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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended July 30, 2005



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



Commission File Number 000-22791



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COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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)        |  | (Zip Code)



Registrants
telephone number: (706) 259-9711



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Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act: None



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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 an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  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 13, 2005.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES



INDEX



|          |  |                       |  |                                                                                                                   |  |     
|--------- |  | --------------------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----
|          |  |                       |  |                                                                                                                   |  | Page
|Part I.   |  | Financial Information |  |                                                                                                                  
|          |  |                       | 
|          |  | Item 1.               |  | Financial Statements                                                                                              |  |     
|          |  |                       | 
|          |  |                       |  | Consolidated Balance Sheets  As of January 29, 2005 and July 30, 2005                                            |  | 3   
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Operations  Thirteen Weeks and Twenty-Six Weeks Ended July 31, 2004 and July 30, 2005 |  | 4   
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Stockholders Equity  Twenty-Six Weeks Ended July 30, 2005                            |  | 5   
|          |  |                       | 
|          |  |                       |  | Consolidated Statements of Cash Flows  Twenty-Six Weeks Ended July 31, 2004 and July 30, 2005                    |  | 6   
|          |  |                       | 
|          |  |                       |  | Notes to Consolidated Financial Statements                                                                        |  | 7   
|          |  |                       | 
|          |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                             |  | 25  
|          |  |                       | 
|          |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                        |  | 32  
|          |  |                       | 
|          |  | Item 4.               |  | Controls and Procedures                                                                                           |  | 32  
|          |  |                      
|Part II.  |  | Other Information     |  |                                                                                                                  
|          |  |                       | 
|          |  | Item 1.               |  | Legal Proceedings                                                                                                 |  | 34  
|          |  |                       | 
|          |  | Item 6.               |  | Exhibits                                                                                                          |  | 34  
|          | 
|Signature |  | 36                   



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PART I  FINANCIAL INFORMATION



Item 1. Financial Statements



COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)



|                                                                                                                 |  |                  |         |   |              |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                 |  | January 29, 2005 |         |   | July 30,2005 |  
|                                                                                                                 |  |                  |         |   | (Unaudited)  |  
|ASSETS                                                                                                           |  |                  |         |   |              |   |         |  
|CURRENT ASSETS:                                                                                                  |  |                  |         |   |              |   |         |  
|Cash and Cash Equivalents                                                                                        |  | $                | 25,726  |   |              | $ | 3,211   |  
|Accounts Receivable, net of allowances of $822 and $803 in fiscal 2004 and 2005, respectively                    |  |                  | 41,863  |   |              |   | 52,912  |  
|Inventories                                                                                                      |  |                  | 38,978  |   |              |   | 51,855  |  
|Deferred Tax Assets                                                                                              |  |                  | 5,412   |   |              |   | 5,687   |  
|Prepaid Expenses and Other                                                                                       |  |                  | 1,813   |   |              |   | 3,126   |  
|                                                                                                                 |  |                  |         |   |              |   |         |  
|Total Current Assets                                                                                             |  |                  | 113,792 |   |              |   | 116,791 |  
|PROPERTY, PLANT AND EQUIPMENT, net                                                                               |  |                  | 67,687  |   |              |   | 71,235  |  
|GOODWILL                                                                                                         |  |                  | 98,378  |   |              |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                                                                                     |  |                  | 31,143  |   |              |   | 29,752  |  
|OTHER ASSETS                                                                                                     |  |                  | 7,610   |   |              |   | 6,875   |  
|                                                                                                                 |  |                  |         |   |              |   |         |  
|TOTAL ASSETS                                                                                                     |  | $                | 318,610 |   |              | $ | 323,031 |  
|                                                                                                                 |  |                  |         |   |              |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                             |  |                  |         |   |              |   |         |  
|CURRENT LIABILITIES:                                                                                             |  |                  |         |   |              |   |         |  
|Accounts Payable                                                                                                 |  | $                | 18,213  |   |              | $ | 25,863  |  
|Accrued Expenses                                                                                                 |  |                  | 28,228  |   |              |   | 24,117  |  
|Current Portion of Long-Term Debt                                                                                |  |                  | 713     |   |              |   | 726     |  
|                                                                                                                 |  |                  |         |   |              |   |         |  
|Total Current Liabilities                                                                                        |  |                  | 47,154  |   |              |   | 50,706  |  
|OTHER LIABILITIES, including post-retirement benefit obligation                                                  |  |                  | 4,884   |   |              |   | 4,935   |  
|DEFERRED TAX LIABILITIES                                                                                         |  |                  | 4,979   |   |              |   | 5,468   |  
|LONG-TERM DEBT, net of current portion                                                                           |  |                  | 207,536 |   |              |   | 207,901 |  
|MINORITY INTEREST                                                                                                |  |                  | 440     |   |              |   | 401     |  
|COMMITMENTS AND CONTINGENCIES (Note 14)                                                                          |  |                  |        |   |              |   |        |  
|STOCKHOLDERS EQUITY:                                                                                            |  |                  |         |   |              |   |         |  
|Common Stock ($.01 par value per share, 1,000 shares authorized, issued and outstanding in fiscal 2004 and 2005) |  |                  |        |   |              |   |        |  
|Paid-in Capital                                                                                                  |  |                  | 72,648  |   |              |   | 72,648  |  
|Retained Deficit                                                                                                 |  |                  | (17,806 | ) |              |   | (19,215 | )
|Accumulated Other Comprehensive Income (Loss):                                                                   |  |                  |         |   |              |   |         |  
|Foreign Currency Translation Adjustment                                                                          |  |                  | (271    | ) |              |   | 1,141   |  
|Minimum Pension Liability Adjustment, net of tax                                                                 |  |                  | (954    | ) |              |   | (954    | )
|                                                                                                                 |  |                  |         |   |              |   |         |  
|Total Stockholders Equity                                                                                       |  |                  | 53,617  |   |              |   | 53,620  |  
|                                                                                                                 |  |                  |         |   |              |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                       |  | $                | 318,610 |   |              | $ | 323,031 |  
|                                                                                                                 |  |                  |         |   |              |   |         |  



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



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and In Thousands)



|                                                 |  |                     |        |                       |              |   |              |  |              |         |  |   |         |  
|------------------------------------------------ |  | ------------------- | ------ | --------------------- | ------------ | - | ------------ |  | ------------ | ------- |  | - | ------- | -
|                                                 |  | Thirteen WeeksEnded |        | Twenty-Six WeeksEnded |             
|                                                 |  | July 31,2004        |        |                       | July 30,2005 |   | July 31,2004 |  | July 30,2005 |        
|Net Sales                                        |  | $                   | 99,602 |                       |              | $ | 95,074       |  | $            | 177,287 |  | $ | 163,388 |  
|                                                 |  |                     |        |                      
|Cost of Goods Sold                               |  |                     | 60,567 |                       |              |   | 63,692       |  |              | 111,983 |  |   | 113,010 |  
|Selling, General & Administrative Expenses       |  |                     | 20,130 |                       |              |   | 19,810       |  |              | 41,134  |  |   | 39,944  |  
|Amortization                                     |  |                     | 765    |                       |              |   | 614          |  |              | 1,531   |  |   | 1,392   |  
|                                                 |  |                     |        |                       |              |   |              |  |              |         |  |   |         |  
|Operating Expenses                               |  |                     | 81,462 |                       |              |   | 84,116       |  |              | 154,648 |  |   | 154,346 |  
|                                                 |  |                     |        |                       |              |   |              |  |              |         |  |   |         |  
|Operating Income                                 |  |                     | 18,140 |                       |              |   | 10,958       |  |              | 22,639  |  |   | 9,042   |  
|                                                 |  |                     |        |                      
|Minority Interest in (Income) Loss of Subsidiary |  |                     | (14    | )                     |              |   | 29           |  |              | 22      |  |   | 39      |  
|Equity in Earnings of Affiliate                  |  |                     | 365    |                       |              |   |             |  |              | 776     |  |   |        |  
|Gain (Loss) on Disposal of Fixed Assets          |  |                     |       |                       |              |   | 23           |  |              |        |  |   | (94     | )
|Net Interest Expense                             |  |                     | 5,150  |                       |              |   | 4,917        |  |              | 10,273  |  |   | 9,993   |  
|                                                 |  |                     |        |                       |              |   |              |  |              |         |  |   |         |  
|Income (Loss) Before Income Taxes                |  |                     | 13,341 |                       |              |   | 6,093        |  |              | 13,164  |  |   | (1,006  | )
|Income Tax Expense                               |  |                     | 5,390  |                       |              |   | 1,719        |  |              | 5,968   |  |   | 403     |  
|                                                 |  |                     |        |                       |              |   |              |  |              |         |  |   |         |  
|Net Income (Loss)                                |  | $                   | 7,951  |                       |              | $ | 4,374        |  | $            | 7,196   |  | $ | (1,409  | )
|                                                 |  |                     |        |                       |              |   |              |  |              |         |  |   |         |  



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



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

FOR THE TWENTY-SIX WEEKS ENDED JULY 30, 2005

(Unaudited and In Thousands, Except Share Amounts)



|                                        |        |              |        |                |   |                 |                                      |        |                                              |                                   |         |       |  |   |       |   |  |   |      |   |  |   |        |  
|--------------------------------------- | ------ | ------------ | ------ | -------------- | - | --------------- | ------------------------------------ | ------ | -------------------------------------------- | --------------------------------- | ------- | ----- |  | - | ----- | - |  | - | ---- | - |  | - | ------ | -
|                                        |        | Common Stock |        | Paid-inCapital |   | RetainedDeficit |                                      |        | Accumulated OtherComprehensive Income (Loss) |                                   |         | Total | 
|                                        | Shares |              | Amount |                |   |                 | ForeignCurrencyTranslationAdjustment |        |                                              | MinimumPensionLiabilityAdjustment |         |      
|BALANCE, January 29, 2005               |        | 1,000        |        | $              |  |                 | $                                    | 72,648 |                                              | $                                 | (17,806 | )     |  | $ | (271  | ) |  | $ | (954 | ) |  | $ | 53,617 |  
|                                        |        |              |        |                |   |                 |                                      |        |                                              |                                   |         |       |  |   |       |   |  |   |      |   |  |   |        |  
|Net Loss                                |        |             |        |                |  |                 |                                      |       |                                              |                                   | (1,409  | )     |  |   |      |   |  |   |     |   |  |   | (1,409 | )
|Foreign Currency Translation Adjustment |        |             |        |                |  |                 |                                      |       |                                              |                                   |        |       |  |   | 1,412 |   |  |   |     |   |  |   | 1,412  |  
|                                        |        |              |        |                |   |                 |                                      |        |                                              |                                   |         |       |  |   |       |   |  |   |      |   |  |   |        |  
|Total Comprehensive Income (Loss)       |        |             |        |                |  |                 |                                      |       |                                              |                                   | (1,409  | )     |  |   | 1,412 |   |  |   |     |   |  |   | 3      |  
|                                        |        |              |        |                |   |                 |                                      |        |                                              |                                   |         |       |  |   |       |   |  |   |      |   |  |   |        |  
|BALANCE, July 30, 2005                  |        | 1,000        |        | $              |  |                 | $                                    | 72,648 |                                              | $                                 | (19,215 | )     |  | $ | 1,141 |   |  | $ | (954 | ) |  | $ | 53,620 |  
|                                        |        |              |        |                |   |                 |                                      |        |                                              |                                   |         |       |  |   |       |   |  |   |      |   |  |   |        |  



