                   |  |   | (133    | ) |  |   |        |  
|Common stock                                            |  |        |        |   |                       |   |             |  |   |                           |   |  |                            |        |   |              |   | 11,117 |                   |  |   | (11,117 | ) |  |   |        |  
|Paid-in capital                                         |  |        | 72,648  |   |                       |   |             |  |   |                           |   |  |                            | 72,648  |   |              |   | 52,064 |                   |  |   | (52,064 | ) |  |   | 72,648  |  
|Retained earnings (deficit)                             |  |        | (22,435 | ) |                       |   | 27,540       |  |   | (27,540                    | ) |  |                            | (22,435 | ) |              |   | 1,483  |                   |  |   | (1,483  | ) |  |   | (22,435 | )
|Accumulated other comprehensive income                  |  |        | (1,172  | ) |                       |   |             |  |   |                           |   |  |                            | (1,172  | ) |              |   | (343   | )                 |  |   | (247    | ) |  |   | (1,762  | )
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total stockholders equity                              |  |        | 49,041  |   |                       |   | 27,540       |  |   | (27,540                    | ) |  |                            | 49,041  |   |              |   | 64,454 |                   |  |   | (65,044 | ) |  |   | 48,451  |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 254,466 |   |                       | $ | 59,959       |  | $ | (27,540                    | ) |  | $                          | 286,885 |   |              | $ | 83,778 |                   |  | $ | (68,135 | ) |  | $ | 302,528 |  
|                                                        |  |        |         |   |                       |   |              |  |   |                            |   |  |                            |         |   |              |   |        |                   |  |   |         |   |  |   |         |  



17



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended July 29, 2006

(In Thousands)



|                                           |  |        |        |   |                       |   |              |  |   |                            |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        
|------------------------------------------ |  | ------ | ------ | - | --------------------- | - | ------------ |  | - | -------------------------- | - |  | ------------------------- | ------ | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | -------
|                                           |  | Issuer |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | SubtotalIssuer &Guarantors |   |  | Non-GuarantorSubsidiaries |        |   | Eliminations |   |        | ConsolidatedTotal
|Net Sales                                  |  | $      | 52,902 |   |                       | $ | 95,509       |  | $ | (49,047                    | ) |  | $                         | 99,364 |   |              | $ | 23,177 |                   |  | $ | (14,472 | ) |  | $ | 108,069
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        
|Cost of Goods Sold                         |  |        | 45,343 |   |                       |   | 66,611       |  |   | (49,047                    | ) |  |                           | 62,907 |   |              |   | 20,962 |                   |  |   | (14,472 | ) |  |   | 69,397 
|Selling, General & Administrative Expenses |  |        | 8,820  |   |                       |   | 8,463        |  |   |                           |   |  |                           | 17,283 |   |              |   | 3,601  |                   |  |   |        |   |  |   | 20,884 
|Amortization                               |  |        | 615    |   |                       |   |             |  |   |                           |   |  |                           | 615    |   |              |   |       |                   |  |   |        |   |  |   | 615    
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        
|Operating Expenses                         |  |        | 54,778 |   |                       |   | 75,074       |  |   | (49,047                    | ) |  |                           | 80,805 |   |              |   | 24,563 |                   |  |   | (14,472 | ) |  |   | 90,896 
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        
|Operating Income (Loss)                    |  |        | (1,876 | ) |                       |   | 20,435       |  |   |                           |   |  |                           | 18,559 |   |              |   | (1,386 | )                 |  |   |        |   |  |   | 17,173 
|                                           |  |        |        |   |                       |   |             
|Equity in Earnings of Subsidiaries         |  |        | 9,132  |   |                       |   |             |  |   | (12,299                    | ) |  |                           | (3,167 | ) |              |   |       |                   |  |   | 3,167   |   |  |   |       
|Loss on Sale of Fixed Assets               |  |        | 3      |   |                       |   |             |  |   |                           |   |  |                           | 3      |   |              |   | 59     |                   |  |   |        |   |  |   | 62     
|Net Interest Expense                       |  |        | 5,125  |   |                       |   |             |  |   |                           |   |  |                           | 5,125  |   |              |   | 57     |                   |  |   |        |   |  |   | 5,182  
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        
|Income (Loss) Before Income Taxes          |  |        | 2,128  |   |                       |   | 20,435       |  |   | (12,299                    | ) |  |                           | 10,264 |   |              |   | (1,502 | )                 |  |   | 3,167   |   |  |   | 11,929 
|                                           |  |        |        |   |                       |   |             
|Income Tax Expense (Benefit)               |  |        | (4,878 | ) |                       |   | 8,136        |  |   |                           |   |  |                           | 3,258  |   |              |   | 1,665  |                   |  |   |        |   |  |   | 4,923  
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        
|Net Income (Loss)                          |  | $      | 7,006  |   |                       | $ | 12,299       |  | $ | (12,299                    | ) |  | $                         | 7,006  |   |              | $ | (3,167 | )                 |  | $ | 3,167   |   |  | $ | 7,006  
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |  |                           |        |   |              |   |        |                   |  |   |         |   |  |   |        



18



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended July 30, 2005

(In Thousands)



|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |       
|------------------------------------------ |  | ------ | ------ | - | --------------------- | - | ------------ |  | - | -------------------------- | - | ------------------------- | - | ------ | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------
|                                           |  | Issuer |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | SubtotalIssuer &Guarantors |   | Non-GuarantorSubsidiaries |   |        | Eliminations |   |        | ConsolidatedTotal
|Net Sales                                  |  | $      | 44,729 |   |                       | $ | 84,605       |  | $ | (41,001                    | ) |                           | $ | 88,333 |              | $ | 20,891 |                   |  | $ | (14,150 | ) |  | $ | 95,074
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |       
|Cost of Goods Sold                         |  |        | 38,947 |   |                       |   | 59,591       |  |   | (41,001                    | ) |                           |   | 57,537 |              |   | 20,305 |                   |  |   | (14,150 | ) |  |   | 63,692
|Selling, General & Administrative Expenses |  |        | 7,870  |   |                       |   | 8,044        |  |   |                           |   |                           |   | 15,914 |              |   | 3,896  |                   |  |   |        |   |  |   | 19,810
|Amortization                               |  |        | 614    |   |                       |   |             |  |   |                           |   |                           |   | 614    |              |   |       |                   |  |   |        |   |  |   | 614   
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |       
|Operating Expenses                         |  |        | 47,431 |   |                       |   | 67,635       |  |   | (41,001                    | ) |                           |   | 74,065 |              |   | 24,201 |                   |  |   | (14,150 | ) |  |   | 84,116
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |       
|Operating Income (Loss)                    |  |        | (2,702 | ) |                       |   | 16,970       |  |   |                           |   |                           |   | 14,268 |              |   | (3,310 | )                 |  |   |        |   |  |   | 10,958
|                                           |  |        |        |   |                       |   |             
|Minority Interest in Loss of Subsidiary    |  |        |       |   |                       |   |             |  |   |                           |   |                           |   |       |              |   | 29     |                   |  |   |        |   |  |   | 29    
|Equity in Earnings of Subsidiaries         |  |        | 7,206  |   |                       |   |             |  |   |                           |   |                           |   | 7,206  |              |   |       |                   |  |   | (7,206  | ) |  |   |      
|Gain on Disposal of Fixed Assets           |  |        | 23     |   |                       |   |             |  |   |                           |   |                           |   | 23     |              |   |       |                   |  |   |        |   |  |   | 23    
|Net Interest Expense                       |  |        | 4,869  |   |                       |   |             |  |   |                           |   |                           |   | 4,869  |              |   | 48     |                   |  |   |        |   |  |   | 4,917 
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |       
|Income (Loss) Before Income Taxes          |  |        | (342   | ) |                       |   | 16,970       |  |   |                           |   |                           |   | 16,628 |              |   | (3,329 | )                 |  |   | (7,206  | ) |  |   | 6,093 
|                                           |  |        |        |   |                       |   |             
|Income Tax Expense (Benefit)               |  |        | (4,716 | ) |                       |   | 6,790        |  |   |                           |   |                           |   | 2,074  |              |   | (355   | )                 |  |   |        |   |  |   | 1,719 
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |       
|Net Income (Loss)                          |  | $      | 4,374  |   |                       | $ | 10,180       |  | $ |                           |   |                           | $ | 14,554 |              | $ | (2,974 | )                 |  | $ | (7,206  | ) |  | $ | 4,374 
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |         |   |  |   |       



