UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED ~~MARCH~~JUNE 3130, ~~2005~~2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

~~Propex~~Commission ~~Fabrics~~File ~~Inc.~~ Number 333-122829

Propex Inc.

(Exact name of registrant as specified in its charter)

Delaware

2221

36-2692811

(State or Other Jurisdiction of

Incorporation or Organization)

(Primary Standard Industrial Classification Code Number)

(I.R.S. Employer

Identification Number)

~~260~~6025 ~~The~~Lee ~~Bluffs~~Highway, ~~Austell~~ Suite 425, ~~Georgia~~Chattanooga, ~~30168~~Tennessee 37421

(Address of Principal Executive Offices)

(~~770~~423) ~~941~~855-~~1711~~1466

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as~~or ~~defined~~a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. ~~Rule~~(Check ~~12b2~~one)~~. Yes ¨ No x~~:

~~The~~Large ~~Registrant~~accelerated isfiler ¨ Accelerated afiler ¨ Non-accelerated ~~wholly~~filer x ~~owned subsidiary of Propex Fabrics Holdings Inc., and there is no public market for the Registrant’s common stock.~~

~~Number~~Indicate ofby ~~shares~~check ofmark ~~common~~whether ~~stock~~the ~~outstanding~~registrant atis ~~May~~a ~~13,~~shell ~~2005:~~company ~~100~~(as ~~shares~~defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The Registrant is a wholly owned subsidiary of Propex Holdings Inc., and there is no public market for the Registrant’s common stock.

Number of shares of common stock outstanding at August 14, 2006: 10 shares.

Propex ~~Fabrics~~ Inc.

Table of Contents to Form 10-Q

For the Quarter Ended ~~March 31~~June 30, ~~2005~~2006

PART I	~~PART I~~
FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Income	4
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2336
Item 3.	~~Qualitative~~Quantitative and ~~Quantitative~~Qualitative Disclosures ~~about~~Regarding Market Risk	3054
Item 4.	Controls and Procedures	3255
Note regarding forward-looking statements		3256
PART II	~~PART II~~
OTHER INFORMATION
Item 1.	Legal Proceedings	3457
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3457
Item 3.	Defaults Upon Senior Securities	3458
Item 4.	Submission of Matters to a Vote of Security Holders	3458
Item 5.	Other Information	3458
Item 6.	Exhibits	3559
SIGNATURES		3660

PART I

ITEM 1. ~~Condensed~~CONDENSED ~~Consolidated~~CONSOLIDATED ~~Financial~~FINANCIAL ~~Statements~~STATEMENTS

Propex ~~Fabrics~~ Inc.

Condensed Consolidated Balance Sheets

(In Millions)

	March 31,2005		December 31,2004
	June 30, 2006		December 31,2005
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	26.12	$	2458.13
Accounts receivable, net (Note 2)		110.1		92.6
Accounts receivable, net (Note 3)		128.6		92.6
Inventories, net (Note 3)		101.1		90.7
Inventories, net (Note 4)		131.0		94.6
Deferred income taxes		39.60		3.5
Prepaid expenses and other current assets		715.04		89.83
Total current assets		247.9		219.7
Assets held for sale (Note 6)		5.0		26.7
Total current assets		315.2		285.0
Other assets:
Intangible assets, net		13.5		14.3
Goodwill (Note 7)		37.1		—
Deferred income taxes		20.3		22.0
Intangible assets, net (Note 7)		36.6		8.4
Other assets		13.3		14.2
Deferred income taxes		27.5		15.8
		47.1		50.5
Other assets		14.2		12.9
Property, plant, and equipment, net		203.0		207.9
		115.4		37.1
Total assets	$	498.0	$	478.1
Property, plant and equipment, net (Note 5)		253.2		164.3
Liabilities and stockholders’ equity:
	$	683.8	$	486.4
Liabilities and stockholder’s equity:
Current liabilities:
Accounts payable	$	49.64	$	2842.85
Accrued liabilities		1926.97		19.91
Current portion of debt and accrued interest		1115.20		711.01
Restructuring and other similar costs (Note 4)		0.7		0.9
Restructuring and other similar costs (Note 8)		2.6		1.7
Other current liabilities		3.8		73.12
Total current liabilities		8597.25		6377.76
Debt		253.1		254.5
Debt, less current portion (Note 13)		383.0		244.8
Deferred income taxes		79.60		7.8.6
Accrued pension and other postretirement benefit liabilities (Notes 6 and 7)		59.0		59.3
Accrued pension and other postretirement benefit liabilities (Notes 10 & 11)		51.5		52.5
Other non-current liabilities		—23.1		01.51
		319.7		322.1
		466.6		307.0
Total stockholders’ equity		93.1		92.3
Total stockholder’s equity		119.7		101.8
Total liabilities and stockholders’ equity	$	498.0	$	478.1
Total liabilities and stockholder’s equity	$	683.8	$	486.4

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

Propex ~~Fabrics~~ Inc.

Condensed Consolidated Statements of ~~Income~~Operations

(Unaudited)

(In Millions)

			Predecessor (Note 1)
	Three-months endedMarch 31,
	2005		2004
Net revenue	$	161.5	$	140.5
Cost of sales		136.7		121.6
Gross profit		24.8		18.9
Operating expenses:
Selling, general, and administrative		14.5		12.8
Operating income		10.3		6.1
Other (income) expense		0.1		(0.1	)
Income before interest and income taxes		10.2		6.2
Interest expense, net		4.9		1.3
Income before income taxes		5.3		4.9
Income taxes (Note 8)		2.1		0.9
Net income	$	3.2	$	4.0

(Unaudited)


	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
Net revenue	$	205.5		$	168.1		$	396.6		$	329.6
Cost of sales		165.3			140.6			328.1			277.3

Gross profit		40.2			27.5			68.5			52.3

Operating expenses:
Selling, general and administrative		25.6			14.1			51.6			28.3
In-process research and development (Note 2)		—			—			3.7			—
Pension curtailment gain (Note 10)		(0.4	)		—			(0.4	)		—
Restructuring and similar costs (Note 8)		3.4			—			6.4			—
Impairment of long-lived assets (Note 5)		—			—			5.5			—
Gain from sale of Roanoke plant		(44.5	)		—			(44.5	)		—

Operating income		56.1			13.4			46.2			24.0
Other (income)		(0.5	)		(0.3	)		(0.8	)		(0.2	)

Income before interest and income taxes		56.6			13.7			47.0			24.2
Interest expense, net		8.5			5.7			20.5			10.9

Income before income taxes		48.1			8.0			26.5			13.3
Income tax provision (Note 12)		18.4			2.6			10.3			4.7

Net income	$	29.7		$	5.4		$	16.2		$	8.6

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

Propex ~~Fabrics~~ Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In Millions)

				Predecessor (Note 1)
	Six months endedJune 30,
	Three months endedMarch 31,
	2006			2005
	2005			2004
	(Unaudited)
Cash flows from operating activities
Net income	$	316.2		$	48.06
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		414.5			59.84
Non-cash interest on debt		45.3			10.4
Gain on sale of property, plant, and equipment		—			(0.3	)
Gain on sale of Roanoke plant		(44.5	)		—
Pension and postretirement benefit costs		0.7			2.2
Impairment of long-lived assets		5.5			—
Deferred income taxes		1.4			(0.8	)
Pension and postretirement benefit costs		(2.6	)		0.9
Changes in operating assets and liabilities		(9.9	)		(17.6	)
Deferred income taxes		(12.7	)		3.3
Net cash provided by (used in) operating activities		4.2			(5.3	)
In-process research and development charges		3.7			—
Changes in operating assets and liabilities		5.9			(18.2	)
Net cash provided by (used in) operating activities		(8.7	)		4.4
Cash flows from investing activities
Capital expenditures		(02.53	)		(21.03	)
Proceeds from sale of property, plant, and equipment		—			0.3
Proceeds from sale of Roanoke plant		73.0			—
Net cash (used in) investing activities		(0.5	)		(1.7	)
Acquisition of business (net of cash acquired)		(229.7	)		—
Net cash used in investing activities		(159.0	)		(1.3	)
Cash flows from financing activities
Net receipts from parent company		—			7.4
Payments of long-term debt principal		(169.1	)		(2.8	)
Net payments of long term debt		(1.4	)		—
Debt issuance costs		(5.3	)		—
Net cash (used in) provided by financing activities		(1.4	)		7.4
Dividends		(0.4	)		(0.5	)
Effect of changes in foreign exchange rates on cash and cash equivalents		(0.3	)		0.1
Proceeds from issuance of debt		310.5			—
Change in cash and cash equivalents		2.0			0.5
Net cash provided by (used in) financing activities		135.7			(3.3	)
Cash and cash equivalents – Beginning of period		24.1			6.6
Effect of changes in foreign exchange rates on cash and cash equivalents		(0.1	)		(0.3	)
Cash and cash equivalents – End of period	$	26.1		$	7.1
Change in cash and cash equivalents		(32.1	)		(0.5	)
Cash and cash equivalents – Beginning of period		58.3			24.1
Cash and cash equivalents – End of period	$	26.2		$	23.6

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

Propex ~~Fabrics~~ Inc.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. Description of the Business and Summary of Significant Accounting Policies

Description of the Business

Propex ~~Fabrics~~ Inc. (the “Company”), orformerly ~~the~~Propex ~~“Successor”)~~Fabrics Inc. until its name change on June 13, ~~formerly~~2006, and previously Amoco Fabrics and Fibers Company, which together with its affiliates were collectively known as the BP Fabrics and Fibers Business (the “Business” ~~or the “Predecessor”~~), is the world’s largest independent producer of primary and secondary carpet backing and a leading manufacturer and marketer of ~~polypropylene~~ ~~synthetic~~woven and nonwoven polypropylene fabrics and fibers used in geosynthetic applications and a variety of other industrial applications such as ~~geotextile end-uses,~~ fabric bags/containers, ~~and~~fabric protective coverings and concrete fiber reinforcement. The Company has been engaged in the textile industry since 1884 and was wholly- owned by its former parent company BP p.l.c. (“BP”) until November 30, 2004.

On December 1, 2004, the Company acquired the Business from BP and became a stand-alone company. ~~The~~This ~~condensed~~transaction ~~consolidated~~is ~~financial~~referred ~~statements of the Company included herein reflect the accounts of the Company for the presented periods subsequent~~ to ~~the~~as ~~acquisition on December 1, 2004. The condensed combined statements of income and cash flows of~~ the ~~Predecessor~~“BP for the three month period ended March 31, 2004 are presented for comparative purposes and reflect the cash flows and results of operations of the Business prior to its acquisition by Propex Fabrics IncAcquisition.”

On January 31, 2006, pursuant to a stock purchase agreement dated December 30, 2005, as amended, by and among the Company, SI Concrete Systems Corporation (“SICSC” – now known as Propex Concrete Systems Corporation), SI Geosolutions Corporation (“SIGC” – now known as Propex Geosolutions Corporation), and the holders of the capital stock of SICSC and SIGC, the Company acquired all the outstanding capital stock of SICSC and SIGC, collectively known as SI, for approximately $232.6 million, comprised of the $228.0 million cash price, including adjustments, paid to the seller and $4.6 million of direct acquisition related costs. This transaction is referred to as the “SI Acquisition.” Note 2 to the condensed consolidated financial statements includes a preliminary purchase price allocation for the SI Acquisition.

Basis of Presentation

~~Predecessor~~The condensed consolidated financial statements of the Company, including the wholly owned subsidiaries, are prepared in conformity with U.S. generally accepted accounting principles. All significant intercompany accounts and transactions have been eliminated.

~~The~~Stock-Based ~~predecessor~~Compensation financial statements include amounts that have been derived from the financial statements and accounting records of BP using the historical results of operations and historical cost basis of the assets and liabilities of the Predecessor. The condensed combined statements include all revenues and costs attributable to the Predecessor including charges or an allocation of the costs for BP provided support services and BP corporate costs.

~~Successor~~For stock-based compensation effected prior to December 31, 2005, the Company accounted for stock-based compensation using the minimum value method as prescribed under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and provided the disclosure-only provisions of SFAS No. 123, as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment to FASB No. 123” (“SFAS No. 148”), providing alternative methods of accounting and requiring more prominent and frequent disclosures of the effects of stock-based compensation under the fair value-based method. As described in Note 17 to the condensed consolidated financial statements, effective

Subsequent to the acquisition on December 1, 2004, the condensed consolidated financial statements of the Company include the wholly-owned and majority-owned foreign subsidiaries and, together with the predecessor statements, are prepared in conformity with generally accepted accounting principles in the United States of America. All significant intercompany accounts and transactions have been eliminated.

Interim Financial Statements

The accompanying consolidated balance sheet as of March 31, 2005, the statements of income and cash flows for the three months ended March 31, 2005 and 2004, and related notes are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company. The operating results

~~for~~January 1, the interim periods are not necessarily indicative of the operating results to be expected for a full year or for other interim periods. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to instructions2006, ~~rules and regulations prescribed by~~ the ~~Securities~~Company ~~and~~adopted ~~Exchange Commission (“SEC”). Although management believes that~~ the ~~disclosures~~fair ~~provided~~value ~~are~~recognition ~~adequate~~provisions toof ~~make~~Statement ~~the~~of ~~information~~Financial ~~presented not misleading, management recommends that these unaudited~~Accounting ~~consolidated~~Standards ~~financial statements be read in conjunction with the audited consolidated financial statements and the related footnotes for the period ended December 31, 2004~~No.

123(R), “Share-Based Payment” (“SFAS No. 123(R)”) using the prospective method. SFAS No. 123(R) is applied to awards granted, modified, or settled after January 1, 2006. The adoption did not have a material impact on our financial condition or results of operations.

There were no grants of stock-based compensation for the six months ended June 30, 2006; however, the options of the Chief Financial Officer were modified in conjunction with a separation agreement dated May 3, 2006, as previously reported on a Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 8, 2006. The expense recorded under SFAS No. 123(R) in connection with this modification, is included in selling, general and administrative expenses in the condensed consolidated statement of operations for the quarter ended June 30, 2006.

Interim Financial Statements

The accompanying condensed consolidated balance sheet as of June 30, 2006, the statements of operations for the three and six months ended June 30, 2006 and 2005, the statements of cash flows for the six months ended June 30, 2006 and 2005 and the related notes are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company. The operating results for the interim periods are not necessarily indicative of the operating results to be expected for a full year or for other interim periods. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the Securities and Exchange Commission (“SEC”). Although management believes that the disclosures provided are adequate to make the information presented not misleading, management recommends that these unaudited condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the related footnotes included in the Company’s Form 10-K filing for the period ended December 31, 2005.

Earnings Per Share Data

Because Propex ~~Fabrics~~ Inc. is a wholly owned subsidiary of Propex Holdings Inc. (formerly known as Propex Fabrics Holdings Inc.) and its stock is not publicly traded, earnings per common share data is excluded from presentation.

Use of Estimates

The preparation of financial statements in conformity with ~~accounting principles~~GAAP ~~generally accepted in the United States of America~~ requires management to make estimates and assumptions that affect reported amounts and disclosures in the notes to the ~~combined/~~condensed consolidated financial statements. Actual results could differ from the estimates and assumptions used.

Goodwill and Other Intangible Assets

~~Intangible~~On ~~assets~~January 31, ~~created~~2006, ~~as a result of~~ the ~~acquisition~~Company ~~have~~acquired ~~been~~all ~~recorded in accordance with~~ the ~~requirements~~outstanding ofcapital ~~Statement~~stock of ~~Financial Accounting Standards No~~ SI. ~~141,~~Intangible ~~Business~~assets ~~Combinations~~created ~~(“SFAS~~as ~~141”),~~a ~~which~~result ~~required their valuation to fair value as~~ of the ~~December~~SI ~~1, 2004~~Acquisition ~~acquisition~~have ~~date~~been ~~with~~recorded ~~amortization~~in toaccordance ~~occur over their useful lives. The fair value calculations were prepared~~ with the assistance of an independent third party valuation specialist. However, as the Company continues to evaluate and refine certain estimates, the allocation of their fair value across assets and segments could be adjusted.

Parent Company Investment – Predecessor

For periods on or before November 30, 2004, the parent company investment included in the balance sheet reflected BP’s investment in the Predecessor, accumulated earnings and losses of the Predecessor, less dividends paid, and accumulated other comprehensive income. Debt instruments issued to BP affiliates and trade payables related to resin purchases from BP affiliates are recognized as liabilities in the combined balance sheet; all other balances with BP affiliates are included within parent company investment. The operations of the Predecessor in the United States participated in BP’s centralized cash management programs. Disbursements were made through centralized accounts payable systems, which were operated by BP. Cash receipts were transferred to centralized accounts, also maintained by BP. As cash was disbursed and received by BP, it was accounted for through parent company investment. The predecessor financial statements include direct charges for certain BP provided services and allocations of BP’s expenses for general corporate expenses, income taxes, and non-charged services provided by BP, which are discussed in Note 13 of the Company’s annual report on Form 10-K for the year ended December 31, 2004.

~~Stockholders’~~the ~~Equity~~requirements –of ~~Successor~~Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”), which required their valuation to fair value as of the acquisition date. The Company has provided a preliminary purchase price allocation in Note 2 to the condensed consolidated financial statements. The fair value calculations were completed with the assistance of an independent third party valuation specialist. However, as the Company continues to evaluate and refine certain estimates, the allocation of fair value across assets and segments could be adjusted.