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



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and In Thousands)



|                                                                                                   |  |                        |         |   |              |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                   |  | Twenty-Six Weeks Ended |        
|                                                                                                   |  | July 31,2004           |         |   | July 30,2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                        |         |   |              |   |         |  
|Net Income (Loss)                                                                                  |  | $                      | 7,196   |   |              | $ | (1,409  | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                        |         |   |              |   |         |  
|Depreciation and leasehold amortization                                                            |  |                        | 5,119   |   |              |   | 5,035   |  
|Amortization of other intangible assets                                                            |  |                        | 1,531   |   |              |   | 1,392   |  
|Amortization and write-off of deferred financing fees                                              |  |                        | 840     |   |              |   | 835     |  
|Change in deferred income tax                                                                      |  |                        | 759     |   |              |   | 214     |  
|Equity in earnings of affiliate                                                                    |  |                        | (776    | ) |              |   |        |  
|Minority interest in income (loss) of subsidiary                                                   |  |                        | (22     | ) |              |   | (39     | )
|Loss on disposal of fixed assets                                                                   |  |                        |        |   |              |   | 94      |  
|Changes in operating assets and liabilities:                                                       |  |                        |         |   |              |   |         |  
|Accounts receivable                                                                                |  |                        | (15,250 | ) |              |   | (11,049 | )
|Inventories                                                                                        |  |                        | (8,453  | ) |              |   | (12,877 | )
|Accounts payable                                                                                   |  |                        | 1,742   |   |              |   | 7,650   |  
|Accrued expenses                                                                                   |  |                        | 8,879   |   |              |   | (4,111  | )
|Other, net                                                                                         |  |                        | 1,695   |   |              |   | (2,293  | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Total adjustments                                                                                  |  |                        | (3,936  | ) |              |   | (15,149 | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                        | 3,260   |   |              |   | (16,558 | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                        |         |   |              |   |         |  
|Equity distribution from affiliate                                                                 |  |                        | 922     |   |              |   |        |  
|Additions to property, plant, and equipment                                                        |  |                        | (3,411  | ) |              |   | (7,111  | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Net cash used in investing activities                                                              |  |                        | (2,489  | ) |              |   | (7,111  | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                              |  |                        |         |   |              |   |         |  
|Proceeds from revolving credit facility                                                            |  |                        | 15,280  |   |              |   |        |  
|Repayments of revolving credit facility                                                            |  |                        | (15,280 | ) |              |   |        |  
|Proceeds from issuance of long-term debt                                                           |  |                        |        |   |              |   | 601     |  
|Repayments of long-term debt                                                                       |  |                        | (1,573  | ) |              |   | (260    | )
|Financing costs                                                                                    |  |                        | (237    | ) |              |   | (97     | )
|                                                                                                   |  |                        |         |   |              |   |         |  
|Net cash provided by (used in) financing activities                                                |  |                        | (1,810  | ) |              |   | 244     |  
|                                                                                                   |  |                        |         |   |              |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                       |  |                        | 22      |   |              |   | 910     |  
|                                                                                                   |  |                        |         |   |              |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                                                            |  |                        | (1,017  | ) |              |   | (22,515 | )
|CASH AND CASH EQUIVALENTS, beginning of period                                                     |  |                        | 11,041  |   |              |   | 25,726  |  
|                                                                                                   |  |                        |         |   |              |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                                                           |  | $                      | 10,024  |   |              | $ | 3,211   |  
|                                                                                                   |  |                        |         |   |              |   |         |  



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



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



1. General and Critical Accounting Policies



The accompanying unaudited consolidated financial statements of Collins & Aikman Floorcoverings, Inc. (the Company) 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 29, 2005, which was filed with the Securities and Exchange Commission on April 29, 2005. The accompanying unaudited consolidated financial statements, in the
opinion of management, include all adjustments necessary for fair presentation. All such adjustments are of a normal and recurring nature.



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 29, 2005. 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 $5.9 million and $6.0 million for the twenty-six weeks ended July 30, 2005 and July 31, 2004, respectively, and $3.1 million and $3.5 million for the thirteen weeks
ended July 30, 2005 and July 31, 2004, 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 the historical experience for these items, actual amounts
determined to be due and payable could differ and additional allowances may be required.



Foreign Currency Translation. Assets and liabilities of the Companys Canadian, United Kingdom (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 stockholders equity. Foreign currency gains (losses) are recognized in the
consolidated statements of operations and amounted to $0.1 million and $0.6 million for the 13 week periods ended July 30, 2005 and July 31, 2004, respectively, and $0.1 million and $0.0 million for the twenty-six weeks ended July 30,
2005 and July 31, 2004, respectively.



Impairment of Goodwill and
Indefinite Lived Intangible Assets. In addition to the annual impairment tests required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142) 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 effect 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.



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.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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.



2. Organization



Collins & Aikman Floorcoverings, Inc., 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 carpet. 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 locations in California (see Note 15Facility Maximization Project), Canada, the United Kingdom, Singapore and
China.



The Company is a wholly-owned subsidiary of Tandus
Group, Inc. Subsequent to a recapitalization transaction on January 25, 2001, investment funds managed by Oaktree Capital Management, LLC and Banc of America Capital Investors control a majority of the outstanding capital stock of Tandus Group.



3. Reclassifications



Certain reclassifications have been made to the prior periods to conform to
the current period presentation.



4. 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.



5. Inventories



Net inventory balances are summarized below (in thousands):



|                |  |                 |        |              |   |       
|--------------- |  | --------------- | ------ | ------------ | - | ------
|                |  | January 29,2005 |        | July 30,2005
|                |  |                 |        | (Unaudited) 
|Raw materials   |  | $               | 20,315 |              | $ | 26,069
|Work in process |  |                 | 5,634  |              |   | 6,692 
|Finished goods  |  |                 | 13,029 |              |   | 19,094
|                |  |                 |        |              |   |       
|                |  | $               | 38,978 |              | $ | 51,855
|                |  |                 |        |              |   |       



6. Accrued Expenses



Accrued expenses are summarized below (in thousands):



|                              |  |                 |        |              |   |       
|----------------------------- |  | --------------- | ------ | ------------ | - | ------
|                              |  | January 29,2005 |        | July 30,2005
|                              |  |                 |        | (Unaudited) 
|Payroll and employee benefits |  | $               | 12,178 |              | $ | 7,537 
|Customer claims               |  |                 | 2,715  |              |   | 2,544 
|Accrued interest              |  |                 | 8,085  |              |   | 7,760 
|Accrued professional fees     |  |                 | 3,184  |              |   | 2,819 
|Other                         |  |                 | 2,066  |              |   | 3,457 
|                              |  |                 |        |              |   |       
|                              |  | $               | 28,228 |              | $ | 24,117
|                              |  |                 |        |              |   |       



Included in the January 29, 2005
and July 30, 2005 balances are $0.8 million and $0.1 million, respectively, related to the Companys facility maximization project (see Note 15).



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



7. Goodwill and Other Intangible Assets



The gross carrying amount and accumulated amortization of the intangible assets subject to amortization as of July 30,
2005 are as follows (in thousands):



|                             |  |                      |        |                         |   |       
|---------------------------- |  | -------------------- | ------ | ----------------------- | - | ------
|                             |  | July 30, 2005       
|                             |  | Gross CarryingAmount |        | AccumulatedAmortization
|Amortized intangible assets: |  |                      |        |                         |   |       
|Patent                       |  | $                    | 27,000 |                         | $ | 20,862
|Supply Agreement             |  |                      | 8,000  |                         |   | 8,000 
|                             |  |                      |        |                         |   |       
|Total                        |  | $                    | 35,000 |                         | $ | 28,862
|                             |  |                      |        |                         |   |       



The patent is being
amortized over an eleven-year period using the straight-line method. The supply agreement is being amortized over a three-year period using the straight-line method and was fully amortized as of July 30, 2005.



|                                                                             |  |   |       
|---------------------------------------------------------------------------- |  | - | ------
|Unamortized intangible assets with an indefinite life (other than goodwill): |  |   |       
|Trade name                                                                   |  | $ | 23,614
|                                                                             |  |   |       



|                               |  |                     |     |                       |   |              |  |              |       |  |   |      
|------------------------------ |  | ------------------- | --- | --------------------- | - | ------------ |  | ------------ | ----- |  | - | -----
|                               |  | Thirteen WeeksEnded |     | Twenty-Six WeeksEnded
|                               |  | July 31,2004        |     | July 30,2005          |   | July 31,2004 |  | July 30,2005
|Aggregate amortization expense |  | $                   | 765 |                       | $ | 614          |  | $            | 1,531 |  | $ | 1,392
|                               |  |                     |     |                       |   |              |  |              |       |  |   |      



|                                |  |   |      
|------------------------------- |  | - | -----
|Estimated amortization expense: |  |   |      
|Fiscal 2005                     |  | $ | 2,619
|Fiscal 2006                     |  | $ | 2,455
|Fiscal 2007                     |  | $ | 2,455
|Fiscal 2008                     |  | $ |     
|Fiscal 2009                     |  | $ |     



For the period ended
July 30, 2005, there were no changes to the carrying value of goodwill.



8. Stock Based Compensation



As of
July 30, 2005, the Company had one stock-based employee compensation plan, which is described more fully in Note 12 of the audited consolidated financial statements included in the Companys Form 10-K for the year ended January 29,
2005, which was filed in April 2005 with the Securities and Exchange Commission. The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, (APB Opinion No. 25) and related interpretations. The Company accounts for these options as variable options and records expense based on increases and decreases in the fair
market value of the Companys common stock at the end of each reporting period. These options vest only upon the achievement of certain earnings targets, as defined. As of July 31, 2004 and July 30, 2005, the Company had not recorded
any expense related to this plan as the Company had not achieved its earnings targets, and the fair market value of the Companys common stock has not increased from the date of grant.



The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) to the stock-based employee
compensation (in thousands):



|                                                                                                                                |  |                     |       |                       |   |              |  |              |       |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ----- | --------------------- | - | ------------ |  | ------------ | ----- |  | - | ------ | -
|                                                                                                                                |  | Thirteen WeeksEnded |       | Twenty-Six WeeksEnded |  
|                                                                                                                                |  | July 31,2004        |       | July 30,2005          |   | July 31,2004 |  | July 30,2005 |      
|Net income (loss), as reported                                                                                                  |  | $                   | 7,951 |                       | $ | 4,374        |  | $            | 7,196 |  | $ | (1,409 | )
|Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of
tax |  |                     | 10    |                       |   | 7            |  |              | 18    |  |   | 16     |  
|                                                                                                                                |  |                     |       |                       |   |              |  |              |       |  |   |        |  
|Proforma net income (loss)                                                                                                      |  | $                   | 7,941 |                       | $ | 4,367        |  | $            | 7,178 |  | $ | (1,425 | )
|                                                                                                                                |  |                     |       |                       |   |              |  |              |       |  |   |        |  



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



9. Recent Accounting Pronouncements



In May 2005, the FASB issued SFAS 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 does not expect that the adoption of SFAS No. 154 will have a
material impact on the Companys consolidated financial statements.



In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143 (FIN 47), which
requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years
ending after December 15, 2005. The Company does not expect the adoption of FIN 47 to have a material impact on its consolidated financial statements.



In December 2004, the FASB issued FASB Staff Position 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes
(SFAS No. 109) to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (FSP 109-1). The American Jobs Creation Act of 2004 (the Jobs Act), enacted
October 22, 2004, introduces a special tax deduction of up to 9.0 percent when fully phased in, of the lesser of qualified production activities income or taxable income. FSP 109-1 clarifies that this deduction should be accounted
for as a special tax deduction in accordance with SFAS No. 109. Although FSP 109-1 was effective upon issuance, the Company is still evaluating the impact FSP No. 109-1 will have on its consolidated financial statements, although it is
expected to result in a benefit of approximately one-half of one percent. The Company will finalize its analysis of the benefits of the qualified activities production deduction when final regulations are issued by the U. S. Treasury Department.
Those regulations are expected to be issued in the next 6 to 12 months.



In December 2004, the FASB issued FASB Staff Position 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2), which
provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises income tax expense and deferred tax liability. FSP 109-2 states that an enterprise is
allowed time beyond the financial reporting period of enactment for purposes of applying FASB Statement No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions and has not adjusted its tax expense or
deferred tax liability to reflect the repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.



In November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 151,
Inventory Costs-An Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, 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 overheads to the costs of conversion be
based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating SFAS No. 151 and does not expect it to have a material impact on
the Companys consolidated financial statements.



In
December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS No. 123R). This statement is a revision to SFAS No. 123 and supersedes APB Opinion 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 will be 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 will be 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 will be 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. 123R will be effective for fiscal years beginning



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



after June 15, 2005, due to the Securities and Exchange Commissions Rule 2005-57, which amended the effective date of SFAS No. 123R.
Accordingly the Company will adopt SFAS No. 123R on January 29, 2006. The Company is currently evaluating the provisions of SFAS No. 123R and has not determined the impact that this Statement will have on its results of operations or
financial position.



10. Long-Term Debt



Effective May 1, 2004, the Company amended its Senior Credit Facility
to revise certain covenants. The amended principal financial covenants for fiscal 2005 are 1.1 to 1.0 and 2.25 to 1.0 for the fixed charge coverage ratio and interest coverage ratio, respectively.



The Companys fixed charge coverage ratio and interest coverage ratio
were 1.26 and 2.26, respectively, at July 30, 2005. 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% Senior Subordinated Notes (the 9.75% Notes). The Company was in compliance with all covenants as of July 30, 2005 and currently expects to remain in compliance throughout fiscal 2005, although no
assurances to that effect can be given.



Total net interest
expense was $5.2 million and $4.9 million for the thirteen weeks ended July 31, 2004 and July 30, 2005, respectively, which included minimal interest income. Total net interest expense was $10.3 and $10.0 million for the twenty-six weeks
ended July 31, 2004 and July 30, 2005, respectively, which included minimal interest income.