19



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Twenty-six Weeks Ended July 29, 2006

(In Thousands)



|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|------------------------------------------ |  | ------ | ------- | - | --------------------- | - | ------------ |  | - | -------------------------- | - |  | ------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                           |  | Issuer |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | SubtotalIssuer &Guarantors |   |  | Non-GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal | 
|Net Sales                                  |  | $      | 89,925  |   |                       | $ | 164,396      |  | $ | (82,180                    | ) |  | $                         | 172,141 |   |              | $ | 45,489 |                   |  | $ | (28,838 | ) |  | $ | 188,792 |  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Cost of Goods Sold                         |  |        | 80,158  |   |                       |   | 116,008      |  |   | (82,180                    | ) |  |                           | 113,986 |   |              |   | 40,337 |                   |  |   | (28,838 | ) |  |   | 125,485 |  
|Selling, General & Administrative Expenses |  |        | 17,720  |   |                       |   | 16,932       |  |   |                           |   |  |                           | 34,652  |   |              |   | 7,005  |                   |  |   |        |   |  |   | 41,657  |  
|Amortization                               |  |        | 1,229   |   |                       |   |             |  |   |                           |   |  |                           | 1,229   |   |              |   |       |                   |  |   |        |   |  |   | 1,229   |  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Operating Expenses                         |  |        | 99,107  |   |                       |   | 132,940      |  |   | (82,180                    | ) |  |                           | 149,867 |   |              |   | 47,342 |                   |  |   | (28,838 | ) |  |   | 168,371 |  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Operating Income (Loss)                    |  |        | (9,182  | ) |                       |   | 31,456       |  |   |                           |   |  |                           | 22,274  |   |              |   | (1,853 | )                 |  |   |        |   |  |   | 20,421  |  
|                                           |  |        |         |   |                       |   |             
|Equity in Earnings of Subsidiaries         |  |        | 15,219  |   |                       |   |             |  |   | (18,944                    | ) |  |                           | (3,725  | ) |              |   |       |                   |  |   | 3,725   |   |  |   |        |  
|Gain (Loss) on Sale of Fixed Assets        |  |        | 26      |   |                       |   |             |  |   |                           |   |  |                           | 26      |   |              |   | (59    | )                 |  |   |        |   |  |   | (33     | )
|Net Interest Expense                       |  |        | 10,778  |   |                       |   |             |  |   |                           |   |  |                           | 10,778  |   |              |   | 133    |                   |  |   |        |   |  |   | 10,911  |  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Income (Loss) Before Income Taxes          |  |        | (4,715  | ) |                       |   | 31,456       |  |   | (18,944                    | ) |  |                           | 7,797   |   |              |   | (2,045 | )                 |  |   | 3,725   |   |  |   | 9,477   |  
|Income Tax Expense (Benefit)               |  |        | (10,107 | ) |                       |   | 12,512       |  |   |                           |   |  |                           | 2,405   |   |              |   | 1,680  |                   |  |   |        |   |  |   | 4,085   |  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Net Income (Loss)                          |  | $      | 5,392   |   |                       | $ | 18,944       |  | $ | (18,944                    | ) |  | $                         | 5,392   |   |              | $ | (3,725 | )                 |  | $ | 3,725   |   |  | $ | 5,392   |  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  



20



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Twenty-six Weeks Ended July 30, 2005

(In Thousands)



|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |         |              |   |        |                   |  |   |         |   |  |   |         |  
|------------------------------------------ |  | ------ | ------ | - | --------------------- | - | ------------ |  | - | -------------------------- | - | ------------------------- | - | ------- | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                           |  | Issuer |        |   | GuarantorSubsidiaries |   | Eliminations |  |   | SubtotalIssuer &Guarantors |   | Non-GuarantorSubsidiaries |   |         | Eliminations |   |        | ConsolidatedTotal | 
|Net Sales                                  |  | $      | 74,119 |   |                       | $ | 142,279      |  | $ | (66,629                    | ) |                           | $ | 149,769 |              | $ | 39,431 |                   |  | $ | (25,812 | ) |  | $ | 163,388 |  
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |         |              |   |        |                   |  |   |         |   |  |   |         |  
|Cost of Goods Sold                         |  |        | 65,243 |   |                       |   | 100,778      |  |   | (66,629                    | ) |                           |   | 99,392  |              |   | 39,430 |                   |  |   | (25,812 | ) |  |   | 113,010 |  
|Selling, General & Administrative Expenses |  |        | 15,135 |   |                       |   | 16,789       |  |   |                           |   |                           |   | 31,924  |              |   | 8,020  |                   |  |   |        |   |  |   | 39,944  |  
|Amortization                               |  |        | 1,228  |   |                       |   | 164          |  |   |                           |   |                           |   | 1,392   |              |   |       |                   |  |   |        |   |  |   | 1,392   |  
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |         |              |   |        |                   |  |   |         |   |  |   |         |  
|Operating Expenses                         |  |        | 81,606 |   |                       |   | 117,731      |  |   | (66,629                    | ) |                           |   | 132,708 |              |   | 47,450 |                   |  |   | (25,812 | ) |  |   | 154,346 |  
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |         |              |   |        |                   |  |   |         |   |  |   |         |  
|Operating Income (Loss)                    |  |        | (7,487 | ) |                       |   | 24,548       |  |   |                           |   |                           |   | 17,061  |              |   | (8,019 | )                 |  |   |        |   |  |   | 9,042   |  
|                                           |  |        |        |   |                       |   |             
|Minority Interest in Loss of Subsidiary    |  |        |       |   |                       |   |             |  |   |                           |   |                           |   |        |              |   | 39     |                   |  |   |        |   |  |   | 39      |  
|Equity in Earnings of Subsidiaries         |  |        | 7,503  |   |                       |   |             |  |   |                           |   |                           |   | 7,503   |              |   |       |                   |  |   | (7,503  | ) |  |   |        |  
|Gain (Loss) on Sale of Fixed Assets        |  |        | 23     |   |                       |   |             |  |   |                           |   |                           |   | 23      |              |   | (117   | )                 |  |   |        |   |  |   | (94     | )
|Net Interest Expense                       |  |        | 9,898  |   |                       |   |             |  |   |                           |   |                           |   | 9,898   |              |   | 95     |                   |  |   |        |   |  |   | 9,993   |  
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |         |              |   |        |                   |  |   |         |   |  |   |         |  
|Income (Loss) Before Income Taxes          |  |        | (9,859 | ) |                       |   | 24,548       |  |   |                           |   |                           |   | 14,689  |              |   | (8,192 | )                 |  |   | (7,503  | ) |  |   | (1,006  | )
|                                           |  |        |        |   |                       |   |             
|Income Tax Expense (Benefit)               |  |        | (8,450 | ) |                       |   | 9,822        |  |   |                           |   |                           |   | 1,372   |              |   | (969   | )                 |  |   |        |   |  |   | 403     |  
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |         |              |   |        |                   |  |   |         |   |  |   |         |  
|Net Income (Loss)                          |  | $      | (1,409 | ) |                       | $ | 14,726       |  | $ |                           |   |                           | $ | 13,317  |              | $ | (7,223 | )                 |  | $ | (7,503  | ) |  | $ | (1,409  | )
|                                           |  |        |        |   |                       |   |              |  |   |                            |   |                           |   |         |              |   |        |                   |  |   |         |   |  |   |         |  