OnGoodwill ~~October~~is ~~4, 2004,~~ the ~~Successor~~excess ~~entered into a stock purchase agreement with BP Amoco Chemical Holding Company, an indirect subsidiary~~ of ~~BP p.l.c. For purposes of this disclosure, BP p.l.c. and BP Amoco Chemical Holding Company and certain of its affiliates are collectively referred to as “BP.” Pursuant to~~ the ~~stock~~ purchase ~~agreement,~~price BPover ~~sold all~~ the ~~outstanding~~ ~~capital~~fair ~~stock~~value of the ~~entities~~net ~~comprising~~assets ~~the fabrics business of BP to the Company~~acquired. BPIt ~~also~~is ~~sold~~not toamortized ~~the~~but ~~Company~~is ~~specified assets comprising BP’s Canadian fabrics business, various intellectual property assets and various other~~tested ~~assets~~for ~~associated~~impairment ~~with the fabrics business~~annually. ~~The closing date of this transaction was December 1~~Intangibles, ~~2004.~~which Asinclude ofcustomer ~~December 1~~relationships, ~~2004,~~patents ~~the Company reports the financial statements on a consolidated basis with stockholders’ equity or deficit~~ and ~~reorganized~~ ~~the~~trade Business’ corporate structure and began operating under the name of Propex Fabrics Inc. The Company also formed two domestic subsidiary holding companies (“Propex Fabrics International Holdings I Inc.” and “Propex Fabrics International Holdings II Inc.”names, ~~collectively~~are ~~the~~amortized ~~“Guarantors”)~~over totheir ~~own~~estimated auseful ~~portion of the capital stock of its foreign subsidiaries~~lives.

Deferred Financing Costs

Deferred financing costs represent certain capitalized costs incurred by the Company to finance its long-term debt obligations. These costs are amortized to interest expense over the life of the related debt using the effective interest method. These capitalized costs have been recorded within “Other Assets” in the balance sheets.

Reclassifications

Certain prior period financial statement amounts have been reclassified to conform to the current year presentation.

2.New ~~Accounts~~Accounting ~~Receivable~~Standards

~~Accounts~~In ~~receivable~~July ~~consisted~~2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“Interpretation No. 48” or “FIN No. 48”). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We are currently evaluating the ~~following:~~impact this interpretation will have on our financial statements. For the Company, this interpretation will be effective beginning January 1, 2007.

	March 31,2005			December 31,2004
Trade accounts receivable, gross	$	114.4		$	97.0
Less:
Allowance for discounts and returns		(0.5	)		(0.5	)
Allowance for doubtful accounts		(3.8	)		(3.9	)
Accounts receivable, net	$	110.1		$	92.6

2. SI Acquisition

3On January 31, 2006, the Company acquired all the outstanding capital stock of SI for approximately $232.6 ~~Inventories~~million, comprised of the $228.0 million cash price, including adjustments, paid to the seller and $4.6 million of direct acquisition related costs. We financed the total purchase price with borrowings under a refinanced senior credit facility as described more fully in Note 13 and approximately $29.2 million of cash on-hand.

Inventories are stated at the lower of cost or market value. Beginning December 1, 2004, all work in process and finished goods are valued using the first in, first out (FIFO) method both domestically and internationally. All raw materials, storehouse stock, process material, and packaging inventories are carried at average cost.

Predecessor: Prior to December 1, 2004, cost was determined using the last in first out (LIFO) method for substantially all domestically held raw materials, work in process, and finished goods.

~~Inventories~~The ~~consist~~Company acquired SI because of SI’s complementary product offering in existing and new products, its complementary low-cost non-wovens manufacturing position, and the ~~following:~~potential value related to the significant synergies upon combining the two complementary companies.

	March 31,2005		December 31,2004
Raw materials	$	19.4	$	15.0
Work in process		21.1		24.0
Finished goods		51.9		44.8
		92.4		83.8
Storehouse stock and other		8.7		6.9
Total inventories, net	$	101.1	$	90.7

In accordance with SFAS No. 141, the Company allocated the total purchase price of the SI Acquisition to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values, which is due primarily to a portion of the forecasted synergies value possible upon combining the two companies, is recorded as goodwill. The fair value assigned to intangible assets acquired is based on valuations prepared by independent third party appraisal firms using estimates and assumptions provided by management. The goodwill recorded as a result of the SI Acquisition is expected to be deductible for tax purposes. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”(“SFAS No. 142”), goodwill will be reviewed at least annually for impairment. Purchased intangible assets with finite lives are amortized on a straight-line basis over their respective useful lives.

4.Preliminary ~~Restructuring~~Purchase ~~and~~Price ~~Other~~Allocation ~~Similar Costs~~

The ~~Successor~~preliminary ~~recognized~~allocation noof ~~expense~~the intotal ~~the~~purchase ~~three months~~price ~~ended~~of ~~March~~SI’s ~~31,~~net ~~2005~~tangible and ~~2004~~intangible assets was based on their estimated fair values as of January 31, 2006. These ~~transactions~~estimates ~~resulted~~are inbased on a ~~$0.7~~preliminary ~~million~~valuation ~~unpaid~~and ~~balance~~are atsubject ~~March~~to ~~31,~~change ~~2005~~as the valuation is finalized. ~~These~~The ~~restructuring~~excess ~~activities~~of ~~continue~~the ~~under~~purchase price over the ~~Successor’s~~net ~~ownership~~tangible and intangible assets was allocated to goodwill. The total purchase price of $232.6 million has been allocated as follows:

Restructuring accruals are summarized as follows:


	*(in millions)*
Tangible assets acquired and liabilities assumed:
Cash	$	3.0
Accounts receivable		26.5
Inventory		46.7
Deferred income tax assets		4.9
Other current assets		5.7
Property, plant and equipment		99.9
Other non-current assets		3.4
Goodwill		37.1
Other intangible assets		32.7
In-process research and development		3.7
Current liabilities		(28.6	)
Deferred income tax liability		(2.4	)

Total purchase price	$	232.6

	March 31,2005
Balance at beginning of period	$	0.9
Cash payments		(0.2	)
Accrual for new committed / announced program		—
Excess accrual reversal		—
Balance at end of period	$	0.7

An estimate of $3.7 million has been allocated to in-process research and product development and charged to expense in the quarter ended March 31, 2006. During the second quarter of 2006, the property, plant and equipment fair value was increased by $2.3 million due to further valuation analysis and the offset was recorded to goodwill. However, as the Company continues to identify additional minor acquisition-related costs, the total purchase price and related allocation of their fair value across assets and segments may be adjusted.

5. Comprehensive Income

The following table sets forth the reconciliation of net income to comprehensive income (in millions):

				Predecessor (Note 1)
	Three Months EndedMarch 31,
	2005			2004
Net income	$	3.2		$	4.0
Foreign currency translation losses		(2.4	)		(1.8	)
Comprehensive income	$	0.8		$	2.2

6. Pension Benefits

The Company sponsors two defined benefit pension plans in the U.S. for employees who have completed a qualifying length of service. The Company operates an unfunded defined benefit pension plan in Germany and a funded defined benefit plan in Brazil, which are available to all employees after meeting certain service levels. Benefits for all plans are generally based on employees’ years of service and salary levels. For the U.S. plans, contribution amounts are determined by independent actuaries using an actuarial method that has an objective of providing an adequate fund to meet pension obligations as they mature. Prior to December 1, 2004, pension costs were derived using

~~the~~Other ~~projected~~intangible ~~unit~~assets ~~credit method and were based on a combination of BP and Company-specific assumptions. Beginning December 1, 2004, all assumptions reflect the Company as a stand-alone entity.~~

InThe ~~Europe~~fair atvalue of other intangible assets has been estimated through the ~~time~~use of ~~the~~ ~~divestiture,~~an BPindependent ~~split~~third party valuation firm that used the ~~German~~discounted ~~pension~~debt-free ~~plan~~cash ~~between~~flow ~~active~~method ~~and~~to ~~retired~~value ~~employees~~these ~~and~~identifiable BPintangible assets, ~~retained~~which ~~the~~are ~~retiree~~subject ~~portion~~to ofamortization. The following table sets forth the ~~plan~~components ~~along~~of ~~with~~these other intangible assets resulting from the ~~associated~~SI ~~liabilities.~~Acquisition and their weighted average estimated useful lives at January 31, 2006:

					Predecessor (Note 1)
	PreliminaryFair Value			Weighted-AverageUseful Life (in years)
	Three months endedMarch 31,
	(in millions)
Components of net periodic pension cost	2005				2004
Customer relationships	$	24.2		7
Service cost	$	1.0			$	0.7
Trademarks and trade names		3.4		20
Interest cost		1.6				1.3
Patents		5.1		15
Expected return on plan assets		(1.4	)			(1.4	)
Other intangible assets	$	32.7
Amortization of transition amount		0.1				(0.1	)
Amortization of prior service cost		—				(0.1	)
Amortization of unrecognized actuarial (gain)/loss		—				0.3
Net periodic pension cost	$	1.3			$	0.7

~~During~~The ~~the~~following ~~three~~is ~~month period~~a ~~ended~~brief ~~March~~description ~~31,~~of ~~2005,~~ the ~~Company~~types ~~contributed~~of ~~$0.7~~intangibles ~~million~~identified toas ~~the~~a ~~U.S.~~result ~~pension~~of ~~plans. The Company expects to contribute $0.8 million, $1.3 million, and $1.8 million to its U.S. pension plans during~~ the ~~second, third and fourth quarters,~~SI ~~respectively,~~Acquisition: ~~for the remainder of fiscal year 2005.~~

7• Customer relationships. ~~Other postretirement~~SI ~~benefits~~has developed a number of long-standing customer relationships that have a probability of continuing into the future.

~~The~~• ~~Company~~Trademarks ~~provides~~and ~~certain health~~trade ~~care~~names. ~~and~~SI ~~life~~has ~~insurance~~established ~~benefits~~several ~~for~~leading ~~retired~~trademarks ~~employees~~and intrade ~~the~~names ~~United~~primarily ~~States.~~focused ~~Costs~~on ~~borne~~geosynthetic byand ~~the~~concrete ~~Company~~reinforced ~~for~~fibers ~~retirees~~applications. ~~are~~In ~~based~~the ongeosynthetic ~~age~~product ~~and~~area, ~~length~~SI ofhas ~~service~~Geotex®, atLandlok® ~~retirement.~~and ~~The~~Pyramat® ~~health~~fabrics ~~care~~which ~~benefits~~ are ~~provided~~designed ~~through~~to ~~the~~help ~~Company’s medical~~drain, ~~benefit plan~~separate, and astabilize ~~Group~~soils ~~term~~in ~~life~~civil ~~insurance~~engineering ~~plan.~~and ~~Prior~~environmental toapplications. ~~December~~In ~~1, 2004,~~ the ~~other~~concrete ~~postretirement~~fiber ~~obligations~~product ~~and~~area, ~~related~~SI ~~costs~~has ~~reflected~~Fibermesh® inpolypropylene ~~these~~fibers ~~financial~~for ~~statements~~use ~~reflected~~as ~~the~~a ~~benefit~~secondary ~~arrangements~~reinforcement ~~specific~~for toconcrete ~~the~~and ~~employees~~Novocon® ofsteel ~~the Company~~fibers and ~~were~~Novomesh® ~~based~~blends ~~on a combination~~ of BPpolypropylene and ~~company-specific~~steel ~~assumptions~~fibers ~~that~~for ~~may~~use ~~not~~in ~~necessarily~~more ~~reflect~~demanding ~~the~~applications ~~assumptions~~such ofas ~~the~~composite ~~Company~~metal asdesks aand ~~stand-alone~~industrial ~~entity~~slabs.

As• ~~part of the purchase agreement, BP retained the liability for all retiree eligible employees~~Patents. InSI ~~addition,~~has ~~the~~patented ~~Successor modified~~several ~~the~~of ~~program~~its tofibers ~~limit~~or ~~future~~products ~~participation~~such toas ~~employees~~its ~~within~~X3® 10technology ~~years~~for ofuse ~~retirement~~in ~~eligibility~~Landlok® and ~~curtailed~~Pyramat®. ~~program~~These ~~benefits~~patents ~~for~~have ~~retirees~~strengthened ~~when~~the ~~they~~market ~~reach~~position ~~the~~of ~~age~~SI’s ofGeotex®, 65Lanlok® orand ~~are~~Pyramat® ~~medicare~~geosynthetic ~~eligible.~~fabric trademarks.

Tangible assets acquired

The following table summarizes the estimated fair value of the property plant and equipment acquired in the SI Acquisition and their estimated useful lives at January 31, 2006:


	Preliminary Fair Value		Weighted-Average Useful Life (in years)
	*(in millions)*
Land	$	2.3	N/A
Buildings and land improvements		22.9	35
Machinery, equipment and other		73.9	6
Construction in progress		0.8	N/A

Total tangible assets	$	99.9

			Predecessor (Note 1)
	Three months endedMarch 31,
Components of net periodic benefit cost	2005		2004
Service cost	$	—	$	0.7
Interest cost		0.1		1.1
Amortization of unrecognized actuarial loss		—		0.8
Net periodic benefit cost	$	0.1	$	2.6

Pro forma results

The following unaudited pro forma financial information presents the results of operations of the Company as if the SI Acquisition had occurred as of the beginning of the periods presented. Pro forma adjustments decreasing net income by nil and $0.9 million for the three months and six months ended June 30, 2006, respectively, and pro forma adjustments decreasing net income by $3.3 million and $4.8 million for the three months and six months ended June 30, 2005, respectively, have been reflected in the combined unaudited pro forma results presented below. ~~Income~~The ~~Taxes~~unaudited pro forma financial information is not intended to represent or be indicative of the results of operations or financial condition of the Company that would have been reported had the SI Acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Company. Pro forma results were as follows for the three months and six months ended June 30, 2006 and 2005:

The Company’s effective income tax rate was 39.6% and 18.4% for the three months ended March 31, 2005 and 2004, respectively. Effective income tax rates for the remainder of 2005 are expected to be consistent with the first quarter.


	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006			2005
	*(in millions)*
Net revenue	$	205.5	$	233.6	$	411.7		$	462.8

Net income (loss)	$	29.7	$	0.3	$	(10.3	)	$	1.3

			Predecessor (Note 1)
	Three months endedMarch 31,
	2005		2004
Income tax at statutory rate	$	1.8	$	1.7
Permanent income tax disallowances		0.1		—
State taxes, net of federal benefit		0.1		0.1
Foreign tax rate differences		—		(0.1	)
Valuation allowances		0.1		—
Other, net		—		(0.8	)
	$	2.1	$	0.9

3. Accounts Receivable

~~The~~Accounts ~~provision~~receivable ~~for income~~consisted ~~taxes~~of ~~increased from $0.9 million in 2004 to $2.1 million in 2005 as~~ the ~~2004~~following: ~~tax liability was reduced by certain tax settlements and other non-recurring benefits, included in the Other, net line in the above table.~~

9. Commitments and Contingencies


	June 30, 2006			December 31, 2005
	*(in millions)*
Trade accounts receivable, gross	$	133.0		$	95.8
Less:
Allowance for discounts and returns		(0.7	)		(0.4	)
Allowance for doubtful accounts		(3.7	)		(2.8	)

Accounts receivable, net	$	128.6		$	92.6

The Company is involved in various unresolved legal actions and claims arising in the normal course of business. Although it is not possible to predict with certainty the outcome of the unresolved legal actions, management believes these unresolved legal actions will not have a material adverse effect on the results of operations or financial position of the Company. From time to time, we are subject to lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, health and safety, and employment matters. In addition, we may occasionally resort to litigation or make claims in order to enforce or protect our property and contract rights. Such litigation, claims, investigations and proceedings are handled and defended in the ordinary course of business. While no assurance can be given, the Company believes that, taking into account the indemnification by BP Amoco Chemical Holding Company under the purchase agreement for certain potential pre-closing liabilities, and our current insurance coverage, none of the litigation or legal proceedings in which the Company is currently involved could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.

4. Inventories

Inventories are stated at the lower of cost or market value. All work in process and finished goods are valued using the first in, first out (FIFO) method both domestically and internationally, except for Brazil, which uses the average cost method. All raw materials, storehouse stock, process material, and packaging inventories are carried at average cost.

Inventories consist of the following:


	June 30, 2006		December 31, 2005
	*(in millions)*
Raw materials	$	16.4	$	13.0
Work in progress		23.3		20.3
Finish goods		80.6		53.6

		120.3		86.9
Storehouse stock and other		10.7		7.7

Total inventories, net	$	131.0	$	94.6

Inventory balances are shown net of reserves for obsolescence of $4.3 million at June 30, 2006 and $1.4 million at December 31, 2005.

The increase in reserves for obsolescence is due to management’s revised practice of selling aged inventory to an external polypropylene reclaim company upon reaching an aged level of 12 months, versus the Company’s past practice of selling aged inventory at a minor discount into the fabrics marketplace in order to move the inventory.

5. Property, Plant and Equipment

Property, plant and equipment consisted of the following at June 30, 2006 and December 31, 2005:


	June 30, 2006			December 31, 2005
	*(in millions)*
Land	$	15.6		$	13.2
Buildings and land improvements		77.5			54.2
Machinery, equipment and other		177.9			107.9
Construction in process		5.5			3.1

Total property, plant and equipment		276.5			178.4
Less: Accumulated depreciation		(23.3	)		(14.1	)

Property, plant and equipment, net	$	253.2		$	164.3

During the first quarter, the Company developed a plan to restructure its Seneca, South Carolina plant. The plan involves closing the facility and relocating the manufacturing activities and certain manufacturing assets to the Company’s Ringgold, Georgia facility. In connection with this decision, the Company determined that certain assets would not be relocated and

determined that the values of these assets had been diminished as a result of this decision. As such, during the quarter ended March 31, 2006, the Company recorded a $5.5 million non-cash impairment charge to write down the net book value to fair market value for the excess equipment, which will not be relocated.