11. Segment Information



The Company has adopted SFAS 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
discussion of significant accounting policies in Note 1 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 board approved acquisitions and attempted acquisitions, expenses related to the facility maximization project 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 and polypropylene extruded yarn.



No single customer amounted to or exceeded 10.0% of the floorcovering segments sales for any period presented. The Extrusion segments largest customer accounted for 22.1% and 24.6% of sales and its second largest customer
accounted for 15.4% and 17.2% of sales in the thirteen weeks and twenty-six weeks ended July 30, 2005, respectively.



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



|                                  |  |                     |        |                       |   |              |  |              |         |  |   |        
|--------------------------------- |  | ------------------- | ------ | --------------------- | - | ------------ |  | ------------ | ------- |  | - | -------
|                                  |  | Thirteen WeeksEnded |        | Twenty-Six WeeksEnded
|                                  |  | July 31,2004        |        | July 30,2005          |   | July 31,2004 |  | July 30,2005
|Net Sales to External Customers   |  |                     |        |                       |   |              |  |              |         |  |   |        
|Floorcoverings                    |  | $                   | 94,917 |                       | $ | 88,244       |  | $            | 164,927 |  | $ | 150,359
|Extrusion                         |  |                     | 4,685  |                       |   | 6,830        |  |              | 12,360  |  |   | 13,029 
|                                  |  |                     |        |                       |   |              |  |              |         |  |   |        
|Total Sales To External Customers |  | $                   | 99,602 |                       | $ | 95,074       |  | $            | 177,287 |  | $ | 163,388
|                                  |  |                     |        |                       |   |              |  |              |         |  |   |        



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|                      |  |                     |        |                       |   |              |  |              |        |  |   |       
|--------------------- |  | ------------------- | ------ | --------------------- | - | ------------ |  | ------------ | ------ |  | - | ------
|                      |  | Thirteen WeeksEnded |        | Twenty-Six WeeksEnded
|                      |  | July 31,2004        |        | July 30,2005          |   | July 31,2004 |  | July 30,2005
|Adjusted EBITDA       |  |                     |        |                       |   |              |  |              |        |  |   |       
|Floorcoverings        |  | $                   | 21,484 |                       | $ | 15,586       |  | $            | 28,133 |  | $ | 18,925
|Extrusion             |  |                     | 598    |                       |   | 1,115        |  |              | 2,078  |  |   | 2,370 
|                      |  |                     |        |                       |   |              |  |              |        |  |   |       
|Total Adjusted EBITDA |  | $                   | 22,082 |                       | $ | 16,701       |  | $            | 30,211 |  | $ | 21,295
|                      |  |                     |        |                       |   |              |  |              |        |  |   |       



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 WeeksEnded |        |   | Twenty-Six WeeksEnded |  
|                                                 |  | July 31,2004        |        |   | July 30,2005          |   |        | July 31,2004 |  |   | July 30,2005 |  
|Net income (loss)                                |  | $                   | 7,951  |   |                       | $ | 4,374  |              |  | $ | 7,196        |   |  | $ | (1,409 | )
|Income tax expense                               |  |                     | 5,390  |   |                       |   | 1,719  |              |  |   | 5,968        |   |  |   | 403    |  
|Net interest expense                             |  |                     | 5,150  |   |                       |   | 4,917  |              |  |   | 10,273       |   |  |   | 9,993  |  
|Depreciation                                     |  |                     | 2,533  |   |                       |   | 2,471  |              |  |   | 5,119        |   |  |   | 5,035  |  
|Amortization                                     |  |                     | 765    |   |                       |   | 614    |              |  |   | 1,531        |   |  |   | 1,392  |  
|Chroma cash dividends                            |  |                     | 644    |   |                       |   |       |              |  |   | 922          |   |  |   |       |  
|Equity in earnings of Chroma                     |  |                     | (365   | ) |                       |   |       |              |  |   | (776         | ) |  |   |       |  
|Facility maximization costs                      |  |                     |       |   |                       |   | 2,658  |              |  |   |             |   |  |   | 5,826  |  
|(Gain) loss on disposal of fixed assets          |  |                     |       |   |                       |   | (23    | )            |  |   |             |   |  |   | 94     |  
|Minority interest in income (loss) of subsidiary |  |                     | 14     |   |                       |   | (29    | )            |  |   | (22          | ) |  |   | (39    | )
|                                                 |  |                     |        |   |                       |   |        |              |  |   |              |   |  |   |        |  
|Adjusted EBITDA                                  |  | $                   | 22,082 |   |                       | $ | 16,701 |              |  | $ | 30,211       |   |  | $ | 21,295 |  
|                                                 |  |                     |        |   |                       |   |        |              |  |   |              |   |  |   |        |  



|                          |  |                       |         |                    |   |        
|------------------------- |  | --------------------- | ------- | ------------------ | - | -------
|                          |  | As ofJanuary 29, 2005 |         | As ofJuly 30, 2005
|                          |  |                       |         | (Unaudited)       
|Consolidated Assets       |  |                       |         |                    |   |        
|Floorcoverings            |  | $                     | 291,525 |                    | $ | 296,571
|Extrusion                 |  |                       | 27,085  |                    |   | 26,460 
|                          |  |                       |         |                    |   |        
|Total Consolidated Assets |  | $                     | 318,610 |                    | $ | 323,031
|                          |  |                       |         |                    |   |        



12. Investment in Equity Affiliate



During the fourth quarter of fiscal 2004, the Company
successfully negotiated its exit from the Chroma partnership and entered into the Chroma Transition Agreement with Dixie Group, Inc. (Dixie) to allow for the transition of dyeing and finishing services needed until the Santa Ana,
California manufacturing facility has been closed. Prior to the execution of this Agreement, Monterey Color Systems, Inc. (Monterey Color Systems), a wholly-owned subsidiary of Monterey Carpets, Inc., had a fifty percent
(50%) ownership interest in Chroma, which operates a carpet dyeing and finishing plant. Because the Company did not exercise control over Chroma, the Company accounted for its interest in Chroma under the equity method of accounting.



On August 11, 2004, Monterey gave notice to Dixie that it
had elected to terminate its supply arrangement with Chroma effective August 2005. Chroma has historically dyed and finished substantially all of Montereys carpet production and Dixies Fabrica Divisions carpet production and
performs dyeing and finishing operations for other carpet mills. The Chroma Transition Agreement provides for the Companys withdrawal from the partnership and for the transition of the continued dyeing and finishing needs of Monterey, until
the closing of the Santa Ana, California facility is completed. A charge of $0.2 million was recorded as of October 30, 2004 to reflect the negotiated settlement related to Montereys early termination of its Dyeing and Finishing Agreement
with Chroma and withdrawal from the Chroma Partnership. It is anticipated that the closure of the Santa Ana, California facility will be complete by the end of the Companys third fiscal quarter in 2005.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



13. Comprehensive Income



Comprehensive income is as follows (in thousands):



|                                        |  |                     |       |                       |   |              |  |   |              |   |  |   |        |  
|--------------------------------------- |  | ------------------- | ----- | --------------------- | - | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                        |  | Thirteen WeeksEnded |       | Twenty-Six WeeksEnded |  
|                                        |  | July 31,2004        |       | July 30,2005          |   | July 31,2004 |  |   | July 30,2005 |  
|Net income (loss)                       |  | $                   | 7,951 |                       | $ | 4,381        |  | $ | 7,196        |   |  | $ | (1,409 | )
|Other comprehensive income (loss):      |  |                     |       |                       |   |              |  |   |              |   |  |   |        |  
|Foreign currency translation adjustment |  |                     | 21    |                       |   | 911          |  |   | (31          | ) |  |   | 1,412  |  
|                                        |  |                     |       |                       |   |              |  |   |              |   |  |   |        |  
|Comprehensive income                    |  | $                   | 7,972 |                       | $ | 5,292        |  | $ | 7,165        |   |  | $ | 3      |  
|                                        |  |                     |       |                       |   |              |  |   |              |   |  |   |        |  



14. Commitments &
Contingencies



On June 21, 2005 the Company filed in
Rome, Georgia a joint lawsuit with Shaw Industries and Mohawk Corporation against Interface Corporation, regarding a patent on randomly installed carpet tile that Interface recently received. The Company and its fellow plaintiffs filed suit because
they do not believe that the Interface patent is valid. The joint lawsuit asks the court to declare that companies can continue to produce randomly installed modular carpet designs. Interface, on the same day, filed suit in Atlanta against the
Company and other carpet manufacturers asserting infringement of the aforementioned patent. Both suits are awaiting final determination as to priority and whether the cases will be consolidated.



In 1996 and 1997, the Company sold approximately $0.6 million of carpet tile
product to Employers Mutual Insurance Companies (EMC). EMC subsequently filed suit in the United States District Court for the Southern District of Iowa on August 6, 2002 alleging the carpet experienced premature wearing and
discoloration, and asserted that the Company should pay damages based upon theories of violation of warranties, negligence and fraud. The Company examined EMCs claim prior to commencement of the action and determined that EMC had not properly
maintained the carpet, thus resulting in irreversible damage. The Company filed a motion for summary judgment and the United States District Court for the Southern District of Iowa ruled in favor of the Company on the negligence, written warranty
claims and implied warranty of merchantability. Other claims including express oral warranty, implied warranty of fitness for particular purpose, fraudulent misrepresentation and fraudulent nondisclosure were tried to a jury. On March 18, 2004,
the jury entered a verdict in favor of the Company on the fraudulent misrepresentation and fraudulent nondisclosure claims and in favor of EMC on the express oral warranty and implied warranty of fitness for particular purpose. The jury awarded EMC
$0.8 million in damages for full replacement of this carpet. The Company filed a motion for judgment as a matter of law and a motion for a new trial. The judge denied the Companys motion for judgment as a matter of law but conditionally
granted the Companys motion for a new trial if EMC refused to accept a reduction of the judgment by $0.2 million. EMC agreed to the reduction of the judgment, causing the new trial motion to be denied. The judgment award of $0.6 million was
recorded during the fiscal year ended January 31, 2004. The Company appealed the denial of its motion for judgment as a matter of law asserting that EMC failed to prove the affirmative defense of fraudulent concealment by clear, convincing and
satisfactory evidence. The Company also posted a letter of credit in favor of EMC for $0.8 million to secure EMCs recovery should EMC prevail. On August 16, 2005, the Company received a favorable ruling on its appeal that errors were
committed in the trial and the jury had erroneously applied instructions as to the measure of damages EMC was entitled to receive. As a result, the Company reduced its accrual for this litigation to $150 thousand, the potential damages for the
replacement of the original carpet. Subsequently, on September 12, 2005, EMC agreed to terminate its suit, releasing the Company of all liability for damages. Accordingly, the Company will release its current litigation accrual related to this suit
in full in the third quarter of fiscal 2005.



Monterey Carpets,
Inc., (Monterey) in connection with its previous 50% ownership interest in Chroma Systems Partners (Chroma), is a co-defendant in an alleged claim by Enron Energy Services, Inc. (Enron) that Chroma and its
partners are liable for amounts related to certain energy contracts which existed between Chroma and Enron prior to the filing of Enrons Chapter 11 proceedings. Settlement negotiations are ongoing and it is not possible to estimate the extent
of any possible loss at this time. Monterey has filed its response and intends to vigorously contest Enrons lawsuit. A mandatory mediation session was originally scheduled for June 2, 2005, but has been delayed until September 20,
2005. During fiscal 2004, Monterey terminated its partnership interest in Chroma as part of the facility maximization project.



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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



15. Facility Maximization Project



On August 10, 2004, the Company and its parent announced its intent to close its manufacturing facility in Santa Ana,
California, and transfer the production to its existing Truro, Nova Scotia, Canada facility (the facility maximization project). The facility maximization project was approved by the Companys Board of Directors on August 9,
2004, and is currently expected to be complete by the end of the Companys third fiscal quarter in 2005. The Company had previously expected that the consolidation of the facilities would be completed by the end of the Companys first
fiscal quarter. However, the transfer of production was slowed to accommodate the training of 150 new associates and the completion of certain manufacturing system enhancements. It is currently estimated that the remaining costs will be
approximately $2.0 million and consist of severance, moving, reinstallation, professional fees and other costs, including, among other things, production inefficiencies during the transition period. It is expected that the benefits of the project
will begin to impact the Companys statement of operations in the last quarter of this fiscal year.