21



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS  (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Twenty-six Weeks Ended July 29, 2006

(In Thousands)



|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|------------------------------------------------------------ |  | ------ | ------- | - | --------------------- | - | ---- | ------------------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                             |  | Issuer |         |   | GuarantorSubsidiaries |   |      | Non-GuarantorSubsidiaries |  |   | ConsolidatedTotal |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  | $      | 4,250   |   |                       | $ | 171  |                           |  | $ | (1,444            | ) |  | $ | 2,977   |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Proceeds from disposal of property, plant and equipment      |  |        | 32      |   |                       |   |     |                           |  |   |                  |   |  |   | 32      |  
|Additions to property, plant and equipment                   |  |        | (3,745  | ) |                       |   | (171 | )                         |  |   | (355              | ) |  |   | (4,271  | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Net cash used in investing activities                        |  |        | (3,713  | ) |                       |   | (171 | )                         |  |   | (355              | ) |  |   | (4,239  | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Proceeds from revolving credit facilities                    |  |        | 11,000  |   |                       |   |     |                           |  |   | 1,752             |   |  |   | 12,752  |  
|Repayments of revolving credit facilities                    |  |        | (11,000 | ) |                       |   |     |                           |  |   | (1,051            | ) |  |   | (12,051 | )
|Repayments of long-term debt                                 |  |        | (160    | ) |                       |   |     |                           |  |   | (103              | ) |  |   | (263    | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Net cash provided by (used in) financing activities          |  |        | (160    | ) |                       |   |     |                           |  |   | 598               |   |  |   | 438     |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Effect of exchange rate changes on cash and cash equivalents |  |        |        |   |                       |   |     |                           |  |   | 33                |   |  |   | 33      |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                      |  |        | 377     |   |                       |   |     |                           |  |   | (1,168            | ) |  |   | (791    | )
|CASH AND CASH EQUIVALENTS, beginning of period               |  |        | 2,655   |   |                       |   | 1    |                           |  |   | 3,147             |   |  |   | 5,803   |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                     |  | $      | 3,032   |   |                       | $ | 1    |                           |  | $ | 1,979             |   |  | $ | 5,012   |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  



22



---

##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS - (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Twenty-six Weeks
Ended July 30, 2005

(In Thousands)



|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|------------------------------------------------------------ |  | ------ | ------- | - | --------------------- | - | -- | -------------------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                             |  | Issuer |         |   | GuarantorSubsidiaries |   |    | Non- GuarantorSubsidiaries |  |   | ConsolidatedTotal |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  | $      | (10,119 | ) |                       | $ | 1  |                            |  | $ | (6,440            | ) |  | $ | (16,558 | )
|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|Equity distribution from affiliate                           |  |        |        |   |                       |   |   |                            |  |   |                  |   |  |   |        |  
|Additions to property, plant, and equipment                  |  |        | (4,395  | ) |                       |   | (1 | )                          |  |   | (2,715            | ) |  |   | (7,111  | )
|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|Net cash used in investing activities                        |  |        | (4,395  | ) |                       |   | (1 | )                          |  |   | (2,715            | ) |  |   | (7,111  | )
|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|Proceeds from long-term debt                                 |  |        |        |   |                       |   |   |                            |  |   | 601               |   |  |   | 601     |  
|Repayments of long-term debt                                 |  |        |        |   |                       |   |   |                            |  |   | (260              | ) |  |   | (260    | )
|Financing costs                                              |  |        | (97     | ) |                       |   |   |                            |  |   |                  |   |  |   | (97     | )
|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|Net cash used in financing activities                        |  |        | (97     | ) |                       |   |   |                            |  |   | 341               |   |  |   | 244     |  
|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|Effect of exchange rate changes on cash and cash equivalents |  |        |        |   |                       |   |   |                            |  |   | 910               |   |  |   | 910     |  
|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                      |  |        | (14,611 | ) |                       |   |   |                            |  |   | (7,904            | ) |  |   | (22,515 | )
|CASH AND CASH EQUIVALENTS, beginning of period               |  |        | 23,110  |   |                       |   |   |                            |  |   | 2,616             |   |  |   | 25,726  |  
|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                     |  | $      | 8,499   |   |                       | $ |   |                            |  | $ | (5,288            | ) |  | $ | 3,211   |  
|                                                             |  |        |         |   |                       |   |    |                            |  |   |                   |   |  |   |         |  



23



---

##### Table of Contents

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

This discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto in Part I, Item 1
contained in this Quarterly Report on Form 10-Q and with the discussion, analysis and consolidated financial statements and notes thereto in Part I, Items 1 and 1A, and Part II, Items 6, 7, 7A and 8 of the Annual Report on Form 10-K for the fiscal
year ended January 28, 2006.

Overview

Collins & Aikman Floorcoverings, Inc. (the Company), a Delaware corporation, is a manufacturer of floorcovering products for the North American specified commercial carpet market. The Companys floorcovering
products include (i) vinyl-backed six-foot roll carpet and modular carpet tile and (ii) high-style tufted and woven broadloom carpets. The Company designs, manufactures and markets its C&A, Monterey and Crossley brands under the Tandus
name for a wide variety of end markets, including corporate offices, education, healthcare, government facilities and retail stores. The ability to provide a package of product offerings coupled with flexible distribution channels,
allows the Company to provide a wide array of floorcovering solutions. The Company is headquartered in Georgia, with additional manufacturing locations in Canada, the United Kingdom and China.

The Company is a wholly-owned subsidiary of Tandus Group. As a result of a recapitalization transaction on January 25, 2001, investment funds managed by Oaktree and
BACI, specifically the Oaktree Fund and the B of A Fund, respectively, control a majority of the outstanding capital stock of Tandus Group.

Recent
Events

On September 1, 2006, the Company announced the resignation of Edgar M. Bridger, Chief Executive Officer, from its Board of Directors
effective August 31, 2006. In addition, the Company announced Mr. Bridgers resignation from the Chief Executive Officer position effective no later than January 27, 2007.