The property, plant and equipment at June 30, 2006 and December 31, 2005 exclude the Austell, Georgia assets held for sale, as described more fully below in Note 6 to the condensed consolidated financial statements.

6. Assets Held for Sale

During the fourth quarter of 2005, management decided it would be more economical to relocate the Company’s Austell, Georgia headquarters to smaller leased office facilities and to relocate the research and development-scale manufacturing equipment to its plant locations. In addition, selling the Austell building would generate significant cash for the business as well as generate operating expense savings. Subsequent to the SI Acquisition, the Company decided to relocate its headquarters to SI’s existing headquarters in Chattanooga, Tennessee. This decision has no effect on the prior decision to relocate and sell its headquarters and research and development activities or the related impairment.

On December 31, 2005, the Company determined that the held for sale criteria in FASB Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” had been met. Accordingly, the carrying value of the Austell facility was adjusted to its fair value less costs to sell, amounting to $5.0 million, which was determined based on quoted market prices of similar assets. The resulting $5.9 million impairment loss, comprised of $0.9 million related to the Austell facility and $5.0 million related to the Austell research and development-scale manufacturing assets and software, was recorded in the fourth quarter of 2005.

On April 3, 2006, the Company completed the sale of its Roanoke, Alabama carpet-backing manufacturing facility to Aladdin Manufacturing Corporation for $73.0 million, including price adjustments. Given the existence of the March 1, 2006 asset sale agreement and the scheduled closing for the beginning of April 2006, the Roanoke facility assets were reported as assets held for sale on the December 31, 2005 condensed consolidated balance sheet.

The following table shows the components of Assets Held for Sale as of June 30, 2006 and December 31, 2005:


	June 30, 2006		December 31, 2005
	*(in millions)*
Austell Facility
Land	$	1.0	$	1.0
Buildings and land improvements		4.0		4.0

		5.0		5.0
Roanoke Facility
Land		—		0.3
Buildings and land improvements		—		9.1
Machinery, equipment and other		—		12.3

		—		21.7

Total assets for sale	$	5.0	$	26.7

7. Goodwill and Other Intangible Assets


	June 30, 2006					December 31, 2005
	Cost		Accumulated Amortization			Cost		Accumulated Amortization
	*(in millions)*
Intangible assets not subject to amortization:
Goodwill	$	37.1		N/A			N/A		N/A

Intangible assets subject to amortization:
Customer relationships		27.0		(3.4	)		3.3		(1.9	)
Software licenses		1.0		(0.2	)		1.2		(0.1	)
Patents		5.3		(0.3	)		0.3		(0.1	)
BP non-compete agreement		6.4		(2.5	)		7.6		(1.9	)
Trademarks and tradenames		3.4		(0.1	)		—		—

Total intangible assets	$	80.2	$	(6.5	)	$	12.4	$	(4.0	)

Amortization of intangibles totaled $1.0 million and $2.5 million in the three and six months ended June 30, 2006, respectively, and $0.9 million and $2.4 million in the three and six months ended June 30, 2005, respectively. The following presents the estimated amortization expense for intangible assets for each of the next five years and thereafter:


	*(in millions)*
2006	$	2.7
2007		5.4
2008		5.4
2009		5.3
2010		4.9
Thereafter		12.9

	$	36.6

8. Restructuring and Other Similar Costs

Restructuring reserves for the six months ended June 30, 2006 and 2005 are summarized as follows:


	June 30, 2006			June 30, 2005
	*(in millions)*
Balance at January 1	$	1.7		$	0.9
Cash payments		(7.2	)		(0.2	)
Accrual for new committed/announced program		6.4			—
Reserves acquired through SI acquisition		1.7			—

Balance at period end	$	2.6		$	0.7

Selling, General and Administrative Redundancy

For the three and six months ended June 30, 2006, the Company recognized $2.7 million and $5.7 million in restructuring expense related to severance benefits for certain Austell, Georgia facility employees. Beginning in the first quarter, as part of integrating the newly acquired SI with the Company and as part of relocating the Company headquarters to Chattanooga, Tennessee, most of the Austell, Georgia employees were made redundant. The Company currently estimates it will accrue an additional $0.8 million related to severance for these redundancies primarily in the selling, general and administrative area over the remainder of the year. Total payments of approximately $1.9 million are expected to be paid out during the remainder of 2006 and early 2007.

Shift Reduction in Germany

Cash payments of $0.1 million and $1.1 million for the three and six months ended June 30, 2006 relate primarily to payments under the Germany facility’s restructuring program which eliminated the weekend production shift and trimmed certain benefits to better reflect the current market situation.

Seneca Restructuring

In the first quarter of 2006, the Company developed a plan to restructure its Seneca, South Carolina plant. The Company estimates the total restructuring costs to be approximately $12.5 million, consisting of severance and employee relocation costs of approximately $1.5 million, equipment relocation costs of approximately $5.5 million, comprised of $3.0 million in expense and $2.5 million in capital expenditures, and non-cash equipment impairment charges of approximately $5.5 million. The impairment charges were recorded in the first quarter of 2006, as the diminished values of the assets became apparent. The restructuring charges will be recorded during the remainder of 2006, as the criteria for recognition under Statement of Financial Accounting Standards No. 146; “Accounting for Costs Associated with Exit or Disposal Activities” have not yet been met. The plant closure and relocation process is scheduled to begin in July 2006 and is expected to be completed around year-end 2006.

SI Acquisition

With the SI Acquisition, $1.7 million in restructuring liabilities were included on the January 31, 2006 opening balance sheet related to the former SI restructuring activities. In October 2005, the former SI Corporation sold its Chickamauga, Georgia plant to Shaw Industries. At January 31, 2006, $1.1 million in severance reserves were accrued related to the Shaw transaction. The majority of the related cash payments will be completed during 2006, with the final payments by March 2007.

In June 2005, the former SI Corporation closed its Genesee, Idaho plant. At June 30, 2006 there were $0.6 million in reserves related to existing contracts and closing the site. The related cash payments will be made over the next several years, ending 2010.

The following tables represent restructuring reserves and payments by activity and segment at June 30, 2006 (in millions):

Restructuring reserves by program:


	Restructuring Liabilities Acquired through SI Acquisition			Relocation of HQ Facilities			Shift Reduction in Germany			Early Retirement Program in Germany			Plant Consolidation			Total
Balance at January 1, 2006	$	—		$	—		$	1.0		$	0.7		$	—		$	1.7
Reserves acquired through SI acquisition		1.7			—			—			—						1.7
Severance, relocation and restructuring accruals		0.1			5.7			—			—			0.6			6.4
Severance, relocation and restructuring payments		(0.9	)		(4.6	)		(1.0	)		(0.1	)		(0.6	)		(7.2	)

Balance at June 30, 2006	$	0.9		$	1.1		$	—		$	0.6		$	—		$	2.6

Restructuring reserves by reportable segment:


	Concrete Fiber			Furnishings			Geosynthetics			Industrial Products			Europe			Total
Balance at January 1, 2006	$	—		$	—		$	—		$	—		$	1.7		$	1.7
Reserves acquired through SI acquisition		—			1.1			0.6			—			—			1.7
Severance, relocation and restructuring accruals		0.5			3.7			1.6			0.5			—			6.4
Severance, relocation and restructuring payments		(0.4	)		(3.7	)		(1.4	)		(0.5	)		(1.1	)		(7.2	)

Balance at June 30, 2006	$	0.1		$	1.1		$	0.8		$	—		$	0.6		$	2.6

9. Comprehensive Income

The following table sets forth the reconciliation of net income to comprehensive income:


	Three months ended June 30,					Six months ended June 30,
	2006			2005		2006		2005
	*(in millions)*
Net income	$	29.7		$	5.4	$	16.2	$	8.6
Foreign currency translation gain (loss)		(1.2	)		1.0		2.1		(1.4	)

Comprehensive income	$	28.5		$	6.4	$	18.3	$	7.2

10. Pension Benefits

The Company sponsors two defined benefit pension plans in the U.S. for Propex Inc. employees who have completed a qualifying length of service. However, there is no defined benefit pension plan applicable to employees of the newly acquired SI. The Company operates an unfunded defined benefit pension plan in Germany and a funded defined benefit plan in Brazil, which are available to all employees after meeting certain service levels. Benefits for all plans are generally based on employees’ years of service and salary levels. For the U.S. plans, contribution amounts are determined by independent actuaries using an actuarial method that has an objective of providing an adequate fund to meet pension obligations as they mature.

In 2005, the Company restructured its retirement compensation for its U.S. salaried employees. In July 2005, the Company amended its U.S. Cash Value Retirement Plan (the “Cash Value Plan”) for salaried employees to curtail earned benefits under such plan as of August 31, 2005. The Cash Value Plan was closed to new participants on June 10, 2005. The Company’s U.S. Cash Balance Retirement Plan (the “Cash Balance Plan”) for hourly employees was not changed, but that plan was also closed to new participants on June 10, 2005.

During the second quarter of 2006, as part of harmonizing employee benefits between Propex Inc. and SI employees, the Company amended the Cash Balance Plan for hourly employees to curtail earned benefits under such plan as of August 1, 2006. During the second quarter 2006, the Company recognized a curtailment gain of $0.4 million related to this pension plan curtailment.

Components of net periodic pension costs (benefits) were as follows:


	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
	*(in millions)*
Components of net periodic pension cost
Service cost	$	0.5		$	1.0		$	1.1		$	2.0
Interest cost		1.5			1.6			3.0			3.2
Expected return on plan assets		(1.3	)		(1.4	)		(2.6	)		(2.8	)
Amortization of transition amount		—			0.1			—			0.2
Amortization of unrecognized actuarial loss		0.1			—			0.1			—

Periodic pension cost before curtailment		0.8			1.3			1.6			2.6
Curtailment gain, net		(0.4	)		—			(0.4	)		—

Net period pension cost	$	0.4		$	1.3		$	1.2		$	2.6

During the six month period ended June 30, 2006, the Company contributed $3.5 million to the U.S. pension plans. Under the present plans, the Company expects to contribute $5.6 million to its U.S. pension plans during the remainder of 2006.

In the second quarter of 2006, as part of harmonizing employee benefits between Propex Inc. and SI employees, the Company approved an enhancement for the SI salaried employees to receive a 100% match from the Company on the contributions they make up to 6% of pay, as pay is defined in the 401(k) plan, consistent with Propex U.S. salaried employees. Previously, the SI U.S. salaried employees received a 50% match on the contributions up to 6%, or a maximum matching payment of 3% of pay. In addition, as part of harmonizing employee benefits between the two companies, the Company increased the Company match for Propex Inc. U.S. hourly employees from a 50% matching contribution up to 3% of eligible pay, to a 50% matching contribution up to 6% of eligible pay consistent with the SI U.S. hourly employee 401(k) plan. The Company contributed $2.3 million in employer matching 401(k) contributions in the six months ended June 30, 2006.

11. Other Postretirement Benefits

The Company provides certain health care and life insurance benefits for retired Propex Inc. employees in the United States. Costs borne by the Company for retirees are based on age and length of service at retirement. The health care benefits are provided through the Company’s medical benefit plan and a group term life insurance plan. For U.S. employees of the newly acquired SI, there are no postretirement benefits.

Components of net periodic benefit cost were as follows:


	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006		2005
	*(in millions)*
Components of net periodic pension cost
Service cost	$	0.1	$	—	$	0.1	$	0.1
Interest cost		—		0.1		0.1		0.1
Amortization of unrecognized actuarial loss		—		—		—		—

Net periodic pension cost	$	0.1	$	0.1	$	0.2	$	0.2

12. Income Taxes

The Company’s effective income tax rate was 38.3% and 38.9% for the three and six months ended June 30, 2006, respectively, and 32.5% and 35.3% for the three and six months ended June 30, 2005, respectively. The effective income tax rate for the remainder of 2006 is expected to be consistent with the first six months of 2006. The income tax provision consists of the following:


	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
	*(in millions)*
Income tax at statutory rate	$	18.5		$	2.7		$	11.0		$	4.5
Permanent income tax disallowance		—			—			0.2			0.1
State taxes, net of federal benefit		(0.2	)		0.2			(0.7	)		0.3
Foreign tax rate differences		0.1			(0.3	)		(0.2	)		(0.1	)
Valuation allowances		—			—			—			(0.1	)

Income tax provision	$	18.4		$	2.6		$	10.3		$	4.7

A reconciliation of current and deferred taxes for the three and six months ended June 30, 2006 and 2005 is as follows:


	Three months ended June 30,					Six months ended June 30,
	2006			2005		2006			2005
	*(in millions)*
Current:
Federal	$	19.7		$	—	$	19.7		$	—
State		2.4			—		2.4			—
Non-US		0.4			0.4		0.9			1.1

		22.5			0.4		23.0			1.1
Deferred:
Federal		(4.9	)		2.0		(13.7	)		3.3
State		—			0.2		—			0.3
Non-US		0.8			—		1.0			—

	$	(4.1	)	$	2.2	$	(12.7	)	$	3.6


Total	$	18.4		$	2.6	$	10.3		$	4.7

The above current taxes include certain timing contingencies.

13. Long-Term Debt

On January 31, 2006, the Company entered into a credit agreement (the “Credit Agreement”) by and among the Company, as borrower, the lenders named therein and BNP Paribas, as Administrative Agent. The Credit Agreement provides for a $360.0 million senior credit facility, comprised of a $260.0 million term loan facility, a $50.0 million revolving credit facility and a $50.0 million bridge loan facility. This agreement replaces the credit agreement dated as of December 1, 2004, among the Company, Amoco Fabrics and Fibers Company, the lenders named therein and BNP Paribas, as Administrative Agent.

Total long-term debt at June 30, 2006 and December 31, 2005 consisted of the following:


	June 30, 2006			December 31, 2005
	*(in millions)*
10% senior notes due 2012	$	150.0		$	150.0
Senior secured term loan due 2011		—			104.5
Senior secured term loan due 2012		245.4			—
Revolving line of credit		—			—
Less: current maturities of senior secured term loan		(12.4	)		(9.7	)

Total long-term debt	$	383.0		$	244.8

The $50.0 million bridge loan was fully repaid in April 2006 with a portion of the after-tax proceeds from the Roanoke, Alabama facility sale.

Prior Credit Facility

The prior credit facility was entered into with a syndicate of lenders on December 1, 2004. The prior credit facility provided for a $110.0 million senior secured term loan due 2011 and a $65.0 million revolving line of credit, which had a $104.5 million balance outstanding on the term loan and no balance outstanding on the revolving line of credit as of the January 31, 2006 refinancing date. The credit facility also included a sublimit of $20.0 million for the issuance of letters of credit, of which $0.5 million was issued and outstanding as of the January 31, 2006 refinancing date.

New Credit Facility

•

Senior secured term loan due 2012. The Credit Agreement provides a senior secured term loan of $260.0 million maturing on July 31, 2012. At management’s discretion, the loan bears interest at either LIBOR plus 2.25% or a base rate plus 1.25%, where the base rate equals the higher of the prime rate or the Federal Funds interest rate. Mandatory prepayments are required under certain conditions and voluntary prepayments are allowed at no premium. Certain financial covenants must be met on a quarterly basis including a specified fixed charge coverage ratio, a specified interest coverage ratio, a minimum EBITDA requirement, maximum senior secured and total leverage ratios, and a maximum capital expenditures test. On April 4, 2006, pursuant to the Credit Agreement, the Company used the estimated after-tax proceeds from the April 3, 2006 sale of its Roanoke, Alabama facility to repay its entire $50.0 million bridge loan and to repay $11.5 million of this term loan.

Scheduled repayments on the remaining $245.4 million senior secured term loan at June 30, 2006 are as follows (in millions):


2006	$	6.2
2007		12.4
2008		12.4
2009		12.4
2010		12.4
Thereafter		189.6

•

Revolving loan agreement. The Credit Agreement provides a revolving line of credit of $50.0 million. Interest accrues and is payable under the same terms as the senior secured term loan. Commitment fees, assessed at 0.5% of the unused borrowings less open letters of credit, are payable quarterly. The credit facility also includes a sublimit of $20.0 million for the issuance of letters of credit. As of June 30, 2006, there were no amounts drawn on the revolver and there were $5.8 million of letters of credit outstanding.

14. Commitments and Contingencies

From time to time, the Company is subject to lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, health and safety, and employment matters. Such litigation, claims, investigations and proceedings are handled and defended in the ordinary course of business. While no assurance can be given, the Company believes that, taking into account the indemnification by BP Amoco Chemical Holding Company under the BP Acquisition purchase agreement for certain potential pre-closing liabilities, and the Company’s current insurance coverage, none of the litigation or legal proceedings in which the Company is currently involved could reasonably be expected to have a material adverse effect on its business, financial condition or results of operations.

The Company is subject to potential loss contingencies pursuant to various federal, state, and local environmental laws and regulations. These include possible obligations to remove or mitigate the effects on the environment of the placement, storage, disposal, or release of certain chemical or petroleum substances by the Company or other parties.