During the twenty-six weeks of fiscal 2005, the Company incurred approximately $5.8 million in costs associated with the facility maximization project,
which consist of professional fees, severance and other related costs. Cost of goods sold included $5.0 million and selling, general and administrative expenses included $0.8 million of these expenses in the accompanying consolidated statements of
operations. In addition, capital expenditure costs related to the project were $2.0 million during the twenty-six weeks ended July 30, 2005. The Company anticipates total capital expenditures of approximately $5.3 million related to the
project, $2.5 million more than originally anticipated.



As
part of the facility maximization project, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting of the remaining $1.2 million of Crossleys outstanding sinking fund bonds. The forgiveness will commence in
the fourth quarter of fiscal 2005, will be over the remaining five-year term of the current note and is based upon maintaining a defined level of full-time equivalent employees during the year. The debt is also non-interest bearing.



The costs incurred and the anticipated expenditures remaining are as follows
(in millions):



|                                              |  |                                                     |     |                                                      |   |      |                                     |  |                                  |     |  |   |    
|--------------------------------------------- |  | --------------------------------------------------- | --- | ---------------------------------------------------- | - | ---- | ----------------------------------- |  | -------------------------------- | --- |  | - | ---
|                                              |  | Anticipated TotalExpenditures As of August 10,
2004 |     | Change in Estimateof Expenditures Asof July 30, 2005 |   |      | Amounts Incurred As of July 30,2005 |  | AnticipatedRemainingExpenditures
|Severance Costs                               |  | $                                                   | 1.8 |                                                      | $ | 0.3  |                                     |  | $                                | 2.1 |  | $ |   
|Contractual Obligations and Professional Fees |  |                                                     | 3.1 |                                                      |   | (1.8 | )                                   |  |                                  | 0.4 |  |   | 0.9
|Other Project Costs                           |  |                                                     | 1.5 |                                                      |   | 6.9  |                                     |  |                                  | 7.3 |  |   | 1.1
|                                              |  |                                                     |     |                                                      |   |      |                                     |  |                                  |     |  |   |    
|Gross Project Expenditures                    |  | $                                                   | 6.4 |                                                      | $ | 5.4  |                                     |  | $                                | 9.8 |  | $ | 2.0
|                                              |  |                                                     |     |                                                      |   |      |                                     |  |                                  |     |  |   |    



The accrued facility
maximization costs at January 29, 2005 and July 30, 2005 amounted to $0.8 million and $0.1 million, respectively, which consisted of severance and other project related costs. These costs are included in accrued expenses in the
accompanying consolidated balance sheets.



16. Employee Benefit Plans



The Company maintains a defined benefit program for its
domestic employees, which was frozen during fiscal 2002. Accordingly, no new benefits are being accrued under the plan. Participant accounts are credited with interest at the plan rates. Company contributions are based on computations by independent
actuaries, although the Company may decide to make additional contributions to the plan beyond minimum funding requirements as is deemed appropriate by management. The plan was funded as of January 29, 2005 such that no minimum contribution is
required in the 2005 plan year. Plan assets at July 30, 2005 and January 29, 2005 were invested primarily in mutual funds and money market funds.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Net periodic pension cost (benefit) for the thirteen weeks and twenty-six weeks ended July 31,
2004 and July 30, 2005 was comprised of the following components (in thousands):



|                                              |  |                     |      |   |                       |   |     |              |  |   |              |   |  |   |      |  
|--------------------------------------------- |  | ------------------- | ---- | - | --------------------- | - | --- | ------------ |  | - | ------------ | - |  | - | ---- | -
|                                              |  | Thirteen WeeksEnded |      |   | Twenty-Six WeeksEnded |  
|                                              |  | July 31,2004        |      |   | July 30,2005          |   |     | July 31,2004 |  |   | July 30,2005 |  
|Interest cost on projected benefit obligation |  | $                   | (136 | ) |                       | $ | 60  |              |  | $ | 137          |   |  | $ | 120  |  
|Expected return on plan assets                |  |                     | 65   |   |                       |   | (83 | )            |  |   | (181         | ) |  |   | (166 | )
|Recognized net actuarial (gains) losses       |  |                     | (88  | ) |                       |   | 31  |              |  |   | 49           |   |  |   | 62   |  
|Settlement loss                               |  |                     |     |   |                       |   | 113 |              |  |   |             |   |  |   | 113  |  
|                                              |  |                     |      |   |                       |   |     |              |  |   |              |   |  |   |      |  
|Net periodic pension cost (benefit)           |  | $                   | (159 | ) |                       | $ | 121 |              |  | $ | 5            |   |  | $ | 129  |  
|                                              |  |                     |      |   |                       |   |     |              |  |   |              |   |  |   |      |  



The Company incurred a
settlement loss of $0.1 million in the second quarter of fiscal 2005 due to the closure of the Santa Ana, California facility (see Note 15  Facility Maximization Project).



Canadian Defined Benefit Plan



Substantially all Canadian employees of Crossley Carpets Ltd. (Crossley) who meet eligibility requirements can participate in a defined
benefit plan administered by the Company. Plan benefits are generally based on years of service and employees compensation during their years of employment. The Companys policy is to contribute annually the maximum amount that can be
deducted for income tax purposes. Assets of the pension plan are held in a trust invested primarily in mutual funds.



Net periodic pension cost for the thirteen weeks and twenty-six weeks ended July 31, 2004 and July 30, 2005 was comprised of the following
components (in thousands):



|                                                 |  |                     |      |   |                       |   |      |              |  |   |              |   |  |   |      |  
|------------------------------------------------ |  | ------------------- | ---- | - | --------------------- | - | ---- | ------------ |  | - | ------------ | - |  | - | ---- | -
|                                                 |  | Thirteen WeeksEnded |      |   | Twenty-Six WeeksEnded |  
|                                                 |  | July 31,2004        |      |   | July 30,2005          |   |      | July 31,2004 |  |   | July 30,2005 |  
|Service cost  benefits earned during the period |  | $                   | 198  |   |                       | $ | 262  |              |  | $ | 279          |   |  | $ | 525  |  
|Interest cost on projected benefit obligation    |  |                     | 128  |   |                       |   | 115  |              |  |   | 202          |   |  |   | 231  |  
|Expected return on plan assets                   |  |                     | (145 | ) |                       |   | (133 | )            |  |   | (220         | ) |  |   | (267 | )
|Recognized net actuarial losses                  |  |                     | 1    |   |                       |   | 2    |              |  |   | 1            |   |  |   | 2    |  
|                                                 |  |                     |      |   |                       |   |      |              |  |   |              |   |  |   |      |  
|Net periodic pension cost                        |  | $                   | 182  |   |                       | $ | 246  |              |  | $ | 262          |   |  | $ | 491  |  
|                                                 |  |                     |      |   |                       |   |      |              |  |   |              |   |  |   |      |  



Post-retirement 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 plan currently in effect. The plan is unfunded.



Net periodic post-retirement benefit costs for the thirteen weeks and twenty-six weeks ended July 31, 2004 and
July 30, 2005 was comprised of the following components (in thousands):



|                                                 |  |                     |    |              |                       |     |              |  |              |     |  |   |     |  
|------------------------------------------------ |  | ------------------- | -- | ------------ | --------------------- | --- | ------------ |  | ------------ | --- |  | - | --- | -
|                                                 |  | Thirteen WeeksEnded |    |              | Twenty-Six WeeksEnded |    
|                                                 |  | July 31,2004        |    | July 30,2005 |                       |     | July 31,2004 |  | July 30,2005 |    
|Service cost  benefits earned during the period |  | $                   | 37 |              | $                     | 42  |              |  | $            | 83  |  | $ | 91  |  
|Interest cost on projected benefit obligation    |  |                     | 28 |              |                       | 25  |              |  |              | 62  |  |   | 62  |  
|Curtailment gain                                 |  |                     |   |              |                       | (77 | )            |  |              |    |  |   | (77 | )
|                                                 |  |                     |    |              |                       |     |              |  |              |     |  |   |     |  
|Net periodic post-retirement benefit cost        |  | $                   | 65 |              | $                     | (10 | )            |  | $            | 145 |  | $ | 76  |  
|                                                 |  |                     |    |              |                       |     |              |  |              |     |  |   |     |  



Due to the closure of
the Santa Ana, California facility (see Note 15-Facility Maximization Project), the Company incurred a curtailment gain of $0.1 million in the second quarter of fiscal 2005.



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



17. Income Taxes



The Company had income tax expense of $1.7 million and $0.4 million for the thirteen weeks and twenty-six weeks ended July 30, 2005, respectively,
compared to $5.4 million and $6.0 million for the thirteen weeks and twenty-six weeks ended July 31, 2004, respectively. During the first quarter of fiscal 2005, the Company incurred losses in its domestic operations against which a tax benefit
was recorded. Losses were also incurred in the Companys foreign operations in both the first and second quarters of fiscal 2005, against which no tax benefit was recognized. The tax expense for the thirteen weeks and twenty-six weeks ended
July 31, 2004 is a result of profitability in the Companys domestic operations and a loss in the Companys foreign operations, against which no tax benefit was recognized.



18. 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.



19. Condensed Consolidating Financial Statements



The 9.75% Notes of the Company are guaranteed by the Companys domestic subsidiaries. Effective August 18, 2004, Monterey was released as a
guarantor. 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 and August 18, 2004. The terms of the guarantees 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 30, 2005 is $213.0 million. This 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. The condensed consolidating financial
information of the Company and its subsidiaries as of July 30, 2005 and January 31, 2004, and for each of the thirteen weeks and twenty-six weeks ended July 30, 2005 and July 31, 2004 are as follows:



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Balance Sheets

July 30, 2005



(Unaudited and In Thousands)