Results of Operations

The following
table sets forth certain operating results as a percentage of net sales for the periods indicated.



|                                           |  |                      |   |  |                        |   |  |              |   |  |              |  
|------------------------------------------ |  | -------------------- | - |  | ---------------------- | - |  | ------------ | - |  | ------------ | -
|                                           |  | Thirteen Weeks Ended |   |  | Twenty-six Weeks Ended |  
|                                           |  | July 29,2006         |   |  | July 30,2005           |   |  | July 29,2006 |   |  | July 30,2005 |  
|Net Sales                                  |  | 100.0                | % |  | 100.0                  | % |  | 100.0        | % |  | 100.0        | %
|Cost of Goods Sold                         |  | 64.2                 | % |  | 67.0                   | % |  | 66.5         | % |  | 69.2         | %
|                                           |  |                      |   |  |                        |   |  |              |   |  |              |  
|Gross Profit                               |  | 35.8                 | % |  | 33.0                   | % |  | 33.5         | % |  | 30.8         | %
|Selling, General & Administrative Expenses |  | 19.3                 | % |  | 20.8                   | % |  | 22.1         | % |  | 24.4         | %
|Amortization                               |  | 0.6                  | % |  | 0.7                    | % |  | 0.6          | % |  | 0.9          | %
|                                           |  |                      |   |  |                        |   |  |              |   |  |              |  
|Operating Income                           |  | 15.9                 | % |  | 11.5                   | % |  | 10.8         | % |  | 5.5          | %
|                                           |  |                      |   |  |                        |   |  |              |   |  |              |  
|Net Interest Expense                       |  | 4.8                  | % |  | 5.2                    | % |  | 5.8          | % |  | 6.1          | %
|                                           |  |                      |   |  |                        |   |  |              |   |  |              |  
|Net Income (Loss)                          |  | 6.5                  | % |  | 4.6                    | % |  | 2.9          | % |  | -0.9         | %
|                                           |  |                      |   |  |                        |   |  |              |   |  |              |  
|Adjusted EBITDA                            |  | 19.2                 | % |  | 17.6                   | % |  | 14.5         | % |  | 13.0         | %
|                                           |  |                      |   |  |                        |   |  |              |   |  |              |  

Thirteen Weeks Ended July 29, 2006 as Compared with the Thirteen Weeks Ended July 30, 2005

Net Sales.Net sales for the thirteen weeks ended July 29, 2006 were $108.1 million, an increase of 13.7% from $95.1 million
for the thirteen weeks ended July 30, 2005. Net sales of the Companys Floorcoverings segment were $101.0 million for the thirteen weeks ended July 29, 2006 as compared to $88.3 million for the thirteen weeks ended July 30, 2005,
an increase of $12.7 million or 14.4%, primarily attributable to the North American operations. Within these operations, the Companys Floorcoverings segments net sales experienced a 10.7% increase in broadloom sales combined with an
11.5% increase in sales of structure-backed carpets (six-foot and



24



---

##### Table of Contents

carpet tile). The current quarter results reflect an increase in both Institutional sales (Healthcare, Education and
Government) and Corporate sales, including Retail, of 11.0% and 12.0%, respectively. The overall increase in the Floorcoverings segment sales is primarily volume driven across all of its markets coupled with a slight increase in average selling
prices. In addition, in the thirteen weeks ended July 30, 2005, the Floorcoverings segment experienced lower sales in part due to complications related to the Facility Maximization. Net sales of the Extrusion segment were $7.1 million for the
thirteen weeks ended July 29, 2006 as compared to $6.8 million for the thirteen weeks ended July 30, 2005, an increase of $0.3 million or 4.4%. The increase in sales for the Extrusion segment was due to overall higher demand from the
Extrusion segments external customers.

Cost of Goods Sold. Cost of goods sold was $69.4 million, or 64.2% of sales, for the
thirteen weeks ended July 29, 2006 as compared to $63.7 million, or 67.0% of sales, for the thirteen weeks ended July 30, 2005. The increase in cost of goods sold was primarily due to increased sales. In addition, the Company experienced
increases in the prices of several key raw materials in the current quarter and the second half of fiscal 2005 that have carried over into the first half of fiscal 2006. Included in the 2005 period expenses was $2.3 million of costs related to the
Facility Maximization. Excluding these costs, cost of goods sold for the thirteen weeks ended July 30, 2005 was $61.4 million, or 64.6% of sales.

Selling, General and Administrative Expenses.Selling, general and administrative expenses for the thirteen weeks ended July 29, 2006 were $20.9 million, an increase of 5.6% from $19.8 million for the thirteen
weeks ended July 30, 2005. As a percentage of sales, total selling, general and administrative costs were 19.3% and 20.8% for the thirteen weeks ended July 29, 2006 and July 30, 2005, respectively. During the 2006 period, the Company
incurred an increase of approximately $1.9 million in legal and professional expenses (see Liquidity and Capital Resources contained herein). This increase was partially offset by lower samples expense of approximately $0.6 million. The
Company experienced a foreign currency transaction gain of $0.1 million in each of the thirteen week periods ended July 29, 2006 and July 30, 2005. Included in the 2005 period expense was $0.4 million of costs related to the Facility
Maximization.

Amortization.Intangible asset amortization was $0.6 million for each of the thirteen week periods ended July 29,
2006 and July 30, 2005.

Interest Expense. Net interest expense was $5.2 million and $4.9 million for the thirteen week periods
ended July 29, 2006 and July 30, 2005, respectively, which included nominal interest income.

Income Taxes. The Company had
income tax expense of $4.9 million for the thirteen weeks ended July 29, 2006 compared to $1.7 million for the thirteen weeks ended July 30, 2005.

Net Income. The Company had net income of $7.0 million for thirteen weeks ended July 29, 2006 compared to $4.4 million for the thirteen weeks ended July 30, 2005.

Adjusted EBITDA.Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, non-cash charges or expenses (other than
the write-down of current assets), costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, plus Chroma cash dividends and minority interest in income (loss) of subsidiary less equity in earnings of
Chroma. Adjusted EBITDA for the thirteen weeks ended July 29, 2006 increased to $20.7 million from $16.7 million for the thirteen weeks ended July 30, 2005. As a percentage of sales, Adjusted EBITDA was 19.2% for the second quarter of 2006
compared to 17.6% in the second quarter of 2005. The increase was principally due to higher sales volume in the Floorcoverings segment. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a
companys ability to service debt. Consolidated EBITDA as defined under the Companys Senior Credit Facility provides for additional adjustments. Adjusted EBITDA is not a measure of financial performance under accounting principles
generally accepted in the United States of America and should not be considered an alternative to operating income or net income as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of
liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.



25



---

##### Table of Contents

A reconciliation of net income to Adjusted EBITDA is as follows (in thousands):



|                                        |  |                      |        |              |   |        |  
|--------------------------------------- |  | -------------------- | ------ | ------------ | - | ------ | -
|                                        |  | Thirteen Weeks Ended |       
|                                        |  | July 29,2006         |        | July 30,2005 |  
|Net Income                              |  | $                    | 7,006  |              | $ | 4,374  |  
|Income Tax Expense                      |  |                      | 4,923  |              |   | 1,719  |  
|Net Interest Expense                    |  |                      | 5,182  |              |   | 4,917  |  
|Depreciation                            |  |                      | 2,930  |              |   | 2,471  |  
|Amortization                            |  |                      | 615    |              |   | 614    |  
|Minority Interest in Loss of Subsidiary |  |                      |       |              |   | (29    | )
|Facility Maximization Costs             |  |                      |       |              |   | 2,658  |  
|(Gain) loss on disposal of fixed assets |  |                      | 62     |              |   | (23    | )
|                                        |  |                      |        |              |   |        |  
|Adjusted EBITDA                         |  | $                    | 20,718 |              | $ | 16,701 |  
|                                        |  |                      |        |              |   |        |  

Twenty-six Weeks Ended July 29, 2006 as Compared with the Twenty-six Weeks Ended July 30, 2005