~~Environmental~~In ~~remediation~~connection ~~liabilities~~with ~~are~~the ~~included~~BP ~~within “Other~~Acquisition, ~~non-current~~BP ~~liabilities”~~retained inresponsibility ~~the~~and ~~balance~~has ~~sheet.~~indemnified BPthe ~~retained~~Company ~~responsibility~~ for certain identified environmental liabilities upon selling the ~~business~~Business on December 1, 2004. These indemnified liabilities were estimated at $1.1 million at June 30, 2006 and December 31, 2005. This estimate may change as future events become realized. A long-term liability and corresponding receivable from BP is recorded on the balance sheet as of June 30, 2006 and December 31, 2005 to reflect both the liability and the indemnity. BP also retained limited responsibility for future remediation costs associated with other environmental conditions existing at the Company’s facilities at December 1, 2004. Environmental liabilities related to events originating subsequent to December 1, 2004 are generally the responsibility of the Company. ~~There~~At June 30, ~~are~~2006, nothe ~~environmental~~Company ~~liabilities~~is ~~reflected~~not onaware ~~the~~of ~~balance~~any ~~sheet~~material atenvironmental ~~March~~liabilities ~~31,~~beyond ~~2005~~the above-indemnified liabilities.

10At June 30, 2006, the Company had contracts with two U.S. ~~Business~~suppliers ~~Segment~~for polypropylene resin raw materials for less than 50% of the Company’s projected domestic needs. One contract is cancelable anytime with 90 days notice, and ~~Geographic~~the ~~Area~~other contract ~~Information~~extends to year-end 2006. Under these contracts, monthly pricing is based on monthly negotiations to determine market pricing. Due to the highly volatile nature of polypropylene prices, we cannot reasonably forecast the future spending under this contract with any degree of accuracy.

~~The~~15. ~~Company~~Business ~~operates~~Segment ~~as a collection of regional businesses,~~ and ~~within~~Geographic ~~the~~Area ~~North~~Information ~~America region, further breaks down its operations into furnishings and industrial fabrics, resulting in the following reportable segments:~~

The Company operates as a collection of regional businesses, and within the North America region, further breaks down its operations into several reportable segments. Due to the

SI Acquisition, in the first quarter of 2006, the Company reevaluated and revised its North American reportable segments. The Company’s historical results have been restated to reflect the new reportable segments.

•

Previously, geotextile fabrics had been combined with Propex’s other industrial fabric product lines/operating segment. However, given the increased size and significance of the geotextile operating segment (which now comprises more than 15% of worldwide revenues) and the increased diversity of products within the industrial products operating segment as a result of the SI Acquisition, it was no longer appropriate to combine these two operating segments. These products have been broken out and now constitute a separate Geosynthetics reporting segment.

•

The prior Industrial Fabrics reporting segment was renamed as the Industrial Products reporting segment due to the new inclusion of fiber sales. This segment continues to include products for use in various industrial applications such bags/packaging for carrying chemicals, commodities and protective membrane for home construction, filtration, trampoline fabrics and with the SI Acquisition, now includes intermediate fibers sold to other manufacturers to make similar products. This segment continues to include all of the Company’s Mexico business activity because of its relatively small size (accounting for less than 5% of Propex’s worldwide revenues) and because its products are predominantly industrial products.

•

Concrete Fiber was added as a new reporting segment. Although the Concrete Fiber operating segment represents less than 10% of worldwide revenues, this operating segment is managed independently from the other current operating segments and has certain differences in business attributes versus the other operating segments. Notwithstanding its grouping as one of the four North America reporting segments, this segment also includes the Company’s concrete fiber sales in Europe.

•

There were no changes to the Company’s prior North America Furnishings segment or the two international segments – Europe and Brazil.

As of the first quarter of 2006, the Company’s reportable segments are summarized as follows:

•

North America

•

Furnishings

• ~~Industrial Fabrics~~Geosynthetics

•

Industrial Products

•

Concrete Fiber

•

Europe

•

Brazil

~~The~~Within North America, the business operates with four segments: furnishings, geosynthetics, industrial products and concrete fiber. The Furnishings segment includes the manufacture and sale of various woven and non-woven fabrics ~~primarily~~ to primarily carpet, and furniture and bedding manufacturers for incorporation into their various manufactured furnishing products. The ~~North~~Geosynthetics ~~America industrial fabrics~~ segment includes the manufacture and sale of woven and non-woven fabrics into various industrial applications such as geotextile end-uses, fabric bags/containers and protective coverings. The industrial fabrics segment also includes all of the Company’s Mexico manufacturing and selling activity because the majority of its activities relate to industrial fabric products.

~~The~~22 ~~Europe regional segment primarily sells furnishing products to carpet manufacturers, along with some industrial fabric geotextile products.~~

The Brazil regional segment primarily sells industrial fabrics products along with some furnishing products (carpet backing only).

Segment sales are based on the location of the selling entity rather than the location of the customer. For example, European export sales to customers in Egypt or other non-European locations are included in the Europe regional segment results.

fabrics into various geosynthetic end-uses. The Industrial products segment includes the manufacture and sale of woven and non-woven fabrics and fibers into a broad range of industrial applications such as fabric bags/containers, protective coverings, filtration products, and intermediate fibers for use by other manufacturers to produce similar products. Consistent with management of the business, the Industrial Products segment also includes all of our Mexico manufacturing and selling activity because the majority of its activities relate to industrial products. The Concrete Fiber segment includes the manufacture and outsourced supply and sale of fibers for use as a crack-reduction reinforcing material in concrete applications.

The Europe regional segment primarily sells furnishing carpet backing products, which account for more than 85% of its revenues, along with some industrial fabric geosynthetic products and minor revenues related to a new developmental product.

The Brazil regional segment primarily sells industrial fabrics products, which account for more than 80% of its revenues, along with some furnishing carpet backing products.

Measure of Segment Profit or Loss and Segment Assets

~~Prior~~Segment ~~to the December 1, 2004 acquisition, segment~~ profitability ~~was~~ is measured by pre-tax earnings from continuing operations excluding net of interest expense and, ~~allocated~~in BP2006, ~~corporate costs and~~ the ~~U.S.~~Roanoke ~~LIFO adjustment~~gain. ~~Beginning~~Intersegment ~~December~~sales 1,and ~~2004,~~transfers BPare ~~corporate~~recorded ~~costs~~at ~~are~~cost noplus ~~longer~~an ~~applicable~~agreed ~~due~~upon tointercompany ~~the~~profit ~~Company’s~~on ~~separation from~~intersegment ~~BP,~~sales ~~and~~or ~~the~~transfers. ~~LIFO~~There ~~adjustment~~were is no ~~longer~~material ~~applicable~~intersegment ~~due~~sales to in the ~~Company’s~~three ~~adoption~~and ofsix ~~FIFO~~months ~~accounting~~ended June 30, 2006.

~~Intersegment~~The ~~sales~~Company’s ~~and~~assets, ~~transfers~~which are recorded atby ~~cost~~country, ~~plus~~are annot ~~agreed~~allocated ~~upon~~to ~~intercompany~~product segments ~~profit~~within the North America regional segment because many of the Company’s productive assets are used to produce products in multiple segments and the utilization of many assets can be shifted among segments depending on ~~intersegment~~the ~~sales~~market ordemand for ~~transfers~~different products.

~~The~~23 ~~Company’s assets, which are recorded by country, are not allocated to product segments within the North America regional segment.~~

			Predecessor (Note 1)
	Three months endedJune 30,				Six months ended June 30,
	Three months endedMarch 31,
	2006		2005		2006		2005
	(In millions)
	(in millions)
	2005		2004
Net revenue:
Revenues:
North America
Revenues from external customers:
Furnishings	$	86.9	$	99.8	$	184.8	$	195.5
North America
Geosynthetics		45.5		21.4		71.0		38.6
Furnishings	$	95.6	$	85.2
Industrial Products		18.3		11.3		42.6		26.1
Industrial Fabrics		32.0		23.0
Concrete Fiber		19.4		—		29.7		—
Europe		2526.03		2425.65		50.8		50.5
Brazil		8.9.1		710.71		17.7		18.9
Total revenues from external customers	$	161.5	$	140.5
Total net revenue	$	205.5	$	168.1	$	396.6	$	329.6
Intersegment sales:
North America
Furnishings	$	5.2	$	4.3
Industrial Fabrics		2.1		0.4
Total intersegment sales	$	7.3	$	4.7
Total revenues	$	168.8	$	145.2
Reconciling items
Intersegment revenues	$	7.3	$	4.7
Total consolidated revenues	$	161.5	$	140.5


	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006		2005
	*(in millions)*
Depreciation and amortization expense:
North America
Furnishings	$	3.8	$	3.2	$	6.9	$	6.3
Geosynthetics		1.5		0.8		2.6		1.2
Industrial Products		1.0		0.3		2.6		0.5
Concrete Fiber		1.0		—		0.9		—
Europe		0.5		0.3		0.7		0.7
Brazil		0.5		0.3		0.8		0.7

Total depreciation and amortization	$	8.3	$	4.9	$	14.5	$	9.4


	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
	*(in millions)*
Segment income (loss):
North America
Furnishings	$	11.5		$	11.5		$	14.7		$	20.7
Geosynthetics		0.7			1.4			(4.6	)		1.5
Industrial Products		(1.3	)		(0.5	)		(2.2	)		0.1
Concrete Fiber		(1.2	)		—			(10.1	)		—
Europe		2.1			0.4			3.7			0.2
Brazil		0.3			0.9			1.0			1.7

Total segment income		12.1			13.7			2.5			24.2
Reconciling items:
Gain from Roanoke plant sale		(44.5	)		—			(44.5	)		—
Interest expense, net		8.5			5.7			20.5			10.9

Total consolidated income before income taxes	$	48.1		$	8.0		$	26.5		$	13.3


Other data:

Worldwide sales volumes (million square yards for fabric sales)		573			655			1,206			1,293
Worldwide sales volumes (million lbs for fiber sales)		27			N/A			41			N/A
Unit net spread, $ per square yard (1)	$	0.201		$	0.139		$	0.185		$	0.136
Unit net spread, $ per lb (1)	$	0.672			N/A		$	0.657			N/A

(1) –

Unit net spread is defined as revenue less raw material cost on a per square yard basis for fabric sales and a per pound basis for fiber sales.

N/A –

Concrete fiber sales were acquired with the SI Acquisition; therefore, no volume measures are presented for the prior year.

				Predecessor (Note 1)
	Three months endedMarch 31,
	(In Millions)
	2005			2004
Depreciation and amortization expense:
North America
Furnishings	$	3.1		$	3.2
Industrial Fabrics		0.8			1.2
Europe		0.3			1.3
Brazil		0.3			0.1
Total consolidated depreciation and amortization expense	$	4.5		$	5.8
Segment income:
North America
Furnishings	$	9.0		$	9.9
Industrial Fabrics		0.6			(2.0	)
Europe		(0.1	)		0.3
Brazil		0.8			1.5
Total segment income	$	10.3		$	9.7
Reconciling items
LIFO expense	$	—		$	2.4
Parent costs (1)		—			1.2
Interest expense		5.1			1.5
Interest income		(0.2	)		(0.2	)
Other (income) expense		0.1			(0.1	)
Total consolidated income before income taxes	$	5.3		$	4.9
Other Data:
Worldwide sales volumes (million square yards)		636.9			671.1
Unit net spread, $/square yard (2)	$	0.133		$	0.131

The composition of the Company’s segment assets, consisting of intangible assets including goodwill, property, plant and equipment and other assets between those in the United States and those in other countries as of the end of each period is set forth below:

(1) - Represents BP corporate cost allocations related to the Predecessor.


	June 30, 2006		December 31, 2005
	*(in millions)*
Long-lived assets by segment:
North America
United States	$	286.3	$	131.6
Other North America		3.8		3.9

Total North America		290.1		135.5
Europe		32.0		32.0
Brazil		19.0		18.1

Total long-lived assets	$	341.1	$	185.6

~~(2)~~The -reconciliation ~~Unit~~of ~~net~~segment ~~spread~~assets isto ~~defined~~consolidated astotal ~~revenue~~assets ~~less~~at ~~raw~~June 30, ~~material~~2006 ~~cost~~and on2005 is aas ~~per~~follows: ~~square yard basis.~~


	June 30, 2006		December 31, 2005
	*(in millions)*
Segment assets for total reportable business segments	$	341.1	$	185.6
Items excluded from segment assets:
Current assets		315.2		285.0
Long-term deferred tax assets		27.5		15.8

Total assets	$	683.8	$	486.4

Enterprise Wide Information

			Predecessor (Note 1)
	Three months endedMarch 31,
	(In Millions)
	2005		2004
Revenues
Net Revenues by Geography
US	$	115.1	$	99.6
Other North America		12.5		8.6
Total North America		127.6		108.2
Europe		25.0		24.6
Brazil		8.9		7.7
Total	$	161.5	$	140.5

Net revenue is attributed to countries and regions based on the Company’s selling location rather than the customers’ buying location. However, given the small magnitude of exports, the following table also provides a close approximation of net revenue by customers’ locations.

Gross margin increased from 13.5% in the first quarter of 2004 to 15.4% in the first quarter of 2005 primarily due to lower postretirement benefits, the absence of a LIFO adjustment expense, lower depreciation and lower non-recurring charges.


	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006		2005
	*(in millions)*
Revenues:
Net revenues by geography:
U.S.	$	149.2	$	121.7	$	294.8	$	236.9
Other North America		13.3		10.8		25.7		23.3

Total North America		162.5		132.5		320.5		260.2
Europe		33.9		25.5		58.4		50.5
Brazil		9.1		10.1		17.7		18.9

Total net revenues	$	205.5	$	168.1	$	396.6	$	329.6

~~The~~25 net revenues are attributed to countries and regions based on the Company’s selling location rather than the customers’ buying location. However, given the small magnitude of exports, the following table also provides a close approximation of net revenues by customers’ locations.

11. Condensed Consolidated Financial Information

Effective with the acquisition on December 1, 2004, the Company reorganized the Business’ corporate structure and began operating under the name of Propex Fabrics Inc. The Company also formed two domestic subsidiary holding companies (“Propex Fabrics International Holdings I Inc.” and “Propex Fabrics International Holdings II Inc.”, collectively the “Guarantors”) to own a portion of the capital stock of its foreign subsidiaries. These domestic subsidiaries guarantee the Company’s 10% Senior Notes due 2012 on a joint and several basis. The Company’s foreign subsidiaries do not guarantee the Notes, and these foreign subsidiaries are included in the following tables on a combined basis as the Non-guarantor subsidiaries.

The following tables set forth the consolidated condensed financial position of the Successor as of March 31, 2005 and December 31, 2004, and the Successor’s consolidated results of operations and related cash flows for the three months ended March 31, 2005 and the Predecessor’s combined results and related cash flows for the three months ended March 31, 2004. Amounts are shown separately for the Company’s parent company, Propex Fabrics Holdings Inc., the Company, the Guarantors of the Notes collectively, and the collective Non-guarantor subsidiaries of the Company. Inter-company eliminating amounts have been presented to derive the consolidated or combined financial information for all periods presented.

Separate financial statements of the Company’s parent or the Guarantors are not presented because their guarantees are full and unconditional and joint and several, and the Company believes separate financial statements and other disclosures regarding the parent and Guarantors are not material to investors.

~~Condensed~~Total ~~Consolidated~~assets ~~Balance~~by ~~Sheets~~country are listed as follows:

March 31, 2005


	June 30, 2006			December 31, 2005
	*(in millions)*
Total assets by country:
North America
U.S.	$	647.5		$	447.5
Other North America		24.1			26.2

Total North America		671.6			473.7
Europe		88.0			75.2
Brazil		39.4			36.6
Eliminations		(115.2	)		(99.1	)

Total assets	$	683.8		$	486.4

16. Condensed Consolidating Financial Information

The Company operates under the name of Propex Inc. The Company’s corporate structure includes two domestic subsidiary holding companies (Propex Fabrics International Holdings I Inc. and Propex Fabrics International Holdings II Inc.), which own a portion of the capital stock of its foreign subsidiaries. With the SI Acquisition, the Company added the SI companies as subsidiaries. The Company’s domestic subsidiaries (Propex Fabrics International Holdings I Inc., Propex Fabrics International Holdings II Inc. and the SI domestic subsidiaries, collectively the “Guarantors”) guarantee the Company’s 10% Senior Notes due 2012 (the “Notes”) on a joint and several basis. The Company’s foreign subsidiaries, including the newly acquired SI foreign subsidiaries, do not guarantee the Notes, and these subsidiaries are included in the following tables on a consolidated basis as the Non-guarantor subsidiaries.

The following tables set forth the condensed consolidating balance sheets as of June 30, 2006 and December 31, 2005, the condensed consolidating statements of operations for the three months and six months ended June 30, 2006 and June 30, 2005, and the condensed consolidating statements of cash flows for six months ended June 30, 2006 and June 30, 2005. Amounts are shown separately for the Company’s parent company, Propex Holdings Inc., the Company (“Issuer”), the collective Guarantor domestic subsidiaries, and the collective Non-guarantor subsidiaries of the Company. Intercompany eliminating amounts have been presented to derive the condensed consolidated financial information for the Issuer for all periods presented.

Separate financial statements of the Company’s parent or the Guarantors are not presented because the Guarantor’s guarantees are full and unconditional and joint and several, and the Company believes separate financial statements and other disclosures regarding the parent and Guarantors are not meaningful to investors.