|                                                        |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------ | ------------ |  | - | -------------------------- | - |  | ------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   |        | Eliminations |  |   | SubtotalIssuer &Guarantors |   |  | Non-GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal | 
|ASSETS                                                  |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Cash and cash equivalents                               |  | $      | 2,123   |   |                       | $ | 1      |              |  | $ |                           |   |  | $                         | 2,124   |   |              | $ | 1,087  |                   |  | $ |        |   |  | $ | 3,211   |  
|Accounts receivable, net                                |  |        | 331     |   |                       |   | 44,823 |              |  |   |                           |   |  |                           | 45,154  |   |              |   | 7,758  |                   |  |   |        |   |  |   | 52,912  |  
|Inventories                                             |  |        | 31,539  |   |                       |   | 3,918  |              |  |   |                           |   |  |                           | 35,457  |   |              |   | 16,398 |                   |  |   |        |   |  |   | 51,855  |  
|Deferred tax assets                                     |  |        | 3,682   |   |                       |   | 94     |              |  |   |                           |   |  |                           | 3,776   |   |              |   | 1,972  |                   |  |   | (61     | ) |  |   | 5,687   |  
|Prepaid expenses and other                              |  |        | 921     |   |                       |   |       |              |  |   |                           |   |  |                           | 921     |   |              |   | 872    |                   |  |   | 1,333   |   |  |   | 3,126   |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current assets                                    |  |        | 38,596  |   |                       |   | 48,836 |              |  |   |                           |   |  |                           | 87,432  |   |              |   | 28,087 |                   |  |   | 1,272   |   |  |   | 116,791 |  
|                                                        |  |        |         |   |                       |   |       
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 34,203  |   |                       |   | 13,771 |              |  |   |                           |   |  |                           | 47,974  |   |              |   | 23,261 |                   |  |   |        |   |  |   | 71,235  |  
|DEFERRED TAX ASSETS                                     |  |        |        |   |                       |   |       |              |  |   |                           |   |  |                           |        |   |              |   | 3,088  |                   |  |   | (3,088  | ) |  |   |        |  
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 5,631  |              |  |   |                           |   |  |                           | 68,017  |   |              |   | 30,361 |                   |  |   |        |   |  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                            |  |        | 29,752  |   |                       |   |       |              |  |   |                           |   |  |                           | 29,752  |   |              |   |       |                   |  |   |        |   |  |   | 29,752  |  
|INVESTMENT IN SUBSIDIARIES                              |  |        | 60,422  |   |                       |   |       |              |  |   | (9,869                     | ) |  |                           | 50,553  |   |              |   |       |                   |  |   | (50,553 | ) |  |   |        |  
|OTHER ASSETS                                            |  |        | 6,589   |   |                       |   | 93     |              |  |   |                           |   |  |                           | 6,682   |   |              |   | 193    |                   |  |   |        |   |  |   | 6,875   |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL ASSETS                                            |  | $      | 231,948 |   |                       | $ | 68,331 |              |  | $ | (9,869                     | ) |  | $                         | 290,410 |   |              | $ | 84,990 |                   |  | $ | (52,369 | ) |  | $ | 323,031 |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Accounts payable                                        |  | $      | 10,199  |   |                       | $ | 3,298  |              |  | $ |                           |   |  | $                         | 13,497  |   |              | $ | 12,366 |                   |  | $ |        |   |  | $ | 25,863  |  
|Accrued expenses                                        |  |        | 15,922  |   |                       |   | (127   | )            |  |   |                           |   |  |                           | 15,795  |   |              |   | 6,989  |                   |  |   | 1,333   |   |  |   | 24,117  |  
|Current portion of long-term debt                       |  |        | 321     |   |                       |   |       |              |  |   |                           |   |  |                           | 321     |   |              |   | 405    |                   |  |   |        |   |  |   | 726     |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current liabilities                               |  |        | 26,442  |   |                       |   | 3,171  |              |  |   |                           |   |  |                           | 29,613  |   |              |   | 19,760 |                   |  |   | 1,333   |   |  |   | 50,706  |  
|                                                        |  |        |         |   |                       |   |       
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (60,691 | ) |                       |   | 50,151 |              |  |   |                           |   |  |                           | (10,540 | ) |              |   | (2,455 | )                 |  |   | 12,995  |   |  |   |        |  
|OTHER LIABILITIES, including post-retirement obligation |  |        | 4,588   |   |                       |   |       |              |  |   |                           |   |  |                           | 4,588   |   |              |   | 347    |                   |  |   |        |   |  |   | 4,935   |  
|DEFERRED TAX LIABILITIES                                |  |        | 7,437   |   |                       |   | 1,032  |              |  |   |                           |   |  |                           | 8,469   |   |              |   |       |                   |  |   | (3,001  | ) |  |   | 5,468   |  
|LONG-TERM DEBT, net of current portion                  |  |        | 205,688 |   |                       |   |       |              |  |   |                           |   |  |                           | 205,688 |   |              |   | 2,213  |                   |  |   |        |   |  |   | 207,901 |  
|MINORITY INTEREST                                       |  |        |        |   |                       |   |       |              |  |   |                           |   |  |                           |        |   |              |   | (39    | )                 |  |   | 440     |   |  |   | 401     |  
|                                                        |  |        |         |   |                       |   |       
|STOCKHOLDERS EQUITY:                                   |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Preferred stock                                         |  |        |        |   |                       |   |       |              |  |   |                           |   |  |                           |        |   |              |   | 133    |                   |  |   | (133    | ) |  |   |        |  
|Common stock                                            |  |        |        |   |                       |   |       |              |  |   |                           |   |  |                           |        |   |              |   | 11,117 |                   |  |   | (11,117 | ) |  |   |        |  
|Paid-in capital                                         |  |        | 72,648  |   |                       |   |       |              |  |   |                           |   |  |                           | 72,648  |   |              |   | 52,062 |                   |  |   | (52,062 | ) |  |   | 72,648  |  
|Retained earnings (deficit)                             |  |        | (23,589 | ) |                       |   | 13,977 |              |  |   | (9,869                     | ) |  |                           | (19,481 | ) |              |   | 465    |                   |  |   | (199    | ) |  |   | (19,215 | )
|Accumulated other comprehensive income                  |  |        | (575    | ) |                       |   |       |              |  |   |                           |   |  |                           | (575    | ) |              |   | 1,387  |                   |  |   | (625    | ) |  |   | 187     |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total stockholders equity                              |  |        | 48,484  |   |                       |   | 13,977 |              |  |   | (9,869                     | ) |  |                           | 52,592  |   |              |   | 65,164 |                   |  |   | (64,136 | ) |  |   | 53,620  |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 231,948 |   |                       | $ | 68,331 |              |  | $ | (9,869                     | ) |  | $                         | 290,410 |   |              | $ | 84,990 |                   |  | $ | (52,369 | ) |  | $ | 323,031 |  
|                                                        |  |        |         |   |                       |   |        |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 29, 2005



(In Thousands)



|                                                        |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ------ | ------- | - | --------------------- | - | ------ | ------------ |  | -------------------------- | --- |  | ------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | Issuer |         |   | GuarantorSubsidiaries |   |        | Eliminations |  | SubtotalIssuer &Guarantors |     |  | Non-GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal | 
|ASSETS                                                  |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|CURRENT ASSETS:                                         |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Cash and cash equivalents                               |  | $      | 23,110  |   |                       | $ |       |              |  | $                          |    |  | $                         | 23,110  |   |              | $ | 2,616  |                   |  | $ |        |   |  | $ | 25,726  |  
|Accounts receivable, net                                |  |        | 23,959  |   |                       |   | 2,899  |              |  |                            |    |  |                           | 26,858  |   |              |   | 15,005 |                   |  |   |        |   |  |   | 41,863  |  
|Inventories                                             |  |        | 18,741  |   |                       |   | 3,491  |              |  |                            |    |  |                           | 22,232  |   |              |   | 16,746 |                   |  |   |        |   |  |   | 38,978  |  
|Deferred tax assets                                     |  |        | 2,985   |   |                       |   | 68     |              |  |                            |    |  |                           | 3,053   |   |              |   | 2,359  |                   |  |   |        |   |  |   | 5,412   |  
|Prepaid expenses and other                              |  |        | 464     |   |                       |   |       |              |  |                            |    |  |                           | 464     |   |              |   | 975    |                   |  |   | 374     |   |  |   | 1,813   |  
|                                                        |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current assets                                    |  |        | 69,259  |   |                       |   | 6,458  |              |  |                            |    |  |                           | 75,717  |   |              |   | 37,701 |                   |  |   | 374     |   |  |   | 113,792 |  
|                                                        |  |        |         |   |                       |   |       
|PROPERTY, PLANT AND EQUIPMENT, net                      |  |        | 32,344  |   |                       |   | 14,739 |              |  |                            |    |  |                           | 47,083  |   |              |   | 20,604 |                   |  |   |        |   |  |   | 67,687  |  
|DEFERRED TAX ASSETS                                     |  |        |        |   |                       |   |       |              |  |                            |    |  |                           |        |   |              |   | 2,868  |                   |  |   | (2,868  | ) |  |   |        |  
|GOODWILL                                                |  |        | 62,386  |   |                       |   | 5,631  |              |  |                            |    |  |                           | 68,017  |   |              |   | 30,361 |                   |  |   |        |   |  |   | 98,378  |  
|OTHER INTANGIBLE ASSETS, net                            |  |        | 30,979  |   |                       |   | 164    |              |  |                            |    |  |                           | 31,143  |   |              |   |       |                   |  |   |        |   |  |   | 31,143  |  
|INVESTMENT IN SUBSIDIARIES                              |  |        | 69,640  |   |                       |   |       |              |  |                            | 749 |  |                           | 70,389  |   |              |   |       |                   |  |   | (70,389 | ) |  |   |        |  
|OTHER ASSETS                                            |  |        | 7,327   |   |                       |   | 93     |              |  |                            |    |  |                           | 7,420   |   |              |   | 190    |                   |  |   |        |   |  |   | 7,610   |  
|                                                        |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL ASSETS                                            |  | $      | 271,935 |   |                       | $ | 27,085 |              |  | $                          | 749 |  | $                         | 299,769 |   |              | $ | 91,724 |                   |  | $ | (72,883 | ) |  | $ | 318,610 |  
|                                                        |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                    |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|CURRENT LIABILITIES:                                    |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Accounts payable                                        |  | $      | 8,145   |   |                       | $ | 2,052  |              |  | $                          |    |  | $                         | 10,197  |   |              | $ | 8,016  |                   |  | $ |        |   |  | $ | 18,213  |  
|Accrued expenses                                        |  |        | 17,519  |   |                       |   | (528   | )            |  |                            |    |  |                           | 16,991  |   |              |   | 10,863 |                   |  |   | 374     |   |  |   | 28,228  |  
|Current portion of long-term debt                       |  |        | 321     |   |                       |   |       |              |  |                            |    |  |                           | 321     |   |              |   | 392    |                   |  |   |        |   |  |   | 713     |  
|                                                        |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total current liabilities                               |  |        | 25,985  |   |                       |   | 1,524  |              |  |                            |    |  |                           | 27,509  |   |              |   | 19,271 |                   |  |   | 374     |   |  |   | 47,154  |  
|                                                        |  |        |         |   |                       |   |       
|INTERCOMPANY (RECEIVABLE) PAYABLE                       |  |        | (25,217 | ) |                       |   | 25,706 |              |  |                            |    |  |                           | 489     |   |              |   | (489   | )                 |  |   |        |   |  |   |        |  
|OTHER LIABILITIES, including post-retirement obligation |  |        | 4,468   |   |                       |   |       |              |  |                            |    |  |                           | 4,468   |   |              |   | 416    |                   |  |   |        |   |  |   | 4,884   |  
|DEFERRED TAX LIABILITIES                                |  |        | 7,234   |   |                       |   | 604    |              |  |                            |    |  |                           | 7,838   |   |              |   | 9      |                   |  |   | (2,868  | ) |  |   | 4,979   |  
|LONG-TERM DEBT, net of current portion                  |  |        | 205,848 |   |                       |   |       |              |  |                            |    |  |                           | 205,848 |   |              |   | 1,688  |                   |  |   |        |   |  |   | 207,536 |  
|MINORITY INTEREST                                       |  |        |        |   |                       |   |       |              |  |                            |    |  |                           |        |   |              |   |       |                   |  |   | 440     |   |  |   | 440     |  
|                                                        |  |        |         |   |                       |   |       
|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)                             |  |        | (17,806 | ) |                       |   | (749   | )            |  |                            | 749 |  |                           | (17,806 | ) |              |   | 7,688  |                   |  |   | (7,688  | ) |  |   | (17,806 | )
|Accumulated other comprehensive income                  |  |        | (1,225  | ) |                       |   |       |              |  |                            |    |  |                           | (1,225  | ) |              |   | (173   | )                 |  |   | 173     |   |  |   | (1,225  | )
|                                                        |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|Total stockholders equity                              |  |        | 53,617  |   |                       |   | (749   | )            |  |                            | 749 |  |                           | 53,617  |   |              |   | 70,829 |                   |  |   | (70,829 | ) |  |   | 53,617  |  
|                                                        |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY              |  | $      | 271,935 |   |                       | $ | 27,085 |              |  | $                          | 749 |  | $                         | 299,769 |   |              | $ | 91,724 |                   |  | $ | (72,883 | ) |  | $ | 318,610 |  
|                                                        |  |        |         |   |                       |   |        |              |  |                            |     |  |                           |         |   |              |   |        |                   |  |   |         |   |  |   |         |  



18



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended
July 30, 2005



(Unaudited and 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



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended
July 31, 2004



(Unaudited and In Thousands)



|                                           |  |        |        |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ------ | ------ | --------------------- | - | ------------ |  | - | -------------------------- | - | ------------------------- | - | ------ | ------------ | - | ------ | ----------------- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Issuer |        | GuarantorSubsidiaries |   | Eliminations |  |   | SubtotalIssuer &Guarantors |   | Non-GuarantorSubsidiaries |   |        | Eliminations |   |        | ConsolidatedTotal | 
|Net Sales                                  |  | $      | 72,161 |                       | $ | 25,139       |  | $ | (8,126                     | ) |                           | $ | 89,174 |              | $ | 13,773 |                   |  | $ | (3,345 | ) |  | $ | 99,602 |  
|                                           |  |        |        |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |        |   |  |   |        |  
|Cost of Goods Sold                         |  |        | 40,999 |                       |   | 19,663       |  |   | (8,126                     | ) |                           |   | 52,536 |              |   | 11,376 |                   |  |   | (3,345 | ) |  |   | 60,567 |  
|Selling, General & Administrative Expenses |  |        | 13,060 |                       |   | 4,508        |  |   |                           |   |                           |   | 17,568 |              |   | 2,562  |                   |  |   |       |   |  |   | 20,130 |  
|Amortization                               |  |        | 602    |                       |   | 163          |  |   |                           |   |                           |   | 765    |              |   |       |                   |  |   |       |   |  |   | 765    |  
|                                           |  |        |        |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |        |   |  |   |        |  
|Operating Expenses                         |  |        | 54,661 |                       |   | 24,334       |  |   | (8,126                     | ) |                           |   | 70,869 |              |   | 13,938 |                   |  |   | (3,345 | ) |  |   | 81,462 |  
|                                           |  |        |        |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |        |   |  |   |        |  
|Operating Income (Loss)                    |  |        | 17,500 |                       |   | 805          |  |   |                           |   |                           |   | 18,305 |              |   | (165   | )                 |  |   |       |   |  |   | 18,140 |  
|                                           |  |        |        |                       |   |              | 
|Minority Interest in Income of Subsidiary  |  |        |       |                       |   |             |  |   |                           |   |                           |   |       |              |   | (14    | )                 |  |   |       |   |  |   | (14    | )
|Equity in Earnings of Affiliate            |  |        |       |                       |   | 365          |  |   |                           |   |                           |   | 365    |              |   |       |                   |  |   |       |   |  |   | 365    |  
|Equity in Earnings of Subsidiaries         |  |        | 490    |                       |   |             |  |   |                           |   |                           |   | 490    |              |   |       |                   |  |   | (490   | ) |  |   |       |  
|Net Interest Expense                       |  |        | 5,123  |                       |   |             |  |   |                           |   |                           |   | 5,123  |              |   | 27     |                   |  |   |       |   |  |   | 5,150  |  
|                                           |  |        |        |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |        |   |  |   |        |  
|Income (Loss) Before Income Taxes          |  |        | 12,867 |                       |   | 1,170        |  |   |                           |   |                           |   | 14,037 |              |   | (206   | )                 |  |   | (490   | ) |  |   | 13,341 |  
|Income Tax Expense                         |  |        | 4,916  |                       |   | 456          |  |   |                           |   |                           |   | 5,372  |              |   | 18     |                   |  |   |       |   |  |   | 5,390  |  
|                                           |  |        |        |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |        |   |  |   |        |  
|Net Income (Loss)                          |  | $      | 7,951  |                       | $ | 714          |  | $ |                           |   |                           | $ | 8,665  |              | $ | (224   | )                 |  | $ | (490   | ) |  | $ | 7,951  |  
|                                           |  |        |        |                       |   |              |  |   |                            |   |                           |   |        |              |   |        |                   |  |   |        |   |  |   |        |  