Net Sales.Net sales for the twenty-six weeks ended July 29, 2006 were $188.8 million, an increase of 15.5% from $163.4
million for the twenty-six weeks ended July 30, 2005. Net sales of the Companys Floorcoverings segment were $174.1 million for the twenty-six weeks ended July 29, 2006 as compared to $150.4 million for the twenty-six weeks ended
July 30, 2005, an increase of $23.7 million or 15.8%, primarily attributable to the North American operations. Within these operations, the Companys Floorcoverings segments net sales experienced a 12.5% increase in broadloom sales
combined with a 14.0% increase in sales of structure-backed carpets (six-foot and carpet tile). The current period results reflect an increase in both Institutional sales (Healthcare, Education and Government) and Corporate sales, including Retail,
of 13.4% and 13.8%, respectively. The overall increase in the Floorcoverings segment sales is primarily volume driven across all of its markets coupled with increases in average selling prices. In addition, in the twenty-six weeks ended
July 30, 2005, the Floorcoverings segment experienced lower sales in part due to complications related to the Facility Maximization. Net sales of the Extrusion segment were $14.7 million for the twenty-six weeks ended July 29, 2006 as
compared to $13.0 million for the twenty-six weeks ended July 30, 2005, an increase of $1.7 million or 13.1%. The increase in sales for the Extrusion segment was due to overall higher demand from the Extrusion segments external customers.

Cost of Goods Sold. Cost of goods sold was $125.5 million, or 66.5% of sales, for the twenty-six weeks ended July 29, 2006 as
compared to $113.0 million, or 69.2% of sales, for the twenty-six weeks ended July 30, 2005. The increase in cost of goods sold was primarily due to increased sales. In addition, the Company experienced increases in the prices of several key
raw materials in the current quarter and in the second half of fiscal 2005 that have carried over into the first half of fiscal 2006. Included in the 2005 period expenses was $5.0 million of costs related to the Facility Maximization. Excluding
these costs, cost of goods sold for the twenty-six weeks ended July 30, 2005 was $108.0 million, or 66.1% of sales.

Selling, General and
Administrative Expenses.Selling, general and administrative expenses for the twenty-six weeks ended July 29, 2006 were $41.7 million, an increase of 4.5% from $39.9 million for the twenty-six weeks ended July 30, 2005. As a
percentage of sales, total selling, general and administrative costs were 22.1% and 24.4% for the twenty-six weeks ended July 29, 2006 and July 30, 2005, respectively. During the 2006 period, the Company incurred an increase of $3.7
million in legal and professional expenses (see Liquidity and Capital Resources contained herein) in addition to increased commissions of $0.5 million and an increase in travel and entertainment expense of $0.3 million. These increases
were partially offset by lower salaries, taxes and benefits of $0.3 million, a decrease in company meetings expense of $0.6 million and lower advertising and trade shows expenses of $0.2 million. In addition, the Company experienced an increase in
the foreign currency transaction gain of $0.2 million. Included in the 2005 period expense was $0.8 million of costs related to the Facility Maximization.

Amortization.Intangible asset amortization decreased to $1.2 million for the twenty-six weeks ended July 29, 2006 as compared to $1.4 million for the twenty-six weeks ended July 30, 2005. The decrease was due
to the Companys supply agreement becoming fully amortized during the first quarter of fiscal 2005.

Interest Expense. Net
interest expense was $10.9 million and $10.0 million for the twenty-six week periods ended July 29, 2006 and July 30, 2005, respectively, which included nominal interest income. Net interest expense for the twenty-six weeks ended
July 29, 2006 includes $0.7 million related to a certain litigation verdict. See Note 15 Commitments and Contingencies contained herein in Item 1 and Part II, Item 1 for further discussion.



26



---

##### Table of Contents

Income Taxes. The Company had income tax expense of $4.1 million for the twenty-six weeks ended
July 29, 2006 compared to $0.4 million for the twenty-six weeks ended July 30, 2005.

Net Income. The Company had net income of
$5.4 million for the twenty-six weeks ended July 29, 2006 compared to a net loss of $1.4 million for the twenty-six weeks ended July 30, 2005.

Adjusted EBITDA.Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, non-cash charges or expenses (other than the write-down of current assets), costs related to acquisitions and
attempted acquisitions, expenses related to the Facility Maximization, plus Chroma cash dividends and minority interest in income (loss) of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the twenty-six weeks ended July 29,
2006 increased to $27.4 million from $21.3 million for the twenty-six weeks ended July 30, 2005. As a percentage of sales, Adjusted EBITDA was 14.5% for the 2006 year-to-date period compared to 13.0% in the related 2005 period. The increase was
principally due to higher sales volume in the Floorcoverings segment. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a companys ability to service debt. Consolidated EBITDA as defined
under the Companys Senior Credit Facility provides for additional adjustments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be
considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by
all companies, the presentation in these statements may not be comparable to those disclosed by other companies.

A
reconciliation of net income (loss) to Adjusted EBITDA is as follows (in thousands):



|                                        |  |                        |        |              |   |        |  
|--------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------ | -
|                                        |  | Twenty-six Weeks Ended |       
|                                        |  | July 29,2006           |        | July 30,2005 |  
|Net Income (Loss)                       |  | $                      | 5,392  |              | $ | (1,409 | )
|Income Tax Expense                      |  |                        | 4,085  |              |   | 403    |  
|Net Interest Expense                    |  |                        | 10,911 |              |   | 9,993  |  
|Depreciation                            |  |                        | 5,669  |              |   | 5,035  |  
|Amortization                            |  |                        | 1,229  |              |   | 1,392  |  
|Minority Interest in Loss of Subsidiary |  |                        |       |              |   | (39    | )
|Facility Maximization Costs             |  |                        |       |              |   | 5,826  |  
|Loss on disposal of fixed assets        |  |                        | 65     |              |   | 94     |  
|                                        |  |                        |        |              |   |        |  
|Adjusted EBITDA                         |  | $                      | 27,351 |              | $ | 21,295 |  
|                                        |  |                        |        |              |   |        |  

Liquidity and Capital Resources

The Companys principal uses of cash have historically been for operating expenses, working capital, capital expenditures and debt repayment. The Company has financed its cash requirements through internally
generated cash flows, borrowings and the offering of the senior subordinated notes.

Net cash provided by operating activities for the twenty-six weeks
ended July 29, 2006 was $3.0 million compared to net cash used of $17.9 million for the twenty-six weeks ended July 30, 2005. The change was primarily due to the generation of net income for the period coupled with lower working capital
requirements of $13.3 million.

Net cash used in investing activities for the twenty-six weeks ended July 29, 2006 and July 30, 2005 was $4.2
million and $7.1 million, respectively, primarily representing capital expenditures. Included in capital expenditures for the 2005 period is $2.0 million related to the Facility Maximization. Capital expenditures during the remainder of fiscal 2006
are expected to be approximately $3 million to $5 million.

Net cash provided by financing activities for the twenty-six weeks ended July 29, 2006 and
July 30, 2005 was $0.4 million and $1.6million, respectively. The decrease primarily represents lower net borrowings against the Companys revolving credit facilities during the 2006 period. In addition, the 2005 period cash
provision included a $0.6 million issuance of long-term debt. No long-term debt issuances have been made by the Company during the 2006 period.