Condensed Consolidating Balance Sheet

June 30, 2006

(Unaudited)

(In Millions)

					Guarantor Subsidiaries		Non- Guarantor Subsidiaries
	Parent		Issuer		Guarantor		Non- GuarantorSubsidiaries		Eliminations			Consolidated
	Parent		Issuer						Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—1.5	$	148.69	$	—5.9	$	11.54	$	—(1.5	)	$	26.12
Accounts receivable, net		—		8463.04		—35.6		3243.36		(614.20	)		~~110~~128.16
Inventories, net		—		6560.31		—36.9		3534.80		—			~~101~~131.10
Deferred income taxes		—		3.27		—4.9		0.4		—			39.60
Intercompany loan receivable		—		~~2.0~~—		—0.3		—		(2.0.3	)		—
Prepaid expenses and other current assets		—		25.78		—3.5		46.31		—			715.04
Total current assets		—		171.8		—		84.3		(8.2	)		247.9
Assets held for sale		—		5.0		—		—		—			5.0
Total current assets		1.5		146.9		87.1		95.5		(15.8	)		315.2
Other assets:
Intangible assets, net		—		11.7		—		1.8		—			13.5
Goodwill		—		—		37.1		—		—			37.1
Deferred income taxes		0.3		18.3		—		2.0		(0.3	)		20.3
Intangible assets, net		—		4.1		31.1		1.4		—			36.6
Investment in subsidiaries		93.1		92.6		92.6		—		(278.3	)		—
Deferred income taxes		1.5		19.3		7.0		1.2		(1.5	)		27.5
Other assets		—		12.9		—		0.4		—			13.3
Intercompany loan receivable		—		—		13.3		—		(13.3	)		—
		93.4		135.5		92.6		4.2		(278.6	)		47.1
Investment in subsidiaries		119.7		321.5		56.4		—		(497.6	)		—
Property, plant, and equipment, net		—		150.4		—		52.6		—			203.0
Other non-current assets		—		11.9		0.6		1.7		—			14.2
Total assets	$	93.4	$	457.7	$	92.6	$	141.1	$	(286.8	)	$	498.0
		121.2		356.8		145.5		4.3		(512.4	)		115.4
Property, plant and equipment, net		—		105.6		96.0		51.6		—			253.2
Total assets	$	122.7	$	609.3	$	328.6	$	151.4	$	(528.2	)	$	683.8
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	—	$	4026.97	$	—24.2	$	1412.95	$	(614.20	)	$	49.64
Accrued liabilities		—		127.56		—10.0		79.41		—			1926.97
Current portion of debt and accrued interest		—		11.2		—		2.0		(2.0	)		11.2
Current portion of debt and accrued interest, including Intercompany loans		—		14.5		—		0.8		(0.3	)		15.0
Restructuring and other similar costs		—		—1.1		—0.9		0.76		—			02.76
Other current liabilities		—		31.84		—0.8		—1.6		—			3.8
Total current liabilities		—		6851.43		—35.9		2524.06		(814.23	)		8597.25
Debt		2529.80		~~253~~383.10		—		—		(2529.80	)		~~253~~383.10
Intercompany loan payable		—		—		—		1713.03		(1713.03	)		—
Deferred income taxes		—		32.08		—2.4		43.68		—			79.60
Accrued pension and other postretirement benefit liabilities		—		4029.14		—		1822.91		—			5951.05
Other non-current liabilities		—		—23.1		—		—		—			—23.1
		25.8		296.2		—		40.5		(42.8	)		319.7
		29.0		438.3		2.4		39.2		(42.3	)		466.6
Total stockholders’ equity		6793.67		93119.17		92290.63		7587.6		(~~235~~471.86	)		93119.17
Total liabilities and stockholders’ equity	$	93122.47	$	~~457~~609.73	$	92328.6	$	~~141~~151.14	$	(~~286~~528.82	)	$	~~498~~683.08

1727

Condensed ~~Consolidated~~Consolidating Balance ~~Sheets~~Sheet

December 31, ~~2004~~2005

(In Millions)

					Guarantor Subsidiaries		Non- Guarantor Subsidiaries
	Parent		Issuer		Guarantor		Non-GuarantorSubsidiaries		Eliminations			Consolidated
	Parent		Issuer						Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	—1.5	$	1544.8	$	—	$	813.35	$	—(1.5	)	$	2458.13
Accounts receivable, net		—		6264.82		—		3332.06		(34.2	)		92.6
Inventories, net		—		5763.68		—		3330.18		—			9094.76
Deferred income taxes		—		3.1		—		0.4		—			3.5
Intercompany loan receivable		—		1.32		—0.5		—		(1.37	)		—
Prepaid expenses and other current assets		—		43.58		—		45.36		—(0.1	)		89.83
Total current assets		—		145.1		—		79.1		(4.5	)		219.7
Assets held for sale		—		26.7		—		—		—			26.7
Total current assets		1.5		207.6		0.5		82.9		(7.5	)		285.0
Other assets:
Intangible assets, net		—		126.39		—		21.05		—			148.34
Deferred income taxes		—1.0		1914.67		—		21.41		—(1.0	)		2215.08
Investment in subsidiaries		92.3		94.0		94.0		—		(280.3	)		—
Intercompany loan receivable		—		—		17.0		—		(17.0	)		—
Other assets		—		13.4		—		0.8		—			14.2
Investment in subsidiaries		101.8		93.4		48.5		—		(243.7	)		—
		92.3		139.3		94.0		5.2		(280.3	)		50.5
Other non-current assets		—		10.7		—		2.2		—			12.9
Property, plant, and equipment, net		—		153.1		—		54.8		—			207.9
		102.8		125.7		65.5		4.8		(261.7	)		37.1
Total assets	$	92.3	$	437.5	$	94.0		139.1		(284.8	)	$	478.1
Property, plant and equipment, net		—		114.0		—		50.3		—			164.3
Total assets	$	104.3	$	447.3	$	66.0	$	138.0	$	(269.2	)	$	486.4
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable	$	—	$	2236.14	$	—	$	910.93	$	(34.2	)	$	2842.85
Accrued liabilities		—		1312.97		—0.1		6.03		—			19.91
Current portion of debt and accrued interest		—		7.0		—		1.3		(1.3	)		7.0
Current portion of debt and accrued interest, including Intercompany loans		—		11.1		—		1.7		(1.7	)		11.1
Restructuring and other similar costs		—		—		—		01.97		—			01.97
Other current liabilities		—		51.26		—		1.96		—			73.12
Total current liabilities		—		4861.28		—0.1		2021.06		(4.5.9	)		6377.76
Debt		2527.27		~~254~~244.58		—		—		(2527.27	)		~~254~~244.58
Intercompany loan payable		—		—		—		17.0		(17.0	)		—
Deferred income taxes		—		24.78		—		53.18		—			7.8.6
Accrued pension and other postretirement benefit liabilities		—		3933.80		—		19.5		—			5952.35
Other non-current liabilities		—		01.1		—		~~0.4~~—		—			01.51
		25.2		297.1		—		42.0		(42.2	)		322.1
		27.7		283.7		—		40.3		(44.7	)		307.0
Total stockholders’ equity		6776.16		92101.28		9465.09		7776.1		(~~238~~218.16	)		92101.38
Total liabilities and stockholders’ equity	$	92104.3	$	~~437~~447.53	$	9466.0	$	~~139~~138.10	$	(~~284~~269.82	)	$	~~478~~486.14

1828

Condensed ~~Consolidated~~Consolidating ~~Statements~~Statement of ~~Income~~Operations

For the Three Months Ended ~~March 31~~June 30, ~~2005~~2006

(Unaudited)

(In Millions)

	Parent			Issuer			Guarantor			Non- GuarantorSubsidiaries			~~Eliminations~~	Eliminations			~~Combined~~	Consolidated
Net revenue	$	—		$	~~122~~96.58		$	—62.7		$	4653.36		$	~~(7.3~~$	)(7.6	)	$	~~161.5~~$	205.5
Cost of sales		—			~~102~~76.86			—49.3			4147.20			~~(7.3~~	)(7.6	)		~~136.7~~	165.3
Gross profit		—			1920.72			—13.4			56.16			—	—			~~24.8~~	40.2
Operating expenses:
Selling, general, and administrative		—			11.0			—			3.5			—				14.5
Selling, general and administrative		—			6.7			15.3			3.6				—				25.6
Operating income		—			8.7			—			1.6			—				10.3
Pension curtailment gain		—			(0.4	)		—			—				—				(0.4	)
Other (income) expense:
Restructuring and similar costs		—			1.2			2.2			—				—				3.4
Interest expense, net		0.6			5.0			(0.1	)		—			(0.6	)			4.9
Gain from sale of Roanoke plant		—			(44.5	)		—			—				—				(44.5	)
Other expense		—			—			—			0.1			—				0.1
Operating income (loss)		—			57.2			(4.1	)		3.0				—				56.1
Equity in earnings of subsidiaries		(3.2	)		(1.0	)		(0.9	)		—			5.1				—
Other (income) expense:
		(2.6	)		4.0			(1.0	)		0.1			4.5				5.0
Other (income)		—			(0.2	)		—			(0.3	)			—				(0.5	)
Income before income taxes		2.6			4.7			1.0			1.5			(4.5	)			5.3
Interest expense, net		2.0			8.6			(0.1	)		—				(2.0	)			8.5
Income taxes		(0.3	)		1.5			—			0.6			0.3				2.1
Equity (income) loss from earnings of subsidiaries		(29.7	)		0.2			(2.5	)		—				32.0				—
Net income (loss)	$	2.9		$	3.2		$	1.0		$	0.9		$	(4.8	)		$	3.2
		(27.7	)		8.6			(2.6	)		(0.3	)			30.0				8.0
Income (loss) before income taxes		27.7			48.6			(1.5	)		3.3				(30.0	)			48.1
Income tax provision (benefit)		(0.3	)		18.9			(1.7	)		1.2				0.3				18.4
Net income (loss)	$	28.0		$	29.7		$	0.2		$	2.1			$	(30.3	)		$	29.7

1929

Condensed ~~Combined~~Consolidating ~~Statements~~Statement of ~~Income~~Operations

For the ~~Three~~Six Months Ended ~~March 31~~June 30, ~~2004~~2006

(Unaudited)

(In Millions)

	Guarantor			Non- GuarantorSubsidiaries				Eliminations				Combined
	Parent				Issuer				Guarantor				Non- Guarantor Subsidiaries			Eliminations			Consolidated
Net revenue	$	~~104.2~~—		$	~~40.9~~$	211.7		$	~~(4.6~~$	)97.8		$	~~140.5~~$	101.8		$	(14.7	)	$	396.6
Cost of sales		~~91.2~~—			~~35.0~~	168.7			~~(4.6~~	)85.3			~~121.6~~	88.8			(14.7	)		328.1
Gross profit		~~13.0~~—			~~5.9~~	43.0			—	12.5			~~18.9~~	13.0			—			68.5
Operating expenses:
Selling, general, and administrative		9.3			3.5				—				12.8
Selling, general and administrative		—				18.6				25.6				7.4			—			51.6
		9.3			3.5				—				12.8
In-process research and development charges		—				—				3.7				—			—			3.7
Operating income		3.7			2.4				—				6.1
Pension curtailment gain		—				(0.4	)			—				—			—			(0.4	)
Other (income) expense:
Restructuring and similar costs		—				4.2				2.2				—			—			6.4
Interest expense, net		1.3			—				—				1.3
Impairment of long-lived assets		—				5.5				—				—			—			5.5
Other income		—			(0.1	)			—				(0.1	)
Gain from sale of Roanoke plant		—				(44.5	)			—				—			—			(44.5	)
		1.3			(0.1	)			—				1.2
Operating income (loss)		—				59.6				(19.0	)			5.6			—			46.2
Income before income taxes		2.4			2.5				—				4.9
Other (income) expense:
Income taxes		1.0			(0.1	)			—				0.9
Other (income)		—				(0.2	)			—				(0.6	)		—			(0.8	)
Net income	$	1.4		$	2.6			$	—			$	4.0
Interest expense, net		1.3				20.7				(0.2	)			—			(1.3	)		20.5
Equity (income) loss from earnings of subsidiaries		(16.2	)			7.4				(3.6	)			—			12.4			—
		(14.9	)			27.9				(3.8	)			(0.6	)		11.1			19.7
Income (loss) before income taxes		14.9				31.7				(15.2	)			6.2			(11.1	)		26.5
Income tax provision (benefit)		(0.5	)			15.5				(7.0	)			1.8			0.5			10.3
Net income (loss)	$	15.4			$	16.2			$	(8.2	)		$	4.4		$	(11.6	)	$	16.2

2030

Condensed ~~Consolidated~~Consolidating ~~Statements~~Statement of ~~Cash~~Operations ~~Flows~~

For the Three Months Ended ~~March 31~~June 30, 2005

(Unaudited)

(In Millions)

	Parent			Issuer			~~GuarantorSubsidiaries~~Guarantor			Non- GuarantorSubsidiaries			Eliminations			Consolidated
Operating activities
Net revenue	$	—		$	127.8		$	—		$	46.5		$	(6.2	)	$	168.1
Net income	$	2.9		$	3.2		$	1.0		$	0.9		$	(4.8	)	$	3.2
Cost of sales		—			105.7			—			41.1			(6.2	)		140.6
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gross profit		—			22.1			—			5.4			—			27.5
Depreciation and amortization		—			3.8			—			0.7			—			4.5
Operating expenses:
Non-cash interest on debt		0.6			4.3			(0.1	)		0.1			(0.6	)		4.3
Selling, general and administrative		—			10.9			—			3.2			—			14.1
Pension and postretirement benefit costs		—			0.2			—			0.5			—			0.7
Operating income		—			11.2			—			2.2			—			13.4
Deferred income taxes		(0.3	)		1.5			—			(0.1	)		0.3			1.4
Other (income) expense:
Undistributed earnings of subsidiaries		(3.2	)		(1.0	)		(0.9	)		—			5.1			—
Other (income)		—			(0.1	)		—			(0.2	)		—			(0.3	)
Changes in operating assets and liabilities		—			(10.9	)		—			1.0			—			(9.9	)
Interest expense, net		0.6			5.6			—			0.1			(0.6	)		5.7
Net cash provided by (used in) operating activities		—			1.1			—			3.1			—			4.2
Equity (income) loss from earnings of subsidiaries		(5.4	)		(1.8	)		(1.1	)		—			8.3			—
Investing activities
		(4.8	)		3.7			(1.1	)		(0.1	)		7.7			5.4
Capital expenditures		—			(0.3	)		—			(0.2	)		—			(0.5	)
Income (loss) before income taxes		4.8			7.5			1.1			2.3			(7.7	)		8.0
Net cash (used in) investing activities		—			(0.3	)		—			(0.2	)		—			(0.5	)
Income tax provision (benefit)		(0.2	)		2.1			—			0.5			0.2			2.6
Financing activities
Net income (loss)	$	5.0		$	5.4		$	1.1		$	1.8		$	(7.9	)	$	5.4
Net (payments to) receipts from parent company		—			(0.6	)		—			0.6			—			—
Payment of long-term debt		—			(1.4	)		—			—			—			(1.4	)
Net cash (used in) provided by financing activities		—			(2.0	)		—			0.6			—			(1.4	)
Effect of changes in foreign exchange rates on cash		—			—			—			(0.3	)		—			(0.3	)
Change in cash and cash equivalents		—			(1.2	)		—			3.2			—			2.0
Cash and cash equivalents – Beginning of period	$	—		$	15.8		$	—		$	8.3		$	—		$	24.1
Cash and cash equivalents – End of period	$	—		$	14.6		$	—		$	11.5		$	—		$	26.1

2131

Condensed ~~Combined~~Consolidating ~~Statements~~Statement of ~~Cash~~Operations ~~Flows~~

For the ~~Three~~Six Months Ended ~~March 31~~June 30, ~~2004~~2005

(Unaudited)

(In Millions)

	Guarantor			Non- GuarantorSubsidiaries			Eliminations			Combined
	Parent			Issuer			Guarantor				Non- GuarantorSubsidiaries			Eliminations			Consolidated
Operating activities
Net revenue	$	—		$	250.3		$	—			$	92.8		$	(13.5	)	$	329.6
Net income	$	1.5		$	2.5		$	—		$	4.0
Cost of sales		—			208.5			—				82.3			(13.5	)		277.3
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Gross profit		—			41.8			—				10.5			—			52.3
Depreciation and amortization		4.3			1.5			—			5.8
Operating expenses:
Non-cash interest on related party debt		1.2			0.2			—			1.4
Selling, general and administrative		—			21.6			—				6.7			—			28.3
(Gain) on sale of property, plant, and equipment		—			(0.3	)		—			(0.3	)
Operating income		—			20.2			—				3.8			—			24.0
Pension and postretirement benefit costs		2.6			(0.4	)		—			2.2
Other (income) expense:
Deferred income taxes		(0.5	)		(0.3	)		—			(0.8	)
Other income		—			(0.1	)		—				(0.1	)		—			(0.2	)
Changes in operating assets and liabilities		(14.9	)		(2.7	)		—			(17.6	)
Interest expense, net		1.2			10.9			(0.1	)			0.1			(1.2	)		10.9
Net cash (used in) provided by operating activities		(5.8	)		0.5			—			(5.3	)
Equity (income) loss from earnings of subsidiaries		(8.6	)		(2.8	)		(1.5	)			—			12.9			—
Investing activities
		(7.4	)		8.0			(1.6	)			—			11.7			10.7
Capital expenditures		(1.1	)		(0.9	)		—			(2.0	)
Income (loss) before income taxes		7.4			12.2			1.6				3.8			(11.7	)		13.3
Proceeds from sale of property, plant and equipment		—			0.3			—			0.3
Income tax provision (benefit)		(0.5	)		3.6			—				1.1			0.5			4.7
Net cash (used in) investing activities		(1.1	)		(0.6	)		—			(1.7	)
Net income (loss)	$	7.9		$	8.6		$	1.6			$	2.7		$	(12.2	)	$	8.6
Financing activities
Net receipts from (payments to) from parent company		6.9			0.5			—			7.4
Net cash provided by financing activities		6.9			0.5			—			7.4
Effect of changes in foreign exchange rates on cash		—			0.1			—			0.1
Change in cash and cash equivalents		—			0.5			—			0.5
Cash and cash equivalents – Beginning of period	$	(0.3	)	$	6.9		$	—		$	6.6
Cash and cash equivalents – End of period	$	(0.3	)	$	7.4		$	—		$	7.1