20



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Twenty-Six Weeks Ended
July 30, 2005



(Unaudited and 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 | )                 |  |   |        |   |  |   | 9,041   |  
|                                           |  |        |        |   |                       |   |             
|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



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Twenty-Six Weeks Ended
July 31, 2004



(Unaudited and In Thousands)



|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |        |   |  |   |        
|------------------------------------------ |  | ------ | ------- | - | --------------------- | - | ------------ |  | - | -------------------------- | - |  | ------------------------- | ------- | - | ------------ | - | ------ | ----------------- |  | - | ------ | - |  | - | -------
|                                           |  | Issuer |         |   | GuarantorSubsidiaries |   | Eliminations |  |   | SubtotalIssuer &Guarantors |   |  | Non-GuarantorSubsidiaries |         |   | Eliminations |   |        | ConsolidatedTotal
|Net Sales                                  |  | $      | 121,606 |   |                       | $ | 50,992       |  | $ | (13,173                    | ) |  | $                         | 159,425 |   |              | $ | 25,348 |                   |  | $ | (7,486 | ) |  | $ | 177,287
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |        |   |  |   |        
|Cost of Goods Sold                         |  |        | 72,107  |   |                       |   | 39,823       |  |   | (13,173                    | ) |  |                           | 98,757  |   |              |   | 20,712 |                   |  |   | (7,486 | ) |  |   | 111,983
|Selling, General & Administrative Expenses |  |        | 25,636  |   |                       |   | 9,293        |  |   |                           |   |  |                           | 34,929  |   |              |   | 6,205  |                   |  |   |       |   |  |   | 41,134 
|Amortization                               |  |        | 1,204   |   |                       |   | 327          |  |   |                           |   |  |                           | 1,531   |   |              |   |       |                   |  |   |       |   |  |   | 1,531  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |        |   |  |   |        
|Operating Expenses                         |  |        | 98,947  |   |                       |   | 49,443       |  |   | (13,173                    | ) |  |                           | 135,217 |   |              |   | 26,917 |                   |  |   | (7,486 | ) |  |   | 154,648
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |        |   |  |   |        
|Operating Income (Loss)                    |  |        | 22,659  |   |                       |   | 1,549        |  |   |                           |   |  |                           | 24,208  |   |              |   | (1,569 | )                 |  |   |       |   |  |   | 22,639 
|                                           |  |        |         |   |                       |   |             
|Minority Interest in Loss of Subsidiary    |  |        |        |   |                       |   |             |  |   |                           |   |  |                           |        |   |              |   | 22     |                   |  |   |       |   |  |   | 22     
|Equity in Earnings of Affiliate            |  |        |        |   |                       |   | 776          |  |   |                           |   |  |                           | 776     |   |              |   |       |                   |  |   |       |   |  |   | 776    
|Equity in Earnings of Subsidiaries         |  |        | (246    | ) |                       |   |             |  |   |                           |   |  |                           | (246    | ) |              |   |       |                   |  |   | 246    |   |  |   |       
|Net Interest Expense                       |  |        | 10,219  |   |                       |   |             |  |   |                           |   |  |                           | 10,219  |   |              |   | 54     |                   |  |   |       |   |  |   | 10,273 
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |        |   |  |   |        
|Income (Loss) Before Income Taxes          |  |        | 12,194  |   |                       |   | 2,325        |  |   |                           |   |  |                           | 14,519  |   |              |   | (1,601 | )                 |  |   | 246    |   |  |   | 13,164 
|Income Tax Expense                         |  |        | 4,998   |   |                       |   | 933          |  |   |                           |   |  |                           | 5,931   |   |              |   | 37     |                   |  |   |       |   |  |   | 5,968  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |        |   |  |   |        
|Net Income (Loss)                          |  | $      | 7,196   |   |                       | $ | 1,392        |  | $ |                           |   |  | $                         | 8,588   |   |              | $ | (1,638 | )                 |  | $ | 246    |   |  | $ | 7,196  
|                                           |  |        |         |   |                       |   |              |  |   |                            |   |  |                           |         |   |              |   |        |                   |  |   |        |   |  |   |        



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COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Twenty-Six Weeks Ended
July 30, 2005



(Unaudited and 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) provided by 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   |  
|                                                             |  |        |         |   |                       |   |    |                           |  |   |                   |   |  |   |         |  



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##### Table of Contents

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Guarantor Financial Statements

Condensed Consolidating Statement of Cash Flows

For the Twenty-Six Weeks Ended
July 31, 2004



(Unaudited and In Thousands)



|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|------------------------------------------------------------ |  | ------ | ------- | - | --------------------- | - | ---- | ------------------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                             |  | Issuer |         |   | GuarantorSubsidiaries |   |      | Non-GuarantorSubsidiaries |  |   | ConsolidatedTotal |  
|CASH FLOWS FROM OPERATING ACTIVITIES                         |  | $      | (11,588 | ) |                       | $ | (736 | )                         |  | $ | 15,584            |   |  | $ | 3,260   |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                        |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Equity distribution from affiliate                           |  |        |        |   |                       |   | 922  |                           |  |   |                  |   |  |   | 922     |  
|Additions to property, plant and equipment                   |  |        | (932    | ) |                       |   | (186 | )                         |  |   | (2,293            | ) |  |   | (3,411  | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Net cash (used in) provided by investing activities          |  |        | (932    | ) |                       |   | 736  |                           |  |   | (2,293            | ) |  |   | (2,489  | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                        |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Proceeds from revolving credit facilities                    |  |        | 15,280  |   |                       |   |     |                           |  |   |                  |   |  |   | 15,280  |  
|Repayments of revolving credit facilities                    |  |        | (15,280 | ) |                       |   |      |                           |  |   |                   |   |  |   | (15,280 | )
|Repayments of long-term debt                                 |  |        |        |   |                       |   |     |                           |  |   | (1,573            | ) |  |   | (1,573  | )
|Financing costs                                              |  |        | (237    | ) |                       |   |     |                           |  |   |                  |   |  |   | (237    | )
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|Net cash used in financing activities                        |  |        | (237    | ) |                       |   |     |                           |  |   | (1,573            | ) |  |   | (1,810  | )
|                                                             |  |        |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS |  |        |        |   |                       |   |     |                           |  |   | 22                |   |  |   | 22      |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|NET CHANGE IN CASH AND CASH EQUIVALENTS                      |  |        | (12,757 | ) |                       |   |     |                           |  |   | 11,740            |   |  |   | (1,017  | )
|                                                             |  |        |         |  
|CASH AND CASH EQUIVALENTS, beginning of period               |  |        | 19,047  |   |                       |   |     |                           |  |   | (8,006            | ) |  |   | 11,041  |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                     |  | $      | 6,290   |   |                       | $ |     |                           |  | $ | 3,734             |   |  | $ | 10,024  |  
|                                                             |  |        |         |   |                       |   |      |                           |  |   |                   |   |  |   |         |  



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



The following discussion and analysis of the financial condition and results of operations should be read in conjunction with and is qualified in its entirety by
reference to the Companys consolidated financial statements and the accompanying notes. Except for historical information, the discussions in this section contain forward-looking statements that involve risks and uncertainties. Future results
could differ materially from those discussed below as a result of a number of factors. See Forward-Looking Statements contained herein.



GENERAL



Collins & Aikman Floorcoverings, Inc. 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 carpet. 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 locations in California (See Note 15- Facility Maximization Project), Canada, the United
Kingdom, Singapore and China.



The Company is a wholly owned subsidiary of
Tandus Group, Inc. Subsequent to a recapitalization transaction on January 25, 2001, investment funds managed by Oaktree Capital Management, LLC and Banc of America Capital Investors control a majority of the outstanding capital stock of Tandus
Group.



RESULTS OF OPERATIONS



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



|                                           |  |                     |   |  |                       |   |  |              |   |  |              |  
|------------------------------------------ |  | ------------------- | - |  | --------------------- | - |  | ------------ | - |  | ------------ | -
|                                           |  | Thirteen WeeksEnded |   |  | Twenty-Six WeeksEnded |  
|                                           |  | July 31,2004        |   |  | July 30,2005          |   |  | July 31,2004 |   |  | July 30,2005 |  
|Net Sales                                  |  | 100.0               | % |  | 100.0                 | % |  | 100.0        | % |  | 100.0        | %
|Cost of Goods Sold                         |  | 60.8                |   |  | 67.0                  |   |  | 63.2         |   |  | 69.2         |  
|                                           |  |                     |   |  |                       |   |  |              |   |  |              |  
|Gross Profit                               |  | 39.2                |   |  | 33.0                  |   |  | 36.8         |   |  | 30.8         |  
|Selling, General & Administrative Expenses |  | 20.2                |   |  | 20.8                  |   |  | 23.2         |   |  | 24.4         |  
|Amortization                               |  | 0.8                 |   |  | 0.7                   |   |  | 0.8          |   |  | 0.9          |  
|                                           |  |                     |   |  |                       |   |  |              |   |  |              |  
|Operating Income                           |  | 18.2                |   |  | 11.5                  |   |  | 12.8         |   |  | 5.5          |  
|                                           |  |                     |   |  |                       |   |  |              |   |  |              |  
|Net Interest Expense                       |  | 5.2                 |   |  | 5.2                   |   |  | 5.8          |   |  | 6.1          |  
|                                           |  |                     |   |  |                       |   |  |              |   |  |              |  
|Net Income (Loss)                          |  | 8.0                 |   |  | 4.6                   |   |  | 4.1          |   |  | (0.9         | )
|                                           |  |                     |   |  |                       |   |  |              |   |  |              |  
|Adjusted EBITDA                            |  | 22.2                |   |  | 17.6                  |   |  | 17.0         |   |  | 13.0         |  
|                                           |  |                     |   |  |                       |   |  |              |   |  |              |  



Thirteen Weeks Ended
July 30, 2005 As Compared with the Thirteen Weeks Ended July 31, 2004



Net Sales. Net sales for the thirteen weeks ended July 30, 2005 were $95.1 million, a decrease of 4.5% from the $99.6 million for the thirteen weeks ended July 31, 2004. Net sales of the
Companys Floorcoverings segment were $88.3 million for the thirteen weeks ended July 30, 2005 as compared to $94.9 million for the thirteen weeks ended July 31, 2004, a decrease of $6.6 million or 7.0%, primarily attributable to the
North American operations. Within these operations, the decrease in the Floorcoverings segments net sales was primarily attributable to a 17.5% decrease in broadloom sales combined with a 5.2% decrease in sales of 6-foot roll goods.
Contributing to the decline in broadloom sales were operational complications associated with the facility maximization project, as discussed more fully herein and in Note 15 of the Notes to Consolidated Financial Statements contained
herein in Item 1. Partially offsetting these declines was a 7.7% increase in the sales of carpet tiles. From an end use perspective, the current quarter results reflect a 0.5% decrease in Institutional sales and an 18.1% decrease in Corporate sales,
including retail. Net sales of the Extrusion segment were $6.8 million for the thirteen weeks ended July 30, 2005 as compared to $4.7 million for the thirteen weeks ended July 31, 2004, an increase of $2.1 million or 44.7%. The increase in
sales for the Extrusion segment was due to higher sales to seven of the Extrusion segments ten largest customers during the current quarter.