27



---

##### Table of Contents

The Company has significant indebtedness which, as of July 29, 2006, consists of $175.0 million of 9.75% senior
subordinated notes due 2010 (the 9.75% Notes) of which $165.0 million is outstanding, a $109.0 million credit facility which had an outstanding balance of $30.4 million in term loan borrowings (the Senior Credit Facility),
$1.9 million in purchase money and other indebtedness, and $1.1 million in sinking fund bonds under Crossley. The sinking fund bonds are subject to forgiveness beginning in fiscal 2006 given certain requirements are met. See further discusssion
contained herein and Note 11 of the Notes to Consolidated Financial Statements contained herein in Item 1. As of July 29, 2006, the Companys $50.0 million U.S. revolving line of credit had no outstanding borrowings and
$4.0 million of letters of credit outstanding leaving total availability of $46.0 million. Crossley has a $4.4 million revolving line of credit agreement with a Canadian bank which had $4.3 million in borrowings outstanding as of July 29, 2006.

The Companys semi-annual interest payments of the 9.75% Notes are due on each February 15 and August 15 through February 15, 2010.
The interest amount due on each date is $8.0 million.

As is customary in debt agreements, in the event the Company is not in compliance with the covenants
of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75% Notes. The Company was in compliance with all covenants as of July 29, 2006, and expects to remain in compliance throughout
fiscal 2006, although no assurances to that effect can be given.

The Companys ability to make scheduled payments of principal, interest, or to
refinance its indebtedness, depends on its future performance, which, to a certain extent, is subject to general economic, financial, competitive and other factors beyond its control. However, there can be no assurance that the Companys
business will generate sufficient cash flow from operations or that future borrowings will be available in an amount sufficient to enable the Company to service its indebtedness or to make necessary capital expenditures. Potential acquisitions of
businesses that complement existing operations are periodically evaluated. Depending on various factors, including, among others, the cash consideration required in such potential acquisitions, the Company may determine to finance any such
transaction with existing sources of liquidity.

Management believes that cash generated by its operations and availability under its $50.0 million
revolving credit line will be sufficient to fund the Companys current commitments and planned requirements. Management also believes that the Company will be able to replace its revolving credit facility upon its expiration in January 2007 on
similar terms and conditions. However, no assurances can be given with respect to the foregoing.

During the second quarter of fiscal 2006, the Company
entered into an agreement to fix the price of natural gas. The agreement states that the Company is fixed on set amounts of natural gas from August 2006 to November 2006, ranging from 4,000 to 6,000 MMBtu per month, at a fixed, predetermined rate.
See Note 5 Derivative Instruments for further discussion.

On September 18, 1998, James Bradley Thomason (Thomason) filed an
action in the District Court, 285thJudicial District, Bexar County, Texas (the Court) against Linda
Gomez Whitener, Steve Whitener, and Gomez Floor Covering (the Gomez Defendants), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a contract with Thomason to pay him certain commissions and
had conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services Commission for State of Texas agencies (the
Contract). Thomason settled his claims against the Gomez Defendants and Mannington Commercial. The Court granted the Companys motion for summary judgment and as a result, all of Thomasons claims against the Company were
dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the Appellate Court) affirmed the lower court ruling on all points, except for a claim of quantum meruit (value of services where no contract
exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on February 10, 2006, the jury entered a verdict in favor of the plaintiff in the amount of $1,050,000. Under Texas law, the plaintiff
made a claim for attorneys fees and prejudgment interest, and on May 19, 2006, the Appellate Court entered judgment on the jury verdict in the amount of $1,053,418, awarding attorneys fees in the amount of $351,136 and prejudgment
interest in the amount of $605,189.

Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed
a Notice of Appeal on August 17, 2006. The Company intends to vigorously prosecute its appeal of the jury verdict and the award of attorneys fees and prejudgment interest. The prosecution of the appeal could result in several possible
outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys fees or



28



---

##### Table of Contents

prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court.
The Company has recorded an accrued liability of approximately $2,010,000 related to this case in its accompanying statements of financial condition.

On
June 21, 2005, the Company filed in the United States District Court for the Northern District of Georgia, Rome, Georgia, Division (the Court) a joint lawsuit with Shaw Industries Group, Inc. (Shaw) and Mohawk
Industries, Inc. (Mohawk) against Interface, Inc. (Interface), regarding a patent on a particular pattern of carpet tile that Interface recently received (the Rome Action). The Rome Action asks the Court to
declare that the Interface patent is invalid, unenforceable and not infringed. Interface and certain of its affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers asserting
infringement of the aforementioned patent. In response to motions filed both in the Rome Action and with the court in Atlanta, Interfaces suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the
Rome Action. The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. To date, no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.

From time to time the Company is subject to claims and suits arising in the ordinary course of business, including workers compensation and product liability
claims, which may or may not be covered by insurance. Management believes that the various asserted claims and litigation in which the Company is currently involved will not have a material adverse effect on its financial position or results of
operations.

On August 10, 2004, the Company and its parent announced plans to consolidate its broadloom operations by closing its Santa Ana,
California production facility and moving equipment and production to its manufacturing facility in Truro, Nova Scotia. The Facility Maximization was approved by the Companys Board of Directors on August 9, 2004, and was completed during
the fourth quarter of fiscal year 2005. The Facility Maximization has increased utilization in the Truro, Nova Scotia facility.

During fiscal 2005, the
Company incurred costs associated with the Facility Maximization, which consisted of temporary production inefficiencies, equipment movement and installation costs, professional fees, severance and other related costs. During the thirteen weeks and
twenty-six weeks ended July 30, 2005, cost of goods sold included $2.3 million and $5.0 million, respectively, and selling, general and administrative expenses included $0.4 million and $0.8 million, respectively, of these expenses in the
accompanying consolidated statements of operations.

As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the
forgiveness of debt consisting of the remaining $1.1 million of Crossleys outstanding sinking fund bonds over the next four years. The forgiveness will commence during fiscal 2006, will be over the remaining four-year term of the current note,
and is based upon maintaining a defined level of full-time equivalent employees during the year, of which requirement the Company is in full compliance as of July 29, 2006. The debt will also be non-interest bearing.

Off-Balance Sheet Arrangements

The
Company has no off-balance sheet arrangements as of July 29, 2006 and January 28, 2006.

Critical Accounting Policies

Our significant accounting policies are more fully described in Note 2 to the consolidated financial statements included herein in Item 1. Certain of our accounting
policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty and actual results
could differ from these estimates. These judgments are based on our historical experience, terms of existing contracts, current economic trends in the industry, information provided by our customers and information available from outside sources, as
appropriate. The Companys significant accounting policies include:

Basis of Consolidation.The accompanying consolidated
financial statements include the accounts of Collins & Aikman Floorcoverings, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

Revenue Recognition. Revenue is recognized when goods are shipped, which is when legal title passes to the customer. For product installations subject to customer
approval, revenue is recognized upon acceptance by the customer. The Company provides certain installation services to customers utilizing independent third-party contractors. The billings and expenses for these services are included in net sales
and cost of goods sold, respectively. Additionally, freight charged to customers is included in net sales.



29



---

##### Table of Contents

A customer claims reserve and allowance for product returns is established based upon historical claims experience as a
percent of gross sales as of the balance sheet date. The allowance for customer claims is recorded upon shipment of goods and is recorded as a reduction of sales. While management believes that the customer claims reserve and allowance for product
returns is adequate and that the judgment applied is appropriate based upon historical experience for these items, actual amounts determined to be due and payable could differ and additional allowances may be required.