2232

~~MANAGEMENT’S~~Condensed ~~DISCUSSION~~Consolidating ~~AND~~Statement ~~ANALYSIS~~of OFCash ~~FINANCIAL~~Flows ~~CONDITION AND RESULTS OF OPERATIONS~~

~~The~~For ~~following discussion should be read in conjunction with~~ the ~~financial~~Six ~~statements~~Months ~~and~~Ended the notes to those statements included under “Item 8. Financial Statements and Supplementary Data.” The following discussion presents our historical financial condition and results of operations before and after the consummation of the acquisition discussed below under “Company History.” AccordinglyJune 30, ~~the~~2006 ~~discussion of historical periods before December 1, 2004 does not reflect the significant impact that such acquisition had on us.~~

(Unaudited)

(In Millions)


	Parent			Issuer			Guarantor			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating activities
Net income (loss)	$	15.4		$	16.2		$	(8.2	)	$	4.4		$	(11.6	)	$	16.2
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		—			5.7			7.3			1.5			—			14.5
Non-cash interest on debt		1.3			5.1			0.1			0.1			(1.3	)		5.3
Gain on sale of Roanoke plant		—			(44.5	)		—			—			—			(44.5	)
Impairment of long-lived assets		—			5.5			—			—			—			5.5
Pension and postretirement benefit costs		—			(3.7	)		—			1.1			—			(2.6	)
Deferred income taxes		(0.5	)		(6.7	)		(7.0	)		1.0			0.5			(12.7	)
Undistributed earnings of subsidiaries		(16.2	)		7.4			(3.6	)		—			12.4			—
In-process research and development charges		—			—			3.7			—			—			3.7
Changes in operating assets and liabilities		—			2.5			9.2			(5.8	)		—			5.9

Net cash provided by (used in) operating activities		—			(12.5	)		1.5			2.3			—			(8.7	)

Investing activities
Capital expenditures		—			(0.2	)		(1.6	)		(0.5	)		—			(2.3	)
Proceeds from sale of property, plant and equipment		—			73.0			—			—			—			73.0
Acquisition of business (net of cash acquired)		—			(232.6	)		2.2			0.7			—			(229.7	)

Net cash provided by (used in) investing activities		—			(159.8	)		0.6			0.2			—			(159.0	)

Financing activities
Net receipts from (payments to) issuer and subsidiaries		—			1.2			3.8			(5.0	)		—			—
Payment of long-term debt principal		—			(169.1	)		—			—			—			(169.1	)
Debt issuance costs					(5.3	)		—			—						(5.3	)
Dividends		0.4			(0.4	)		—			—			(0.4	)		(0.4	)
Proceeds from issuance of debt		—			310.0			—			0.5			—			310.5
Proceeds from sale of stock		(0.4	)		—			—			—			0.4			—

Net cash provided by (used in) financing activities		—			136.4			3.8			(4.5	)		—			135.7

Effect of changes in foreign exchange rates on cash and cash equivalents		—			—			—			(0.1	)		—			(0.1	)

Change in cash and cash equivalents		—			(35.9	)		5.9			(2.1	)		—			(32.1	)
Cash and cash equivalents – Beginning of period		1.5			44.8			—			13.5			(1.5	)		58.3

Cash and cash equivalents – End of period	$	1.5		$	8.9		$	5.9		$	11.4		$	(1.5	)	$	26.2

Condensed Combining Statement of Cash Flows

For the Six Months Ended June 30, 2005

(Unaudited)

(In Millions)


	Parent			Issuer			Guarantor			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating activities
Net income (loss)	$	7.9		$	8.6		$	1.6		$	2.7		$	(12.2	)	$	8.6
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		—			7.9			—			1.5			—			9.4
Non-cash interest on debt		1.2			0.4			(0.1	)		0.2			(1.3	)		0.4
Pension and postretirement benefit costs		—			0.4			—			0.5			—			0.9
Deferred income taxes		(0.5	)		3.6			—			(0.4	)		0.6			3.3
Undistributed earnings of subsidiaries		(8.6	)		(2.8	)		(1.5	)		—			12.9			—
Changes in operating assets and liabilities		—			(16.1	)		—			(2.1	)		—			(18.2	)

Net cash provided by (used in) operating activities		—			2.0			—			2.4			—			4.4

Investing activities
Capital expenditures		—			(0.7	)		—			(0.6	)		—			(1.3	)

Net cash used in investing activities		—			(0.7	)		—			(0.6	)		—			(1.3	)

Financing activities
Net (payments to) receipts from parent company		—			0.1			—			(0.1	)		—			—
Net payment of long-term debt principal		—			(2.8	)		—			—			—			(2.8	)
Dividends		0.5			(0.5	)		—			—			(0.5	)		(0.5	)
Stock repurchase		(0.5	)		—			—			—			0.5			—
Proceeds from stock sale		0.9			—			—			—			(0.9	)		—

Net cash provided by (used in) financing activities		0.9			(3.2	)		—			(0.1	)		(0.9	)		(3.3	)

Effect of changes in foreign exchange rates on cash		—			0.1			—			(0.4	)		—			(0.3	)

Change in cash and cash equivalents		0.9			(1.8	)		—			1.3			(0.9	)		(0.5	)
Cash and cash equivalents – Beginning of period		—			15.8			—			8.3			—			24.1

Cash and cash equivalents – End of period	$	0.9		$	14.0		$	—		$	9.6		$	(0.9	)	$	23.6

17. Stock Compensation Plan

In 2005, the board of directors and stockholders of Propex Holdings Inc. (“Holdings”) approved the 2005 Stock Awards Plan (the “Plan”). The purpose of the Plan is to provide for granting incentive stock options, nonqualified stock options, stock appreciation rights (SARs), restricted stock awards, performance awards, phantom stock awards, or any combination of the foregoing, to selected employees, directors, and consultants of Holdings and its subsidiaries, including the Company. Each award of stock options, stock appreciation rights, restricted stock, performance awards or phantom stock will be evidenced by an agreement between Holdings and the recipient of the award.

There were no nonqualified stock options or restricted stock awards issued in the second quarter of 2006. Except for the stock options which were modified under an employee separation agreement, both the stock options and restricted stock awards have a vesting period over 5 years, or immediate vesting upon change of control. The stock options have a 10-year maximum term and an 8.4 year weighted average remaining life. The restricted stock awards do not have a maximum term.

The following table summarizes the activity of nonqualified stock options awarded under the Plan:


	2006
	Shares		Weighed Average Exercise Price
Outstanding, January 1, 2006	64,350		$	100
Granted at fair market value on dates of grant	—			—
Exercised	—			—
Forfeited	(23,200	)	$	100

Outstanding, June 30, 2006	41,150		$	100

Exercisable, June 30, 2006	1,250		$	100

The following table summarizes the activity of restricted stock awarded under the Plan:


Outstanding, January 1, 2006	9,000
Granted	—
Exercised	—
Forfeited	(4,000	)
Redeemed	(200	)

Outstanding, June 30, 2006	4,800

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and the notes to those statements included under “Item 1. Condensed Consolidated Financial Statements and Notes to the Condensed Consolidated Financial Statements.” References to “we”, “us”, “our” and “the Company” mean Propex Inc. and its consolidated subsidiaries.

Overview

We are the world’s largest independent producer of primary and secondary carpet backing, and a leading manufacturer and marketer of woven and nonwoven polypropylene ~~synthetic~~ fabrics and fibers used in geosynthetic applications and a variety of other industrial applications such as fabric bags/containers, fabric protective coverings and concrete fiber reinforcement. We operate globally in the three geographic regions of North America, Europe and Brazil, from which we market our products to over 40 countries. Within North America, we divide our business ~~between~~ among furnishings, geosynthetics, industrial products and concrete fiber. During the first quarter of 2006, in response to our product changes as a result of the SI Acquisition, we subdivided our previous industrial ~~fabric~~fabrics reporting segment into two reporting segments – geosynthetics and industrial products – and we added the concrete fiber reporting segment. WeIn our furnishings segment, we are the largest independent producer of carpet backing in North America and ~~one of~~ the leading ~~suppliers~~supplier of furniture and bedding internal construction fabrics. In our geosynthetics segment, we are the largest North America supplier of the geosynthetic products which we offer and have a leading position in certain erosion control products. In our industrial ~~fabrics~~products segment, we sell ~~synthetic~~ fabrics for ~~geotextile,~~various industrial applications such as bags/packaging for carrying chemicals, commodities and protective ~~covering~~membrane ~~applications.~~for ~~Net~~home ~~revenue~~construction, ~~represents~~filtration, ~~gross~~trampoline ~~sales~~fabrics ~~less~~and ~~product~~with ~~returns~~the SI Acquisition, ~~customer~~now ~~allowances~~sell ~~and~~intermediate ~~various~~fibers ~~discounts,~~to ~~all~~other manufacturers ~~generated~~to inmake similar products. In our concrete fiber segment, we are the ~~ordinary~~largest ~~course~~supplier of ~~business~~synthetic concrete reinforcement products in North America and we also sell these products in Europe.

WeIn Europe and Brazil, we primarily market carpet backing and industrial ~~fabrics~~products, respectively, ~~in Europe~~ and ~~Brazil, and~~ we are a leading supplier of those products in those regions. Although primarily a regional business in terms of differing customers, competitive issues, and economic and other drivers, we have significant overlap of product offerings across ~~the~~all regions. ~~Where product differences exist, we have the ability to take successful products in one region and exploit these new products in our other regions.~~

Demand for our furnishings products is driven by factors that influence the broader market for floor coverings and furniture and bedding applications. Floor covering demand is driven largely by home remodeling expenditures, frequently related to existing home sales, new housing starts and commercial property construction. The principal macroeconomic factors influencing furniture and bedding sales are housing turnover, the directional movement of consumer confidence expectations and personal income levels. ~~Demand for our industrial fabrics products is driven primarily by civil construction activity, including civil engineering projects and road construction and general economic conditions.~~

~~Our~~Demand ~~primary~~for ~~raw~~our ~~material is polypropylene resin~~ geosynthetic and ~~resin~~concrete ~~costs~~fiber ~~comprise~~products ~~approximately~~is ~~45%~~driven ofprimarily ~~our~~by ~~cost~~civil ofconstruction ~~goods~~activity, ~~sold.~~including Wecivil ~~are~~engineering ~~one~~projects ofand ~~the~~road ~~world’s largest consumers of polypropylene~~construction, ~~buying~~commercial ~~over~~and ~~550~~industrial ~~million~~construction ~~pounds in~~and ~~2004.~~single-family Weand ~~believe~~multi-family ~~our~~residential ~~scale~~construction ~~affords~~as uswell ~~attractive~~as general ~~pricing~~economic ~~on these raw materials relative to our competitors~~conditions.

~~However,~~36 polypropylene prices fluctuate based on the industry supply and demand balance, the price of crude oil and other factors beyond our control. In 2004, our average monthly cost of polypropylene in the U.S. increased by approximately 33% over the prior year. Generally, we have been able to pass through raw material price increases to our furnishings customers. However, unlike furnishings, it has been more difficult to

~~pass~~Demand ~~through raw material price fluctuations to customers~~ for our industrial products. ~~Our~~is ~~earnings~~driven ~~are affected~~ by ~~the timing~~general ~~and~~economic ~~the~~conditions ~~extent to~~ which weinfluence ~~are~~housing ~~able~~which uses toour ~~pass~~housewrap ~~through~~products, ~~higher~~chemical ~~polypropylene~~and ~~raw~~agricultural ~~material~~activity ~~pricing~~which ~~costs~~uses to our ~~customers.~~bag ~~See “Item 3~~fabrics. ~~Qualitative and Quantitative Disclosures Regarding Market Risk” below.~~

InOur ~~order~~primary toraw ~~maintain~~material ~~our~~is ~~competitiveness, we maintain a comparatively low~~polypropylene ~~manufacturing~~resin ~~cost~~and ~~structure.~~resin ~~Within~~costs ~~North~~comprise ~~America,~~approximately ~~besides~~65% ~~providing~~percent ~~certain~~of ~~manufacturing~~our ~~flexibility~~cost ~~benefits,~~of ~~our~~goods ~~five U~~sold.S. ~~manufacturing~~We ~~locations~~are ~~enable~~one usof tothe ~~efficiently~~world’s ~~manage~~largest ~~our~~consumers ~~diverse~~of ~~product~~polypropylene, ~~mix~~buying byover ~~focusing~~400 million ~~some~~pounds ~~plants~~annually. onWe ~~running~~believe ~~large volume~~our ~~commodity~~scale ~~products~~affords ~~and~~us ~~focusing~~attractive ~~other plants~~ pricing on ~~producing~~these ~~smaller~~raw ~~volume,~~materials ~~more~~relative ~~specialty~~to ~~products. Our current management team has developed a culture of continuous cost improvement aimed at monitoring and controlling~~ our ~~conversion and administrative expenses~~competitors.

Polypropylene prices fluctuate based on the industry supply and demand balance, the price of crude oil and other factors beyond our control. For the six months ended June 30, 2006, general polypropylene resin pricing in the U.S. increased by approximately 3.9% versus the twelve months ended December 31, 2005. Generally, we have been able to pass through raw material price increases and decreases to our furnishings customers, and in 2006 we have been successful in passing through resin increases to our geosynthetic customers. However, it has been more difficult to pass through raw material price fluctuations to customers for certain of our industrial products and concrete fiber products. Our earnings are affected by the timing and the extent to which we are able to pass through higher polypropylene raw material pricing costs to our customers.

In order to maintain our competitiveness, we maintain a comparatively low manufacturing cost structure. Our management team has developed a culture of continuous cost improvement aimed at monitoring and controlling our conversion and administrative expenses.

Company History

OnWe ~~October~~have 4,been ~~2004,~~engaged wein ~~entered~~the ~~into~~textile aindustry ~~stock~~since ~~purchase~~1884 ~~agreement~~and ~~with~~operated BPprimarily ~~Amoco~~under ~~Chemical~~the ~~Holding~~name ~~Company,~~Amoco anFabrics ~~indirect~~and ~~subsidiary~~Fibers ofCompany BPin pthe U.lS.c. ~~Pursuant~~and tounder ~~the~~other ~~stock~~names ~~purchase~~internationally ~~agreement~~from 1968 until the December 1, 2004, BP ~~sold~~Acquisition, todiscussed usbelow, ~~all~~at ~~the~~which ~~outstanding~~time ~~capital~~we ~~stock~~became ofPropex ~~the~~Fabrics ~~entities~~Inc. In ~~comprising~~June ~~the~~2006, ~~fabrics~~we ~~business~~changed our ofname BPto Propex Inc. BPbecause ~~also~~the ~~sold~~Company tonow ussells ~~specified~~fiber ~~assets comprising~~products ~~BP’s~~in ~~Canadian~~addition to fabrics. ~~business~~We ~~and~~pioneered ~~various~~the ~~intellectual~~introduction ~~property~~of ~~assets~~synthetic ~~and~~woven ~~various~~polypropylene ~~other~~carpet ~~assets~~backing ~~associated~~as ~~with~~a ~~the~~replacement ~~fabrics~~to ~~business.~~jute ~~The~~backing, ~~total~~as ~~consideration~~well ~~paid~~as to the ~~seller~~development ~~was~~of ~~$340.0~~woven ~~million~~and nonwoven fabrics for industrial applications.

WeOn ~~have~~December 1, ~~been~~2004, ~~engaged~~pursuant into ~~the~~a ~~textile~~stock ~~industry~~purchase ~~since~~agreement ~~1884~~with ~~and~~BP ~~operated primarily under the name~~ Amoco ~~Fabrics~~Chemical Holding ~~and Fibers~~ Company, oran BPindirect ~~Fabrics~~subsidiary ~~and~~of ~~Fibers~~BP ~~Business in the U~~p.Sl.c., ~~and~~we ~~under~~acquired ~~other~~all ~~names~~the ~~internationally~~outstanding ~~(“Predecessor”)~~capital ~~from~~stock ~~1968 until the closing~~ of the ~~acquisition,~~entities atcomprising ~~which time we became Propex Fabrics Inc., referred to as “Successor” below. We pioneered~~ the ~~introduction~~fabrics business of ~~synthetic woven polypropylene carpet backing as a replacement to jute backing~~BP, asspecified ~~well~~assets ascomprising ~~the~~BP’s ~~development~~Canadian offabrics ~~woven~~business and ~~non-woven~~various ~~fabrics for industrial~~intellectual ~~applications.~~property ~~Please~~and ~~refer~~other toassets ~~the~~associated ~~“Company~~with ~~History” section of~~ the ~~10-K~~fabrics ~~filing for the year ended December 31, 2004~~business.

~~Results~~Acquisition of ~~Operations~~SI ~~for the Three Months Ended March 31, 2005 Compared to the Three Months Ended March 31, 2004~~

On January 31, 2006, the Company acquired 100% of the outstanding stock of SICSC and SIGC (hereafter referred to as the “SI Acquisition”), who previously was our largest competitor and a leader in providing woven and nonwoven polypropylene fabrics and fiber products for various geosynthetic, industrial products and concrete fiber reinforcement end-uses. As a result of the SI Acquisition, the Company retains its position as the world’s leading

independent producer of carpet backing, its position as the leading North American producer of needle-punch nonwoven fabrics for furniture and bedding applications and its significant woven polypropylene operations in Europe and Brazil. The SI Acquisition enhances the Company’s position in geosynthetic fabrics and provides the Company with a leading sales position in the concrete fiber reinforcement business. Further, the Company’s strength in woven fabrics manufacturing is complemented by SI’s strength in non-woven fabric manufacturing.