Cost of Goods Sold. Cost of goods sold was $63.7 million for the thirteen weeks ended July 30, 2005 as compared to $60.6 million in the thirteen weeks ended
July 31, 2004. As a percentage of sales, costs of goods sold were 67.0% and 60.8% for the thirteen weeks ended July 30, 2005 and July 31, 2004, respectively. The increase was primarily due to facility maximization costs of $2.2
million for the thirteen weeks ended July 30, 2005 related to the Companys planned closure of its manufacturing facility in Santa Ana, California



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and transfer of production to its existing Truro, Nova Scotia facility. (See further discussion in Liquidity and
Capital Resources contained herein and Note 15 of the Notes to Consolidated Financial Statements contained herein in Item 1.) Excluding the facility maximization costs, cost of goods sold for the thirteen weeks ended July 30,
2005 were $61.5 million or 64.7%. In addition, the Company has also experienced a significant increase in the price of several raw materials, including yarns, resins, and other agents and chemicals.



Selling, General and Administrative Expenses.Selling, general and administrative
expenses decreased to $19.9 million for the thirteen weeks ended July 30, 2005, a decrease of 1.0% from $20.1 million in the thirteen weeks ended July 31, 2004. This decrease was primarily due to lower salaries, taxes and benefits of $1.1
million, partially offset by administrative facility maximization charges of $0.4 million and a decrease in the foreign currency transaction gain of $0.4 million. As a percentage of sales, these expenses increased to 20.8% from 20.2% in the prior
year.



Amortization.Intangible asset amortization decreased to
$0.6 million for the thirteen weeks ended July 30, 2005 as compared to $0.8 million for the thirteen weeks ended July 31, 2004. The decrease was due to the Companys supply agreement being fully amortized as of April 30, 2005.



Interest Expense. Net interest expense decreased to $4.9 million
for the thirteen weeks ended July 30, 2005 as compared to $5.2 million for the thirteen weeks ended July 31, 2004, which included minimal interest income.



Income Taxes. The Company had income tax expense of $1.7 million for the thirteen weeks ended July 30, 2005 as compared to $5.4
million for the thirteen weeks ended July 31, 2004. The decrease was predominantly due to the decreased profitability of the Company during the second quarter of fiscal 2005.



Net Income. Net income for the thirteen weeks ended July 30, 2005 decreased to $4.4 million compared to $8.0 million in the
thirteen weeks ended July 31, 2004. This was primarily due to the combined result of lower net sales and higher cost of goods sold as discussed above.



Adjusted EBITDA.Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, non-cash charges or expenses
(other than write-down of current assets), costs related to board approved acquisitions and attempted acquisitions, expenses related to the facility maximization project 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 30, 2005 decreased to $16.7 million from $22.1 million in the thirteen weeks ended July 31, 2004. As a percentage of sales, Adjusted EBITDA was 17.6% in
the thirteen weeks ended July 30, 2005 compared to 22.2% in the thirteen weeks ended July 31, 2004. The decrease was principally due to the lower sales volume in the Floorcoverings segment. In addition, due to the Companys withdrawal
from the Chroma partnership as discussed in Note 12 of the Notes to Consolidated Financial Statements contained herein in Item I, the Companys Adjusted EBITDA decreased due to the termination of receipt of Chroma dividends.
Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a companys ability to service debt. The Company utilizes Adjusted EBITDA as (a) a benchmark for its annual budget and long range plan,
(b) a valuation method for potential acquisitions, and (c) a measure to determine compliance with senior credit facility debt covenants. 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 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 to Adjusted EBITDA is as follows (in thousands):



|                                                 |  |                      |        |   |              |   |        |  
|------------------------------------------------ |  | -------------------- | ------ | - | ------------ | - | ------ | -
|                                                 |  | Thirteen Weeks Ended |       
|                                                 |  | July 31,2004         |        |   | July 30,2005 |  
|Net income                                       |  | $                    | 7,951  |   |              | $ | 4,374  |  
|Income tax expense                               |  |                      | 5,390  |   |              |   | 1,719  |  
|Net interest expense                             |  |                      | 5,150  |   |              |   | 4,917  |  
|Depreciation                                     |  |                      | 2,533  |   |              |   | 2,471  |  
|Amortization                                     |  |                      | 765    |   |              |   | 614    |  
|Chroma cash dividends                            |  |                      | 644    |   |              |   |       |  
|Equity in earnings of Chroma                     |  |                      | (365   | ) |              |   |       |  
|Facility maximization costs                      |  |                      |       |   |              |   | 2,658  |  
|Gain on disposal of fixed assets                 |  |                      |       |   |              |   | (23    | )
|Minority interest in income (loss) of subsidiary |  |                      | 14     |   |              |   | (29    | )
|                                                 |  |                      |        |   |              |   |        |  
|Adjusted EBITDA                                  |  | $                    | 22,082 |   |              | $ | 16,701 |  
|                                                 |  |                      |        |   |              |   |        |  



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##### Table of Contents

RESULTS OF OPERATIONS



Twenty-Six Weeks Ended July 30, 2005 As Compared with the Twenty-Six Weeks Ended July 31, 2004



Net Sales. Net sales for the twenty-six weeks ended July 30, 2005 were $163.4
million, a decrease of 7.8% from the $177.3 million for the twenty-six weeks ended July 31, 2004. Net sales of the Companys Floorcoverings segment were $150.4 million for the twenty-six weeks ended July 30, 2005 as compared to $164.9
million for the twenty-six weeks ended July 31, 2004, a decrease of $14.5 million or 8.8%, primarily attributable to the North American operations. Within these operations, the decrease in the Floorcoverings segments net sales was
primarily attributable to an 18.1% decrease in broadloom sales combined with a 10.6% decrease in sales of 6-foot roll goods. Contributing to the decline in broadloom sales were operational complications associated with the facility maximization
project, as discussed more fully herein and in Note 15 of the Notes to Consolidated Financial Statements contained herein in Item 1. Partially offsetting these declines was a 5.9% increase in the sales of carpet tiles. From an end use
perspective, the current twenty-six weeks results reflect a 7.6% decrease in Institutional sales, principally driven by lower sales in healthcare and government. In addition, Corporate sales, including retail, experienced a 12.4% decline. Net sales
of the Extrusion segment were $13.0 million for the twenty-six weeks ended July 30, 2005 as compared to $12.4 million for the twenty-six weeks ended July 31, 2004, an increase of $0.6 million or 4.8%. The increase in sales for the
Extrusion segment was due to overall higher sales to the Extrusion segments external customers during the twenty-six weeks ended July 30, 2005.



Cost of Goods Sold. Cost of goods sold was $113.0 million for the twenty-six weeks ended July 30, 2005 as compared to $112.0 million in the twenty-six weeks
ended July 31, 2004. As a percentage of sales, costs of goods sold were 69.2% and 63.2%, respectively. The increase was primarily due to the inclusion in the 2005 period expenses of $5.0 million related to the Companys planned closure of
its manufacturing facility in Santa Ana, California and transfer of production to its existing Truro, Nova Scotia facility. (See further discussion in Liquidity and Capital Resources contained herein and Note 15 of the Notes to
Consolidated Financial Statements contained herein in Item I.) Excluding the facility maximization costs, cost of goods sold for the twenty-six weeks ended July 30, 2005 was $108.0 million or 66.1%. In addition, the Company has also
experienced a significant increase in the price of several raw materials, including yarns, resins, and other agents and chemicals.



Selling, General and Administrative Expenses.Selling, general and administrative expenses for the twenty-six weeks ended July 30, 2005 were $40.0 million, a
decrease of 2.7% from $41.1 million in the twenty-six weeks ended July 31, 2004. The decrease was primarily due to lower salaries, taxes and benefits of $1.1 million and decreased legal and professional expenses of $1.4 million, partially
offset by higher samples expense of $0.7 million and an administrative facility maximization charge of $0.8 million. As a percentage of sales, these expenses increased to 24.4% from 23.2% in the prior year.



Amortization.Intangible asset amortization decreased to $1.4 million for the
twenty-six weeks ended July 30, 2005 as compared to $1.5 million for the twenty-six weeks ended July 31, 2004. The decrease was due to the Companys supply agreement being fully amortized as of April 30, 2005.



Interest Expense. Net interest expense for the twenty-six weeks ended July 30,
2005 and the twenty-six weeks ended July 31, 2004 was $10.0 million and $10.3 million, respectively, which included interest income of $0.1 million for each of the twenty-six week periods.



Income Taxes. The Company had income tax expense of $0.4 million for the twenty-six
weeks ended July 30, 2005 as compared to $6.0 million for the twenty-six weeks ended July 31, 2004. During the first quarter of fiscal 2005, the Company incurred losses in its domestic operations against which a tax benefit was recorded.
Losses were also incurred in the Companys foreign operations in both the first and second quarters of fiscal 2005, against which no tax benefit was recognized. The tax expense for the twenty-six weeks ended July 31, 2004 is a result of
profitability in the Companys domestic operations and a loss in the Companys foreign operations, against which no tax benefit was recognized.



Net Income (Loss). The Company incurred a net loss of $1.4 million for the twenty-six weeks ended July 30, 2005 compared to net income of $7.2 million for the
twenty-six weeks ended July 31, 2004. The primary contributor was a decrease in net sales, partially offset by a decrease in income tax expense, as discussed above.



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 board approved acquisitions and attempted acquisitions, expenses related to the facility maximization project 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 30, 2005 decreased to $21.3 million from $30.2 million in the twenty-six weeks ended July 31, 2004. As a percentage of sales, Adjusted EBITDA
was 13.0% in the twenty-six weeks ended July 30, 2005 compared to 17.0% in the twenty-six weeks ended July 31, 2004. The decrease in the twenty-six weeks ended July 30, 2005 was principally due to lower sales volume in the
Floorcoverings segment. In addition, due to the Companys withdrawal from the Chroma partnership as discussed in Note 12 of the Notes to Consolidated Financial Statements contained



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herein in Item I, the Companys Adjusted EBITDA decreased due to the termination of receipt of Chroma dividends. Adjusted EBITDA is presented because it
is commonly used by certain investors and analysts to analyze a companys ability to service debt. The Company utilizes Adjusted EBITDA as (a) a benchmark for its annual budget and long range plan, (b) a valuation method for potential
acquisitions, and (c) a measure to determine compliance with senior credit facility debt covenants. 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 to Adjusted EBITDA is as follows (in thousands):



|                                        |  |                        |        |   |              |   |        |  
|--------------------------------------- |  | ---------------------- | ------ | - | ------------ | - | ------ | -
|                                        |  | Twenty-Six Weeks Ended |       
|                                        |  | July 31,2004           |        |   | July 30,2005 |  
|Net income (loss)                       |  | $                      | 7,196  |   |              | $ | (1,409 | )
|Income taxes                            |  |                        | 5,968  |   |              |   | 403    |  
|Net interest expense                    |  |                        | 10,273 |   |              |   | 9,993  |  
|Depreciation                            |  |                        | 5,119  |   |              |   | 5,035  |  
|Amortization                            |  |                        | 1,531  |   |              |   | 1,392  |  
|Chroma cash dividends                   |  |                        | 922    |   |              |   |       |  
|Equity in earnings of Chroma            |  |                        | (776   | ) |              |   |       |  
|Facility maximization costs             |  |                        |       |   |              |   | 5,826  |  
|Loss on disposal of fixed assets        |  |                        |       |   |              |   | 94     |  
|Minority interest in loss of subsidiary |  |                        | (22    | ) |              |   | (39    | )
|                                        |  |                        |        |   |              |   |        |  
|Adjusted EBITDA                         |  | $                      | 30,211 |   |              | $ | 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 funded its cash requirements through internally generated cash flows, borrowings and the offering of the senior subordinated notes.



Net cash used in operating activities for the twenty-six weeks ended July 30, 2005 was
$16.6 million compared to net cash provided by operating activities of $3.3 million for the twenty-six weeks ended July 31, 2004. The change was primarily due to the increased net loss of $8.6 million in addition to higher working capital
requirements of $11.3 million.



Net cash used in investing activities in the
twenty-six weeks ended July 30, 2005 was $7.1 million compared to $2.5 million in the twenty-six weeks ended July 31, 2004. The increase in cash used in investing activities in the current year was due to increased capital expenditures.
Capital expenditures for the twenty-six weeks ended July 30, 2005 were $7.1 million compared to $3.4 million for the twenty-six weeks ended July 31, 2004. Included in capital expenditures for the 2005 period is $2.0 million related to the
facility maximization project. The Company anticipates capital expenditures for the remainder of the year to be approximately $6.0 million, including $1.2 million related to the completion of the facility maximization project.