Foreign Currency Translation.Effective July 31, 2005, the Companys Canadian subsidiary adopted the U.S. dollar as its functional
currency. Prior to this date, the Canadian dollar had served as the subsidiarys functional currency. The transition to the U.S. dollar as the functional currency was primarily due to the high volume of this subsidiarys transactions that
are denominated in U.S. dollars, the high volume of intercompany transactions, and the interrelationship between the Companys U.S. operations and those of the Canadian subsidiary. The financial information of the Companys Canadian
subsidiary for the quarter ended July 30, 2005 and prior periods have been presented in U.S. dollars in accordance with a translation of convenience method using the exchange rate at July 30, 2005 of US$1.00 being equal to CDN$1.2241, the
Bank of Canada closing buying rate at July 30, 2005. For periods subsequent to July 30, 2005, the Canadian dollar amounts are remeasured into the U.S. dollar reporting currency using the temporal method. When the temporal method is used to
translate the local currency of a foreign entity into its functional currency, the resulting translation adjustment is reported in the current periods statement of operations.

Assets and liabilities of the U.K. and Asian subsidiaries are translated to U.S. dollars at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period.
Translation adjustments are accumulated as a separate component of shareholders equity. Foreign currency gains (losses) are recognized in the statement of operations.

Impairment of Goodwill and Indefinite Lived Intangible Asset. In addition to the annual impairment tests required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, the Company may periodically evaluate the carrying value of its goodwill and indefinite lived intangible asset for potential impairment. Judgments regarding the existence of impairment indicators are based on legal factors, market
conditions and operational performance. Future events could cause the Company to conclude that impairment indicators exist and that the goodwill and indefinite lived intangible asset associated with acquired businesses is impaired. Any resulting
impairment loss could have a material adverse impact on the Companys financial condition and results of operations.

Accounts Receivable
Allowances.The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical experience and periodic evaluation of the financial condition of the Companys customers and collectability
of the Companys accounts receivable. If the financial condition of the Companys customers were to deteriorate, resulting in an impairment of their ability to pay their debts, allowances recorded in the Companys financial statements
may not be adequate.

Inventory Reserves. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out
method. Reserves are established based on percentage markdowns applied to inventories aged for certain time periods and size of lot.

Income Taxes.The Company uses the liability method in accounting for income taxes. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated
financial statements using statutory rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the rate change.

Effects of Inflation

Petroleum-based products comprise a predominant
portion of raw materials the Company uses in manufacturing. While the Company attempts to match cost increases with corresponding price increases, large increases in the cost of petroleum-based raw materials has adversely affected and could
adversely affect the future financial results of the Company if it is unable to pass through such price increases in raw material costs to customers.

The
impact of inflation on the Companys operations has not been significant in recent years with the exception of petroleum-based products noted above. There can be no assurance that a high rate of inflation in the future would not have an adverse
effect on the Companys operating results if the Company is unable to pass through the cost increases to its customers.



30



---

##### Table of Contents

Seasonality

The
Company experiences seasonal fluctuations, with generally lower sales and gross profit in the first and fourth quarters of the fiscal year and higher sales and gross profit in the second and third quarters of the fiscal year. The seasonality of
sales and profitability is primarily a result of disproportionately higher sales in the education end market during the summer months while schools generally are closed and floorcovering can be installed.

Reliance on Primary Third-Party Supplier of Nylon Yarn

Invista, Inc.
(Invista) currently supplies a majority of the Companys requirements for nylon yarn, the primary raw material used in the Companys floorcovering products. The unanticipated termination or interruption of the supply
arrangement with Invista could have a material adverse effect on the Company because of the cost and delay associated with shifting this business to another supplier. Historically, the Company has not experienced significant interruptions in the
supply of nylon yarn from Invista, although no assurances can be given that it will not experience interruption in supply in the future.

While Invista is
an important vendor, the Company believes that there are adequate alternative sources of supply from which the synthetic fiber requirement could be fulfilled including, but not limited to, nylon yarn produced by Extrusion. In addition to Invista,
there are at least three major third party suppliers to the commercial carpet industry from whom the Company acquires yarn.

The other significant raw
materials used by the Company in its carpet manufacturing process include coater materials, such as vinyl resins and primary backing.

Recent Accounting
Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of Statement of Financial Accounting Standards No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109. Unlike SFAS No. 109, FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The guidance is effective for fiscal years beginning after December 15,
2006. The Company has not yet determined the effect of the adoption of FIN 48 on its financial position or results of operations.

In February 2006, the
FASB issued Statement of Financial Accounting Standards No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of Statement of Financial Accounting Standards Nos. 133 (SFAS No. 133) and 140
(SFAS No. 155). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and
principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate beneficial interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and, eliminates restrictions on a qualifying special-purpose
entitys ability to hold passive derivative financial instruments that pertain to beneficial interests that are, or contain, a derivative financial instrument. The guidance is effective for all financial instruments acquired or issued after the
beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption of SFAS No. 155 will not have a material effect on the Companys financial position or results of operations.

In October 2005, the FASB issued FASB Staff Position Financial Accounting Standard 123(R)-2, Practical Accommodation to the Application of Grant Date as Defined in
FASB Statement No. 123(R) (FSP 123(R)-2). FSP 123(R)-2 provides an exception to the application of the concept of mutual understanding as expressed in Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, regarding the determination of whether a grant date or measurement date, as applicable, has occurred. The exception permits companies to measure compensation cost for equity awards to employees on the Board approval
date if certain conditions are met, provided that the communication to the employees occurs within a relatively short period of time from the approval date. The guidance in FSP 123(R)-2 is to be applied upon initial adoption of SFAS
No. 123(R), or to the first reporting period after October 18, 2005, for which financial statements or interim reports have not been issued should an entity have previously adopted the provisions of SFAS No. 123(R). The Company
adopted the provisions of FSP 123(R)-2 effective January 29, 2006. The adoption did not have a material impact on the Companys consolidated financial statements.



31



---

##### Table of Contents

In October 2005, the FASB issued FASB Staff Position Financial Accounting Standard 13-1, Accounting for Rental
Costs Incurred during a Construction Period (FSP 13-1). FSP 13-1 states that rental costs associated with ground or building operating leases that are incurred during a construction period should be recognized as rental expense and
included in income from continuing operations. The guidance is to be applied to the first reporting period beginning after December 15, 2005. The Company adopted the provisions of FSP 13-1 effective January 29, 2006. The adoption did not
have a material impact on the Companys consolidated financial statements.

In August 2005, the FASB issued FASB Staff Position Financial Accounting
Standard 123(R)-1, Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchange for Employee Services under FASB Statement No. 123(R) (FSP 123(R)-1). FSP 123(R)-1 defers indefinitely
the requirement of SFAS No. 123(R) that a share-based payment to an employee subject to SFAS No. 123(R) becomes subject to the recognition and measurement requirements of other applicable GAAP when the rights conveyed by the instrument are
no longer dependent on the holder being an employee. A freestanding instrument issued to an employee in exchange for past or future employee services that is subject to SFAS No. 123(R) or was subject to SFAS No. 123(R) upon initial
adoption shall continue to be subject to the recognition and measurement provisions of SFAS No. 123(R) throughout the life of the instrument, unless its terms are modified when the holder is no longer an employee. The deferral excludes awards
exchanged for non-employee services or a combination of employee and non-employee services. The deferral does not have a material impact on the Companys consolidated financial statements.