Given the complementary nature of the two businesses, we estimate that over the next two to three years the combined Propex/SI entity will realize more than $18.0 million of annualized cost savings. These savings will be primarily driven by estimated reductions in the duplicative administrative costs between the two stand-alone entities and by taking advantage of both companies’ combined manufacturing strengths and existing capabilities.

As a result, most of the fluctuations in the Company’s operating results in 2006 as compared to 2005 are due to the SI Acquisition. The historical results section below presents a discussion of our consolidated operating results using the historical results of the Company prepared in accordance with GAAP for the three months and six months ended June 30, 2006 and 2005, including SI’s results of operations from January 31, 2006 (the SI Acquisition date) to June 30, 2006. In order to provide additional information relating to our operating results, we also present a discussion of our pro forma combined operating results as if the Company and SI had been a consolidated company for the three months and six months ended June 30, 2006 and 2005. We have included this additional information in order to provide further insight into our operating results, prior period trends and current position. This supplemental information is presented in a manner consistent with the disclosure requirements of SFAS No. 141. The operating results for the three months ended June 30, 2006 include SI’s financial results for the same three-month period ended June 30, 2006. However, due to historically different fiscal period-ends for the Company and SI, the pro forma combined operating results for the three months and six months ended June 30, 2005 include SI’s results for their first two fiscal quarters ended March 31, 2005.

Results of Operations for the Three and Six Months Ended June 30, 2006 Compared to the Three and Six Months Ended June 30, 2005

The following discussion compares the historical results of operations for the three months and six months ended June 30, 2006 and 2005. These results include SI’s results of operations from January 31, 2006 (the SI Acquisition date). Results of operations were as follows:


	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
	*(in millions)*
Net revenue (1)	$	205.5		$	168.1		$	396.6		$	329.6
Cost of sales		165.3			140.6			328.1			277.3

Gross profit		40.2			27.5			68.5			52.3

Operating expenses:
Selling, general and administrative		25.6			14.1			51.6			28.3
In-process research and development charges		—			—			3.7			—
Pension curtailment gain		(0.4	)		—			(0.4	)		—
Restructuring and similar costs		3.4			—			6.4			—
Impairment of long-lived assets		—			—			5.5			—
Gain from sale of Roanoke plant		(44.5	)		—			(44.5	)		—

Operating income		56.1			13.4			46.2			24.0
Other (income)		(0.5	)		(0.3	)		(0.8	)		(0.2	)

Income before interest and income taxes		56.6			13.7			47.0			24.2
Interest expense, net		8.5			5.7			20.5			10.9

Income before income taxes		48.1			8.0			26.5			13.3
Income tax provision		18.4			2.6			10.3			4.7

Net income	$	29.7		$	5.4		$	16.2		$	8.6

(1)	Net revenue represents gross sales less product returns, customer allowances and discounts, all generated in the ordinary course of business.

Net revenue

~~Total~~For the three months ended June 30, 2006, total net revenue increased $2137.04 million, or 1422.92%, ~~from~~to $~~140~~205.5 million infrom ~~the first quarter of 2004 to~~ $~~161~~168.51 million in the ~~first~~corresponding ~~quarter~~period of ~~2005~~the prior year. This net revenue increase is ~~primarily~~ due to an increase in North America ~~furnishings~~geosynthetic net revenue of $1024.41 million, an increase in North America industrial products net revenue of $7.0 million, ~~along~~an ~~with~~increase in Europe net revenue ~~increases~~of $0.8 million and concrete fiber net revenues of $919.04 million. These segment increases were partially offset by a $12.9 million net revenue decrease in North America ~~industrial~~furnishings ~~fabrics~~ and a $1.20 million decrease in Brazil.

~~North~~For ~~America~~the ~~furnishings~~six months ended June 30, 2006, total net revenue increased ~~12.2% from~~ $8567.20 million, inor ~~the~~20.3%, ~~first~~to ~~quarter~~$396.6 ofmillion ~~2004~~from to $95329.6 million in the ~~first~~corresponding ~~quarter~~period of ~~2005~~the prior year. This net revenue increase is due to ~~higher~~an ~~unit~~increase ~~selling~~in ~~prices~~North inAmerica ~~the~~geosynthetic ~~segment,~~net asrevenue weof ~~increased~~$32.4 million, ~~pricing~~an increase in ~~both~~North ~~the~~America ~~carpet~~industrial ~~backing~~products ~~and~~net ~~the~~revenue ~~furniture~~of &$16.5 ~~bedding~~million, ~~product~~an ~~lines~~increase toin ~~pass along~~Europe ~~rising~~net ~~raw~~revenue ~~material~~of ~~prices~~$0.3 ~~Furnishing~~million ~~volumes~~and ~~during~~concrete ~~the~~fiber ~~first~~net ~~quarter~~revenues of ~~2005~~$29.7 ~~were~~million. ~~negatively~~These ~~impacted~~segment byincreases ~~Mohawk’s~~were ~~February~~partially ~~2005~~offset ~~purchase~~by ofa ~~Wayn-Tex, Inc~~$10.,7 million anet ~~producer~~revenue ofdecrease ~~primary~~in ~~carpet~~North ~~backing~~America ~~fabrics,~~furnishings ~~giving~~and ~~Mohawk~~a ~~(one~~$1.2 ofmillion ~~our~~decrease ~~largest customers) substantial~~ in~~-house~~ ~~primary~~Brazil. ~~carpet backing~~

24For the three months ended June 30, 2006, North America furnishings net revenue decreased $12.9 million, or 12.9%, to $86.9 million from $99.8 million in the corresponding period of the prior year. For the six months ended June 30, 2006, North America furnishings net revenue decreased $10.7 million, or 5.5%, to $184.8 million from $195.5 million in the corresponding period of the prior year. The net revenue decrease for both the quarter and

~~manufacturing~~year-to-date ~~capacity.~~periods Awas ~~portion~~primarily ofdue to volume decreases in carpet backing resulting from the ~~lost~~back ~~Mohawk~~integration ~~volume~~efforts of Shaw Industries, our largest customer during 2005. The decrease in the second quarter was ~~offset~~also bydue ~~concurrent~~to ~~volume~~the ~~gains~~sale of the Roanoke, Alabama carpet backing plant on April 3, 2006 to ~~other~~a ~~customers previously~~Mohawk ~~supplied~~Industries, byInc. ~~Wayn-Tex~~affiliate. InThese ~~addition~~back integration moves by our two largest customers, ~~overall~~Mohawk ~~carpet~~and ~~industry~~Shaw, ~~volumes~~reduce ~~declined~~the ~~during~~potential merchant market demand for our furnishings products. Partially offsetting these effects was the ~~first~~successful ~~quarter~~pass-through of ~~2005~~higher raw material costs and the inclusion of SI’s furniture and bedding and carpet backing revenues for the post January 31st period.

For the three months ended June 30, 2006, North America ~~industrial~~geosynthetics ~~fabrics~~ net revenue increased 39$24.1 million, or 112.6%, ~~from~~to $2345.05 million from $21.4 million in the ~~first~~corresponding ~~quarter~~period of ~~2004~~the toprior ~~$32~~year.0 ~~million~~For in the ~~first~~six ~~quarter~~months ofended ~~2005 due~~June 30, in2006, ~~part~~North toAmerica ~~higher~~geosynthetics ~~volumes~~net inrevenue ~~our~~increased ~~packaging~~$32.4 ~~product line~~million, ~~both~~or in83.9%, ~~the~~to U$71.S.0 ~~and~~million infrom ~~Mexico~~$38.6 Inmillion ~~particular,~~in athe ~~larger~~corresponding ~~than~~period ~~expected~~of ~~cotton~~the prior ~~crop~~year. ~~and~~The ~~better~~net ~~weather~~revenue ~~conditions~~increase ~~extended~~for both the ~~cotton~~quarter ~~season,~~and ~~positively~~year-to-date ~~impacting~~periods ~~volumes~~was inprimarily ~~our~~due ~~cotton~~to ~~bale products,~~the ~~and~~inclusion ~~strong~~of ~~housing~~SI’s ~~starts~~geosynthetics ~~during~~revenues ~~much~~for of the ~~quarter~~post ~~lifted~~January 31st ~~volumes~~period inand ~~our~~the ~~housewrap~~successful ~~products.~~pass-through ~~The~~of ~~remaining~~higher ~~net~~raw ~~revenue~~material ~~increase~~costs. ~~resulted~~Partially ~~from~~offsetting ~~higher~~these ~~unit~~effects ~~selling~~was ~~prices~~a ~~across~~volume ~~all~~decrease ofin our ~~industrial~~existing ~~fabrics~~ geotextile products, asdue weto ~~increased prices~~two tolarge ~~cover~~customers ~~rising~~being ~~raw~~acquired ~~material~~and ~~prices~~subsequently realigning their suppliers.

~~Europe~~For the three months ended June 30, 2006, North America industrial products net revenue increased $7.0 million, or 61.9%, to $18.3 million from $2411.63 million in the ~~first~~corresponding ~~quarter~~period of ~~2004~~the toprior ~~$25~~year.0 ~~million~~For in the ~~first~~six ~~quarter~~months ofended ~~2005~~June 30, ~~due~~2006, toNorth ~~higher~~America ~~unit~~industrial ~~selling~~products net ~~prices~~revenue inincreased U$16.S.5 ~~dollar~~million, ~~terms~~or 63.2%, ~~driven~~to by$42.6 amillion 4from $26.8%1 ~~appreciation~~million ofin the ~~euro~~corresponding ~~versus~~period of the ~~U.S.~~prior ~~dollar~~year. ~~Lower~~The ~~carpet~~net ~~industry volumes~~revenue ~~essentially~~increase ~~offset~~for both the ~~higher~~quarter ~~unit~~and ~~selling~~year-to-date ~~prices.~~periods ~~Volumes~~was ~~were~~primarily ~~adversely~~due ~~affected~~to bythe ~~cautious~~inclusion ~~consumer~~of ~~spending,~~SI’s industrial ~~which~~products ~~resulted~~revenue infor ~~decreased~~the ~~carpet~~post ~~backing~~January 31st ~~purchases~~period byand the ~~larger~~successful ~~Dutch~~pass-through ~~and~~of ~~Belgian~~higher ~~carpet~~raw material ~~manufacturers~~costs. ~~These~~Partially ~~volume declines~~offsetting ~~were~~these ~~partially~~effects ~~offset~~was bya ~~increased~~volume ~~exports~~decrease ofin ~~secondary~~certain ~~carpet~~packaging ~~backing~~ products~~. In local currency terms~~, ~~average~~especially ~~unit~~our ~~selling~~cotton ~~prices~~bale ~~decreased~~products due to ~~the~~transition ~~temporary~~issues ~~product~~associated ~~mix~~with ~~shift~~changing ~~toward~~the ~~lower-priced~~Company’s ~~secondary~~channels ~~carpet~~to ~~backing~~market.

~~Brazil~~For ~~net revenue increased 15.6% from $7.7 million in~~ the ~~first~~three ~~quarter of~~months ~~2004~~and tosix ~~$8.9~~months ~~million~~ended ~~in the first quarter of 2005 due~~June 30, ~~in part~~2006, toNorth ~~higher~~America ~~unit~~concrete ~~selling~~fiber ~~prices~~net inrevenue ~~both~~was ~~local~~$19.4 ~~currency~~million and U$29.S.7 ~~dollar~~million, ~~terms. We continued shifting our product portfolio toward more specialty products~~respectively, as ~~which~~a ~~resulted~~result inof ~~higher~~the ~~local currency~~SI ~~unit selling prices~~Acquisition. InAs ~~addition,~~this wesegment ~~passed~~relates ~~along~~entirely ato ~~portion~~the ofbusiness ~~our~~acquired ~~higher~~from ~~raw~~SI, ~~material~~there ~~costs~~is ~~during~~no ~~the~~comparable ~~2005~~revenue ~~period.~~amount Anfor ~~8.0% appreciation of~~ the ~~Brazilian~~three ~~real~~months ~~versus~~and ~~the~~six ~~U.S.~~months ~~dollar~~ended ~~resulted~~June 30, ~~in the remaining increase in net revenue~~2005.

For the three months ended June 30, 2006, Europe net revenue increased $0.8 million, or 3.1% to $26.3 million from $25.5 million in the corresponding period of the prior year. For the six months ended June 30, 2006, Europe net revenue increased $0.3 million, or 0.6%, to $50.8 million from $50.5 million in the corresponding period of the prior year. The small net revenue increase for both the quarter and year-to-date periods was primarily due to favorable product mix changes, mostly offset by lower carpet industry volumes due to general weakness in the European economy and cautious consumer spending.

recent tight monetary policy on general commercial activity and specifically the agricultural sector into which many of our products are sold and capacity additions by our competitors. These effects are partially offset by higher unit selling prices in dollar terms due to the foreign exchange effects of Brazil’s tight monetary policy.

Cost of sales

~~Cost~~For the three months ended June 30, 2006, cost of sales increased 1217.46% ~~from~~to $~~121~~165.63 million infrom ~~the first quarter of 2004 to~~ $~~136~~140.76 million in the ~~first~~corresponding ~~quarter~~period of ~~2005~~the prior year. The increase in cost of sales primarily reflects the ~~significant~~inclusion ~~increase in the cost~~ of ~~polypropylene,~~SI ~~along~~results ~~with~~for ~~a $3.4 million expense related to~~ the ~~amortization of purchase accounting related~~post ~~inventory~~January 31st ~~fair value adjustments~~period. ~~These additional costs were offset by lower postretirement benefits, the absence of a LIFO adjustment expense, lower depreciation and lower non-recurring charges.~~ As a percentage of net revenue, cost of sales decreased ~~from~~slightly 86to 80.54% in the ~~first~~three months ~~quarter~~ended ofJune 30, ~~2004~~2006 tofrom 8483.6% in the ~~first~~corresponding ~~quarter~~period of ~~2005~~the prior year, primarily due to ~~the~~higher ~~decreases~~margins inacross ~~non~~most U.S. products and European restructuring-~~raw~~related ~~material~~cost ~~costs~~reductions.

For the six months ended June 30, 2006, cost of sales increased 18.3% to $328.1 million from $277.3 million in the corresponding period of the prior year. The increase in cost of sales primarily reflects the inclusion of SI results for the post January 31^st period and the effects of the $7.7 million inventory fair value adjustment related to the SI Acquisition purchase accounting during the first quarter, which has been recognized in cost of sales during the six month period ended June 30, 2006. As a percentage of net revenue, cost of sales decreased slightly to 82.7% in the six months ended June 30, 2006 from 84.1% in the corresponding period of the prior year, primarily due to higher margins across most U.S. products and European restructuring-related cost reductions partially offset by the inventory fair value adjustment amortization in the first quarter.

For the three and six months ended June 30, 2006, higher margins are the result of improved average selling prices, which increased at a rate greater than that of raw material costs. Also, product mix for the three and six months ended June 30, 2006 shifted toward higher margins products.

Selling, general and administrative expenses

~~Selling~~For the three months ended June 30, 2006, selling, general and administrative expenses increased ~~from~~to $1225.86 million infrom ~~the first quarter of 2004 to~~ $14.51 million in the corresponding ~~first~~period ~~quarter~~ of ~~2005~~the prior year. As a percentage of net revenue, selling, general and administrative expenses ~~were~~increased 9to 12.15% ~~and~~in 9the three months ended June 30, 2006 from 8.04% in the ~~first~~corresponding ~~quarter~~period of ~~2004~~the ~~and~~prior ~~2005, respectively~~year. InThe increase ~~North~~in ~~America~~selling, general and administrative ~~costs~~expenses ~~increased~~primarily ~~during~~reflects the ~~first~~inclusion ~~quarter~~ of ~~2005~~SI’s ~~due~~overhead tocosts for the ~~amortization of~~post ~~intangible~~January 31st ~~assets~~period. ~~established~~We ~~under~~expect ~~purchase~~these ~~accounting,~~costs ~~and~~to ~~the~~decrease ~~inclusion~~as a percentage of ~~certain~~sales ~~stand-alone~~with ~~costs~~the ~~such~~elimination asof ~~insurance~~redundant ~~costs~~selling, general and ~~one-time~~administrative ~~acquisition~~costs, ~~accounting~~which ~~costs.~~was Inlargely ~~2004,~~completed BPduring ~~corporate~~the ~~cost~~second quarter.

25For the six months ended June 30, 2006, selling, general and administrative expenses increased to $51.6 million from $28.3 million in the corresponding period of the prior year. As a percentage of net revenue, selling, general and administrative expenses increased to 13.0% in the six months ended June 30, 2006 from 8.6% in the corresponding period of the prior year. The increase in selling, general and administrative expenses primarily reflects the inclusion of SI’s overhead costs for the post January 31st period. We expect these costs to decrease as a percentage of sales with the elimination of redundant selling, general and administrative costs, which was largely completed during the second quarter.

~~allocations~~In-process ~~were treated as a reconciling item and excluded from segment results. Included within selling, general and administrative expenses is our~~ research and development ~~expense, which totaled $1.7 million in the first quarter of 2004 and 2005, respectively.~~

~~Income~~For ~~before~~the ~~interest~~three months ended June 30, 2006 and ~~taxes~~2005, there were no in-process research and development charges.