Net cash provided by financing activities for the twenty-six weeks ended July 30, 2005
was $0.3 million compared to net cash used in financing activities of $1.8 million in the twenty-six weeks ended July 31, 2004. The cash provided by financing activities was due primarily to net cash borrowings in fiscal 2005. The cash used in
financing for the 2004 period related to repayments of long-term debt.



The
Company has significant indebtedness which, as of July 30, 2005, consists of $175.0 million of 9.75% senior subordinated notes due 2010 (the 9.75% Notes), a $109.0 million credit facility which had an outstanding balance of $30.8
million in term loan borrowings (the Senior Credit Facility), $1.6 million in purchase money and other indebtedness and $1.2 million in sinking fund bonds under Crossley. As of July 30, 2005, the Companys $50.0 million
revolving line of credit had no borrowings outstanding and $4.3 million of letters of credit outstanding leaving total availability of $45.7 million.



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 amount due on
each date during fiscal 2005 is $8.5 million.



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



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borrowings will be available in an amount sufficient to enable the Company to service its indebtedness or to make necessary capital expenditures. We
periodically evaluate potential acquisitions of businesses, which complement our existing operations. Depending on various factors, including, among others, the cash consideration required in such potential acquisitions, we may determine to finance
any such transaction with existing sources of liquidity.



On August 10,
2004, the Company and its parent announced its intent to close its manufacturing facility in Santa Ana, California, and transfer the production to its existing Truro, Nova Scotia, Canada facility. The plan to close the facility was approved on
August 9, 2004, and is expected to be complete by the end of the Companys third fiscal quarter in 2005. The Company had previously expected that the consolidation of the facilities would be completed by the end of the Companys first
fiscal quarter in 2005. However, the transfer of production was slowed to accommodate the training of 150 new associates and the completion of certain manufacturing system enhancements. It is currently estimated that the remaining costs will be
approximately $2.0 million and consist of severance, moving, reinstallation, professional fees and other costs, including, among other things, production inefficiencies during the transition period. The Company also expects additional capital
expenditures of approximately $1.2 million related to the project.



As part of
the facility maximization project, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting of the remaining $1.2 million of Crossleys outstanding sinking fund bonds. The forgiveness will commence in the fourth
quarter of fiscal 2005, will be over the remaining five-year term of the current note and is based upon maintaining a defined level of full-time equivalent employees. The debt is also non-interest bearing.



The costs incurred and the anticipated expenditures
remaining are as follows (in millions):



|                                              |  |                                                     |     |                                                       |   |      |                                    |  |                                  |     |  |   |    
|--------------------------------------------- |  | --------------------------------------------------- | --- | ----------------------------------------------------- | - | ---- | ---------------------------------- |  | -------------------------------- | --- |  | - | ---
|                                              |  | Anticipated TotalExpenditures As of August 20, 2004 |     | Change in Estimateof Expenditures As of July 30,
2005 |   |      | AmountsIncurred As ofJuly 30, 2005 |  | AnticipatedRemainingExpenditures
|Severance Costs                               |  | $                                                   | 1.8 |                                                       | $ | 0.3  |                                    |  | $                                | 2.1 |  | $ |   
|Contractual Obligations and Professional Fees |  |                                                     | 3.1 |                                                       |   | (1.8 | )                                  |  |                                  | 0.4 |  |   | 0.9
|Other Project Costs                           |  |                                                     | 1.5 |                                                       |   | 6.9  |                                    |  |                                  | 7.3 |  |   | 1.1
|                                              |  |                                                     |     |                                                       |   |      |                                    |  |                                  |     |  |   |    
|Gross Project Expenditures                    |  | $                                                   | 6.4 |                                                       | $ | 5.4  |                                    |  | $                                | 9.8 |  | $ | 2.0
|                                              |  |                                                     |     |                                                       |   |      |                                    |  |                                  |     |  |   |    



The accrued facility maximization
costs at January 29, 2005 and July 30, 2005 amounted to $0.8 million and $0.1 million, respectively, which consisted of severance and other projected related costs. These costs are included in accrued expenses in the accompanying
consolidated balance sheets.



The financial covenants for fiscal 2005 related
to the Companys Senior Credit Facility require a fixed charge ratio and interest coverage ratio of at least 1.1 to 1.0 and 2.25 to 1.0, respectively. The Companys fixed charge coverage ratio and interest coverage ratio were 1.26 and
2.26, respectively, at July 30, 2005. 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 debt covenants as of July 30, 2005 and currently expects to remain in compliance throughout fiscal 2005, although no assurances to that effect can be given.



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.



EFFECTS OF INFLATION



Petroleum-based products comprise a predominant portion of raw materials the Company uses in manufacturing. While the Company attempts to match these increases with
corresponding price increases, large increases in the cost of petroleum-based raw materials could adversely affect the 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 which have risen due to demand. However, 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.



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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.



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.



RECENT ACCOUNTING
PRONOUNCEMENTS



In May 2005, the FASB issued SFAS
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 does not expect that the adoption of SFAS No. 154 will have a material impact on the Companys consolidated financial statements.



In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
Obligations, an interpretation of FASB Statement No. 143 (FIN 47), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liabilitys fair
value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not expect the adoption of FIN 47 to have a material impact on its consolidated financial statements.



In December 2004, the FASB issued FASB Staff Position 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes (SFAS No. 109) to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (FSP
109-1). The American Jobs Creation Act of 2004 (the Jobs Act), enacted October 22, 2004, introduces a special tax deduction of up to 9.0 percent when fully phased in, of the lesser of qualified production activities
income or taxable income. FSP 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with SFAS No. 109. Although FSP 109-1 was effective upon issuance, the Company is still evaluating the
impact FSP No. 109-1 will have on its consolidated financial statements, although it is expected to result in a benefit of approximately one-half of one percent. The Company will finalize its analysis of the benefits of the qualified activities
production deduction when final regulations are issued by the U.S. Treasury Department. Those regulations are expected to be issued in the next 6 to 12 months.



In December 2004, the FASB issued FASB Staff Position 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision
within the American Jobs Creation Act of 2004 (FSP 109-2), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises income tax
deferred tax liability. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment for purposes of applying FASB Statement No. 109. The Company has not yet completed evaluating the impact of the
repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.



In November 2004, the FASB issued SFAS No. 151, 
Inventory Costs-An Amendment of ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, 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 overheads to the costs of conversion be
based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. The Company is currently evaluating SFAS No. 151 and does not expect it to have a material impact on
the Companys consolidated financial statements.



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In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (SFAS
No. 123R). This statement is a revision to SFAS No. 123 and supersedes APB Opinion 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 will be 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 will be 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 will be 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. 123R will be effective for fiscal years beginning after June 15,
2005, due to the Securities and Exchange Commissions Rule 2005-57, which amended the effective date of SFAS No. 123R. Accordingly the Company will adopt SFAS No. 123R on January 29, 2006. The Company is currently evaluating the
provisions of SFAS No. 123R and has not determined the impact that this Statement will have on its results of operations or financial position.



CRITICAL ACCOUNTING POLICIES



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 29, 2005. 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.



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 the historical experience for these items, actual amounts determined to be due and payable
could differ and additional allowances may be required.



Foreign Currency
Translation. Assets and liabilities of the Companys Canadian, United Kingdom (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 stockholders equity. Foreign currency gains (losses) are recognized in the consolidated statements of operations and amounted to $0.1
million and $0.6 million for the 13-week periods ended July 30, 2005 and July 31, 2004, respectively, and $0.1 million and $0.0 million for the twenty-six weeks ended July 30, 2005 and July 31, 2004, respectively.



Impairment of Goodwill and Indefinite Lived Intangible Assets. In addition to the
annual impairment tests required by SFAS No. 142, 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 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.



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.



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



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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.



FORWARD-LOOKING
STATEMENTS



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.



In addition, these forward-looking statements may not be realized due to the Companys failure to complete the transition to a single broadloom manufacturing
facility by the end of the third quarter of this year as a result of, among other things, unanticipated training and machinery installation delays, additional increases in costs for this project due to additional training and infrastructure
requirements, any delay in the expected timing of the anticipated positive impact of the facility maximization on the Companys income statement as a result of unforeseen fluctuations in orders and/or related expenses, and other risks and
factors identified in the Companys filings with the Securities and Exchange Commission. The Company undertakes no obligation to revise these statements following the date of the filing of this Form 10-Q for any reason. All written or oral
forward-looking statements that are made or are attributable to the Company with respect to the facility maximization project are expressly qualified by this cautionary notice.



Item 3. Quantitative and Qualitative Disclosures About Market Risk



The Company is subject to various market risk exposures including interest rate risk and foreign exchange rate risk. With respect to the Companys exposure to market risk, see the discussion in Part I,
Item 7A of the Companys annual report on Form 10-K for the fiscal year ended January 29, 2005. During the twenty-six weeks ended July 30, 2005, there was no substantive change to the Companys market risk or the management
of such risk.



Item 4. Controls and Procedures



As of
July 30, 2005, 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. In connection with the new rules, 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.



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,



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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.



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PART II  OTHER INFORMATION



Item 1. Legal Proceedings



On June 21, 2005 the Company filed in Rome, Georgia a joint lawsuit with Shaw Industries and Mohawk Corporation against Interface Corporation, regarding a patent on randomly installed carpet tile that Interface recently received. The
Company and its fellow plaintiffs filed suit because they do not believe that the Interface patent is valid. The joint lawsuit asks the court to declare that companies can continue to produce randomly installed modular carpet designs. Interface, on
the same day, filed suit in Atlanta against the Company and other carpet manufacturer asserting infringement of the aforementioned patent. Both suits are awaiting final determination as to priority and whether the cases will be consolidated.



In 1996 and 1997, the Company sold approximately $0.6 million
of carpet tile product to Employers Mutual Insurance Companies (EMC). EMC subsequently filed suit in the United States District Court for the Southern District of Iowa on August 6, 2002 alleging the carpet experienced premature
wearing and discoloration, and asserted that the Company should pay damages based upon theories of violation of warranties, negligence and fraud. The Company examined EMCs claim prior to commencement of the action and determined that EMC had
not properly maintained the carpet, thus resulting in irreversible damage. The Company filed a motion for summary judgment and the United States District Court for the Southern District of Iowa ruled in favor of the Company on the negligence,
written warranty claims and implied warranty of merchantability. Other claims including express oral warranty, implied warranty of fitness for particular purpose, fraudulent misrepresentation and fraudulent nondisclosure were tried to a jury. On
March 18, 2004, the jury entered a verdict in favor of the Company on the fraudulent misrepresentation and fraudulent nondisclosure claims and in favor of EMC on the express oral warranty and implied warranty of fitness for particular purpose.
The jury awarded EMC $0.8 million in damages for full replacement of this carpet. The Company filed a motion for judgment as a matter of law and a motion for a new trial. The judge denied the Companys motion for judgment as a matter of law but
conditionally granted the Companys motion for a new trial if EMC refused to accept a reduction of the judgment by $0.2 million. EMC agreed to the reduction of the judgment, causing the new trial motion to be denied. The judgment award of $0.6
million was recorded during the fiscal year ended January 31, 2004. The Company appealed the denial of its motion for judgment as a matter of law asserting that EMC failed to prove the affirmative defense of fraudulent concealment by clear,
convincing and satisfactory evidence. The Company also posted a letter of credit in favor of EMC for $0.8 million to secure EMCs recovery should EMC prevail. On August 16, 2005, the Company received a favorable ruling on its appeal that
errors were committed in the trial and the jury had erroneously applied instructions as to the measure of damages EMC was entitled to receive. As a result, the Company reduced its accrual for this litigation to $150 thousand, the potential damages
for the replacement of the original carpet. Subsequently, on September 12, 2005, EMC agreed to terminate its suit, releasing the Company of all liability for damages. Accordingly, the Company will release its current litigation accrual related to
this suit in full in the third quarter of fiscal 2005.



Monterey Carpets, Inc., (Monterey) in connection with its previous 50% ownership interest in Chroma Systems Partners (Chroma), is a co-defendant in an alleged claim by Enron Energy Services, Inc. (Enron)
that Chroma and its partners are liable for amounts related to certain energy contracts which existed between Chroma and Enron prior to the filing of Enrons Chapter 11 proceedings. Settlement negotiations are ongoing and it is not possible to
estimate the extent of any possible loss at this time. Monterey has filed its response and intends to vigorously contest Enrons lawsuit. A mandatory mediation session was originally scheduled for June 2, 2005, but has been delayed until
September 20, 2005. During fiscal 2004, Monterey terminated its partnership interest in Chroma as part of the facility maximization project.



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                                                                                               
|     | 
|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.



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|     |  |                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|32.1 |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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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 13, 2005.



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

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




36