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections-A Replacement of APB Opinion
No. 20 and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS No. 154 requires retrospective application to prior periods financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted the provisions of SFAS No. 154 effective January 29,
2006. The adoption did not have a material impact on the Companys consolidated financial statements.

In December 2004, the FASB issued SFAS
No. 123(R), Share-Based Payment. This statement is a revision to Statement of Financial Accounting Standards No. 123 and supersedes APB No. 25. This statement establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Companies are required to measure the
cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide
service, the requisite service period (usually the vesting period), in exchange for the award. The grant-date fair value of employee share options and similar instruments is estimated using option-pricing models. If an equity award is modified after
the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. SFAS No. 123(R) is
effective for fiscal years beginning after June 15, 2005, due to the Securities and Exchange Commissions Rule 2005-57, which amended the initial effective date of SFAS No. 123(R). The Company adopted the provisions of SFAS
No. 123(R) effective January 29, 2006. The adoption did not have a material impact on the Companys consolidated financial statements.

In
December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets (SFAS No. 153). SFAS No. 153 amends the guidance in Accounting Principles Board Opinion
No. 29, Accounting for Nonmonetary Transactions, to eliminate certain exceptions to the principle that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. SFAS No. 153 eliminates the
exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. This statement is effective for nonmonetary asset exchanges in
fiscal years beginning after June 15, 2005. The Company adopted the provisions of SFAS No. 153 effective January 29, 2006. The adoption did not have a material impact on the Companys consolidated financial statements.

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs-An Amendment of ARB No. 43, Chapter
4 (SFAS No. 151). SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, Inventory Pricing (ARB No. 43), to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight and re-handling costs be recognized as
current-period charges regardless of whether they meet the criterion of



32



---

##### Table of Contents

so abnormal as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of
fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The Company adopted the provisions of SFAS No. 151 effective January 29, 2006. The adoption did not have a material impact
on the Companys consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There was no material change during the thirteen weeks
ended July 29, 2006 in the information provided in response to Part I, Item 7A of the Companys Annual Report on Form 10-K for the fiscal year ended January 28, 2006.

Item 4. Controls and Procedures

As of July 29, 2006, the Company carried out an evaluation, under the supervision
and with the participation of the Companys Chief Executive Officer and the Chief Financial Officer, of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on this
evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to
disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SECs rules and forms. The Chief Executive Officer and Chief Financial Officer also concluded that the Companys
disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Companys periodic SEC filings. The Company is in the process of further reviewing and
documenting its disclosure controls and procedures, including its internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that the Companys systems
evolve with its business. There were no changes in the Companys internal controls over financial reporting that occurred during the period covered by this report that have materially affected or that are reasonably likely to materially affect
the Companys internal controls over financial reporting, except as noted below.

During the disclosure controls and procedures and internal controls
evaluations performed under the supervision and with the participation of the Companys management as of the end of the fiscal year ended January 28, 2006, it was concluded that the Companys disclosure controls and procedures were
not effective due to a material weakness in the area of income tax accounting and that a significant change had occurred in the internal controls over income tax reporting and disclosure. No other material weaknesses or significant changes were
noted during the evaluation. Management believes there were no material misstatements in the consolidated financial statements and the Companys independent registered public accountants issued an unqualified opinion on the consolidated
statements of financial condition as of January 28, 2006 and January 29, 2005, and the related consolidated statements of operations, changes in stockholders equity and cash flows for each of the years in the three year period ended
January 28, 2006.

During the first quarter of fiscal 2006, the Company addressed the material weakness in the area of income tax accounting as it
pertains to the Companys disclosure controls and procedures and internal controls. The Company has supplemented its internal resources with an outside provider to assist in the preparation, documentation and review of the Companys income
tax provision and related taxation disclosures.

The Companys management has confidence in the Companys internal controls and procedures.
Nevertheless, management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the disclosure procedures and controls or internal controls will prevent all errors or intentional fraud. An internal control system,
no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of such internal controls are met. Further, the design of an internal control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company has been detected.

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

On September 18, 1998, James Bradley Thomason (Thomason) filed an action in
the District Court, 285thJudicial District, Bexar County, Texas (the Court) against Linda Gomez
Whitener, Steve Whitener, and Gomez Floor Covering (the Gomez Defendants), the Company, and Mannington Commercial. Thomason alleged that the Gomez Defendants had breached a contract with Thomason to pay him certain commissions and had
conspired with the Company and Mannington to cut Thomason out of several carpet installation transactions stemming from a carpet-buying contract held by the Texas General Services Commission for State of Texas



33



---

##### Table of Contents

agencies (the Contract). Thomason settled his claims against the Gomez Defendants and Mannington Commercial.
The Court granted the Companys motion for summary judgment and as a result, all of Thomasons claims against the Company were dismissed. The Texas Court of Appeals, Fourth Court of Appeals District, San Antonio, Texas (the Appellate
Court) affirmed the lower court ruling on all points, except for a claim of quantum meruit (value of services where no contract exists) related to having C&A products listed on the Contract. That claim was tried before a jury and on
February 10, 2006, the jury entered a verdict in favor of the plaintiff in the amount of $1,050,000. Under Texas law, the plaintiff made a claim for attorneys fees and prejudgment interest, and on May 19, 2006, the Appellate Court
entered judgment on the jury verdict in the amount of $1,053,418, awarding attorneys fees in the amount of $351,136 and prejudgment interest in the amount of $605,189.

Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006. The Company intends to vigorously prosecute its appeal
of the jury verdict and the award of attorneys fees and prejudgment interest. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the
judgment striking all or a portion of the jury verdict, attorneys fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability of
approximately $2,010,000 related to this case in its accompanying statements of financial condition.

On June 21, 2005, the Company filed in the
United States District Court for the Northern District of Georgia, Rome, Georgia, Division (the Court) a joint lawsuit with Shaw Industries Group, Inc. (Shaw) and Mohawk Industries, Inc. (Mohawk) against
Interface, Inc. (Interface), regarding a patent on a particular pattern of carpet tile that Interface recently received (the Rome Action). The Rome Action asks the Court to declare that the Interface patent is invalid,
unenforceable and not infringed. Interface and certain of its affiliated companies, on the same day, filed separate suits in Atlanta, Georgia against the Company and other carpet manufacturers asserting infringement of the aforementioned patent. In
response to motions filed both in the Rome Action and with the court in Atlanta, Interfaces suits against the Company, Shaw and Mohawk were transferred to Rome, Georgia and consolidated with the Rome Action. The Company, Shaw and Mohawk remain
as plaintiffs in the Rome Action. To date, no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.

From time to time the Company is subject to claims and suits arising in the ordinary course of business, including workers compensation and product liability claims, which may or may not be covered by insurance.
Management believes that the various asserted claims and litigation in which the Company is currently involved will not have a material adverse effect on its financial position or results of operations.

Item 6. Exhibits

(a) Exhibits



|     |  |                                                                                                                                                                                   
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Employment and Separation Agreement between Tandus Group, Inc., Collins & Aikman Floorcoverings, Inc. and Edgar M. Bridger                                                        
|     | 
|31.1 |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           
|     | 
|31.2 |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                           
|     | 
|32.1 |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.



34



---

##### Table of Contents

SIGNATURE

Pursuant to the requirement 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 on September 12, 2006.



COLLINS & AIKMAN FLOORCOVERINGS, INC.(Registrant)By:

/s/ Leonard F. FerroLeonard F. FerroVice President, Secretary, Treasurer &Chief Financial Officer (duly authorized officer and principal financial and accounting officer)