~~Income~~For ~~before~~the ~~interest~~six ~~and~~months ~~taxes~~ended ~~increased~~June 30, ~~from~~2006, ~~$6.2~~as ~~million~~part inof the ~~first~~SI ~~quarter~~Acquisition ofduring ~~2004 to $10.2 million in~~ the first quarter, ofthere ~~2005.~~was ~~This~~an ~~increase~~in-process ~~is primarily~~research ~~due~~and todevelopment acharge ~~segment income increase~~ of $23.67 million. inThere ~~North America industrial fabrics income before interest and taxes (hereafter “segment income”), which~~ was ~~partially~~no ~~offset~~comparable byamount afor ~~$0.9~~the ~~million~~corresponding ~~decrease~~period inof ~~North America~~the ~~furnishings,~~prior ~~a $0~~year.4 ~~million decrease in Europe, and a $0.7 million decrease in Brazil.~~

~~North~~Pension ~~America~~curtailment ~~furnishings~~gain segment income decreased from $9.9 million in the first quarter of 2004 to $9.0 million in the first quarter of 2005 primarily due to the lower volumes in both our carpet backing and furniture and bedding product lines. In addition, during the first quarter of 2005 we experienced an increase in certain stand-alone administrative costs. During the first quarter of 2004, BP corporate cost allocations, which covered similar stand-alone administrative costs, were treated as a reconciling item and therefore excluded from all segment income calculations. Partially offsetting these unfavorable effects, unit selling prices increased and product mix was favorable. Fixed manufacturing costs decreased due to cost reduction and efficiency improvement activities and the absence of a significant one-time repair expenditure, which occurred in the first quarter of 2004. Depreciation decreased across all the facilities as a result of the purchase accounting valuation of plant, property and equipment and intangible assets in connection with the December 1, 2004 acquisition.

~~North~~For ~~America~~the ~~industrial~~three ~~fabrics~~months ~~segment~~and ~~income~~six ~~improved~~months ~~from~~ended aJune 30, ~~$2.0~~2006, ~~million loss in~~ the ~~first~~Company ~~quarter~~recorded ofa ~~2004 to~~ $0.64 million ofcurtailment ~~income~~gain infor the ~~first quarter~~reduction ~~of 2005, due,~~ in ~~part,~~the toprojected ~~higher~~benefit ~~volumes.~~obligation Inrelated ~~addition,~~to wethe ~~achieved reductions in fixed costs across all of our~~ U.S. ~~facilities~~pension ~~involved~~plan infor ~~the~~hourly ~~manufacture of industrial fabrics~~employees. ~~The~~There ~~reduction~~was ~~in the cash portion of fixed costs resulted from~~no ~~cost~~comparable ~~reduction~~amount ~~and~~for ~~efficiency improvement activities, while~~ the ~~reduction~~corresponding inperiods ~~depreciation results from the purchase accounting valuation~~ of the ~~assets.~~prior ~~The increase in volumes also contributed to the swing to profitability~~year. Also contributing to the improved results, unit selling prices increased and product mix was favorable. Partially offsetting the increase in industrial fabrics profitability was the increase in certain stand-alone administrative costs. The North America industrial fabrics segment continues to experience significant competition domestically, with certain product lines also experiencing the threat of substitution by natural materials, which are not subject to petroleum-related price volatility, as well as offshore competition.

~~Europe~~Restructuring ~~segment income decreased from income of $0.3 million in the first quarter of 2004 to a loss of $0.1 million in the first quarter of 2005, primarily resulting from the decrease in volumes~~ and ~~the~~other ~~increase~~similar ~~in raw material~~ costs. ~~Partially offsetting this segment income was a decrease in selling, general and administrative costs in our Europe segment.~~

~~Brazil~~For ~~segment~~the ~~income~~three ~~decreased~~months ~~from~~ended ~~$1.5~~June 30, ~~million~~2006, inrestructuring ~~2004~~and toother similar costs were $03.84 million inrelated ~~2005~~to severance costs to eliminate redundant selling, ~~reflecting~~general ~~higher~~and ~~fixed~~administrative ~~manufacturing~~overhead costs ~~resulting~~created ~~from~~by ~~higher~~the ~~resin~~SI ~~costs~~Acquisition. ~~and~~There was no comparable amount for the corresponding period of the prior year.

26For the six months ended June 30, 2006, restructuring and other similar costs were $6.4 million related to severance costs to eliminate redundant selling, general and administrative overhead costs created by the SI Acquisition. There was no comparable amount for the corresponding period of the prior year.

Impairment of long-lived assets

For the three months ended June 30, 2006 and 2005, there were no impairments of long-lived assets.

For the six months ended June 30, 2006, impairment of long-lived assets was $5.5 million related to the Seneca, South Carolina facility closure and impairment of equipment, which will not be relocated to another plant. The amount of the impairment was determined based on the remaining value of the assets in light of the decision to dispose of such assets as compared to the carrying value at the decision to close the Seneca facility. There were no such impairment charges in the corresponding period of the prior year.

Gain from sale of Roanoke plant

For the three and six months ended June 30, 2006, we recorded a $44.5 million gain related to the sale of our Roanoke, Alabama carpet backing plant to a Mohawk Industries, Inc. affiliate in April 2006. This gain results from the excess of the $73.0 million in adjusted sales proceeds over the net book value of $28.5 million. There were no such asset sales the corresponding periods of the prior year.

~~the~~Income ~~2004~~before ~~capacity~~interest ~~expansion~~and ~~of our Curitiba, Brazil facility. This segment~~ income ~~decrease~~taxes ~~was partially offset by increased unit profitability from an improved product mix with a greater focus on higher margin products.~~

~~Segment~~For the three months ended June 30, 2006, income ~~does~~before ~~not~~interest ~~include~~and ~~two~~taxes ~~reconciling~~increased ~~items~~$42.9 ~~The~~million ~~LIFO~~to ~~inventory~~$56.6 ~~adjustment~~million ~~was~~from $213.47 million in ~~expense~~the corresponding toperiod of the ~~Predecessor~~prior ~~for~~year. The increase resulted primarily from the ~~first~~$44.5 ~~quarter~~ million gain on the sale of ~~2004.~~our ~~The~~Roanoke ~~parent~~facility, ~~company~~which ~~overhead~~is ~~expense~~not ~~allocations~~included toin our segment income. Partially offsetting the ~~Predecessor~~gain were decreases of $10.27 million in North ~~the~~America ~~first~~geosynthetics, ~~quarter~~$0.8 million in North America industrial products, $0.6 million in Brazil, and losses of ~~2004~~$1.2 million in North America concrete fiber. These ~~allocations~~decreases ~~related~~were topartially ~~the~~offset ~~former~~by ~~parent~~an increase of $1.7 million in Europe’s income. ~~management~~The ~~overhead~~quarterly segment results were also impacted by $3.4 million in restructuring costs partially offset by a $0.4 million pension curtailment gain.

For the six months ended June 30, 2006, income before interest and taxes increased $22.8 million, or 94.2%, to $47.0 million from $24.2 million in the corresponding period of the prior year. This increase resulted primarily from the $44.5 million gain on the sale of our Roanoke facility, which is not included in our segment income. In addition to the second quarter non-recurring charges mentioned above, the year-to-date segment results were impacted by several non-recurring acquisition and restructuring related charges in the first quarter, including the $7.7 million amortization of the inventory fair value adjustment related to acquisition purchase accounting, the $3.7 million of in-process research and development charges, the Seneca, South Carolina facility restructuring’s $5.5 million non-cash impairment related to equipment which will not be relocated to another plant, and the $3.0 million acquisition integration-related severance costs. By segment, the change is offset by decreases of $6.0 million in North America furnishings, $6.1 million in North America geosynthetics, $2.3 million in North America industrial products, $0.7 million in Brazil and a $10.1 million loss in concrete fiber, partially offset by an increase of $3.5 million in Europe.

For the three months ended June 30, 2006, North America furnishings segment income was $11.5 million, unchanged versus the corresponding period of the prior year. For the six months ended June 30, 2006, North America furnishings segment income decreased $6.0 million, or 29.0%, to $14.7 million from $20.7 million in the corresponding period of the prior year. The segment income decreased for both the quarter and year-to-date periods due to lower volumes resulting from the North America carpet industry restructuring, which occurred largely in 2005, wherein the two largest carpet manufacturers back-integrated significantly into carpet backing manufacturing and in the second quarter, further volume declines due to the sale of the Roanoke plant on April 3^rd. This negative volume effect was offset by increasing margins and the inclusion of SI activity in 2006. However, the year-to-date period was also impacted by a $7.5 million allocation of the above-mentioned non-recurring acquisition integration and restructuring charges in the first quarter.

For the three months ended June 30, 2006, North America geosynthetics segment income decreased $0.7 million, or 50.0%, to $0.7 million from $1.4 million in the corresponding period of the prior year. For the six months ended June 30, 2006, North America geosynthetics segment income decreased $6.1 million to a loss of $4.6 million from $1.5 million in income for the corresponding period of the prior year due to general weakness in demand, volume losses at certain customers who changed suppliers and high

allocated overhead costs prior to eliminating redundant selling, general and administrative overhead, partially offset by the inclusion of SI activity in 2006. In addition, the year-to-date period was impacted by a $5.7 million allocation of the above-mentioned non-recurring acquisition integration and restructuring charges in the first quarter.

For the three months ended June 30, 2006, North America industrial products segment income decreased $0.8 million to $1.3 million loss from a $0.5 million loss in the corresponding period of the prior year. For the six months ended June 30, 2006, North America industrial products segment income decreased $2.3 million to $2.2 million loss from $0.1 million in income for the corresponding period of the prior year. The segment income decreased for both the quarter and year-to-date periods due to decreases in certain packaging volumes and high allocated overhead costs prior to eliminating redundant selling, general and administrative overhead, partially offset by the inclusion of SI activity in 2006. In addition, the year-to-date period was impacted by a $2.0 million allocation of the above-mentioned non-recurring acquisition integration and restructuring charges in the first quarter.

For the three months and six months ended June 30, 2006, the North America concrete fiber segment loss was $1.2 million and $10.1 million, respectively. This segment was acquired as part of the SI acquisition, and there is no comparable amount for the corresponding periods of the prior year. In addition, the year-to-date period was impacted by a $4.7 million allocation of the above-mentioned non-recurring acquisition integration and restructuring charges in the first quarter.

For the three months ended June 30, 2006, Europe segment income increased $1.7 million to $2.1 million from $0.4 million in the corresponding period of the prior year. For the six months ended June 30, 2006, Europe segment income increased $3.5 million to $3.7 million from $0.2 million in the corresponding period of the prior year. The segment income increased for both the quarter and year-to-date periods primarily due to a reduction in manufacturing costs associated with the elimination of the weekend shift at our Gronau, Germany facility.

For the three months ended June 30, 2006, Brazil segment income decreased $0.6 million, or 66.7%, to $0.3 million from $0.9 million in the corresponding period of the prior year. For the six months ended June 30, 2006, Brazil segment income decreased $0.7 million, or 41.2%, to $1.0 million from $1.7 million in the corresponding period of the prior year. The segment income decreased for both the quarter and year-to-date periods because of sales volume declines due to Brazil’s recent tight monetary policy on general commercial activity and specifically the agricultural sector into which many of our products are sold and capacity additions by our competitors. These effects are partially offset by higher unit selling prices in dollar terms due to the foreign exchange effects of Brazil’s tight monetary policy.

Interest expense, net

~~Net~~For the three months ended June 30, 2006, net interest expense increased to $8.5 million from $15.37 million in the ~~first~~corresponding ~~quarter~~period of ~~2004~~the toprior $4year.9 ~~million~~For in the ~~first~~six ~~quarter~~months ofended ~~2005. Prior to December 1~~June 30, ~~2004~~2006, net interest expense ~~was~~increased ~~principally related~~ to ~~the~~$20.5 ~~affiliate~~million ~~debt~~from ~~payable~~$10.9 million toin ~~BP, which was repaid prior to~~ the ~~acquisition~~corresponding asperiod ~~part~~ of the ~~December~~prior 1,year. ~~2004~~Net ~~stock~~interest ~~purchase~~expense ~~agreement,~~increased ~~discussed~~for ~~previously.~~both ~~Beginning~~the ~~December~~quarter ~~1, 2004,~~and ~~interest~~year-to-date ~~expense~~periods isdue ~~principally~~primarily ~~related~~ to the ~~senior~~additional ~~secured~~debt ~~credit~~incurred ~~facility~~to ~~and~~fund the ~~10%~~major ~~Senior~~portion ~~Notes~~of ~~due~~the ~~2012~~SI Acquisition.

Income taxes

~~The~~For the three months ended June 30, 2006, the provision for income taxes increased ~~from~~to $018.94 million infrom ~~2004 to~~ $2.16 million in ~~2005 as~~ the ~~2004~~corresponding ~~tax~~period ~~liability~~of ~~was~~the ~~reduced~~prior ~~by tax settlements and other non-recurring benefits~~year. The ~~Company’s~~increase ~~effective~~in income tax ~~rate~~expense ~~was~~is ~~18.4%~~due ~~and~~primarily ~~39.7%~~to ~~for~~ the ~~first~~gain ~~three~~on sale ~~months~~ of ~~2004~~the ~~and 2005~~Roanoke, ~~respectively~~Alabama plant in April 2006. ~~Effective~~The ~~income~~effective tax ~~rates~~rate ~~for~~was ~~the~~38.3% ~~remainder~~in ofthe ~~2005~~second ~~are~~quarter ~~expected~~as compared to be38.0% ~~consistent~~in ~~with~~ the first quarter of 2006.

~~Liquidity~~For ~~and~~the ~~Capital~~six ~~Resources~~months asended June 30, 2006, the provision for income taxes increased to $10.3 million from $4.7 million in the corresponding period of ~~March~~the ~~31,~~prior ~~2005~~year. The increase in taxes related to the Roanoke plant gain on sale is partially offset by the effects of the first quarter operating losses primarily related to non-recurring acquisition integration and restructuring charges. The effective tax rate was 38.9% for the six months ended June 30, 2006.

~~Our~~We ~~primary~~expect ~~cash~~the ~~needs~~effective ~~are working capital, capital expenditures,~~ tax ~~payments~~rate ~~and~~to ~~debt~~remain ~~service~~around 37.6% ~~Our forecasted capital spending~~ for the ~~current~~remainder ~~year~~of ~~is $10.0 million. The Company believes it has adequate liquidity to fund required capital expenditures for~~ the ~~next~~ year. ~~We finance these cash requirements through internally generated cash flow and funds borrowed from our revolving credit facility.~~

~~Net~~Combined ~~working~~Company ~~capital~~Results ~~is comprised~~ of ~~current~~Operations ~~assets,~~for ~~minus~~the ~~current~~Three ~~liabilities, excluding current maturities of long-term debt~~ and ~~accrued~~Six ~~interest.~~Months WeEnded ~~had net~~June 30, ~~working~~2006 ~~capital~~Compared ofto ~~$163.0~~the ~~million~~Three ~~at December 31, 2004~~ and ~~$173.9~~Six ~~million~~Months atEnded ~~March 31~~June 30, 2005.

~~Cash~~The ~~from~~following ~~operations~~discussion ~~improved~~includes ~~from~~the acombined ~~$5.3~~results ~~million~~of ~~use~~operations of ~~cash~~the ~~for~~Company ~~the~~including ~~three~~SI ~~months~~as ~~ended~~if ~~March~~the ~~31,~~SI ~~2004~~Acquisition tohad aoccurred as ~~$4.2~~of ~~million~~the ~~generation~~beginning of ~~cash~~each ~~for~~period. ~~the~~Adjustments ~~three months~~have ~~ended~~been ~~March~~made ~~31,~~to ~~2005.~~the ~~The~~combined ~~improved~~results ~~cash~~of ~~from~~ operations is primarily ~~due~~ to ~~reduced~~reflect ~~working~~the ~~capital needs~~following.

WeFor ~~used cash from investing activities of $1.7 million for~~ the ~~first~~three ~~quarter~~and ofsix ~~2004~~months ~~compared~~ended ~~to $0.5 million for the first quarter of 2005. Capital expenditures decreased from $2.0 million in the first quarter of 2004~~June 30, ~~which~~2006: ~~included certain one-time repair expenditures, to $0.5 million in the first quarter of 2005.~~

~~Cash~~• ~~provided~~Cost byof ~~financing~~sales ~~activities~~ was ~~$7.4~~adjusted ~~million for the first quarter ended March 31, 2004 compared to cash used~~ by ~~financing~~ ~~activities~~nil ofand $10.42 million ~~for~~in the ~~quarter~~three ~~ended~~and ~~March~~six ~~31,~~months ~~2005.~~ended ~~Prior~~June ~~to the acquisition~~30, ~~the Company was dependent on its former parent company~~2006, BPrespectively, ~~for~~and ~~its~~$0.1 ~~cash~~million ~~funding~~and ~~requirements, resulting in the~~ $70.43 million ofin ~~cash~~the ~~provided~~three ~~by financing~~and ~~activities~~six ~~for~~months ~~the first quarter~~ ended ~~March~~June 3130, ~~2004.~~2005, ~~Effective with the acquisition~~respectively, ~~the~~due ~~Company~~to ~~began~~increases ~~managing~~in ~~cash~~depreciation onrelated anto ~~independent~~increases ~~stand-alone basis. The Company made its first scheduled principal payment under its new credit facility~~ in ~~the~~SI ~~first quarter ended March 31~~property, ~~2005~~plant ~~resulting~~and inequipment ~~the~~to ~~cash~~approximate ~~used~~fair ~~by financing activities of $1~~value.~~4 million.~~

27• Selling, general and administrative was increased nil and $0.3 million in the three and six months ended June 30, 2006, respectively, and $0.9 million and $1.9 million in the three and six months ended June 30, 2005, respectively, to reflect the amortization of intangible assets established in accordance with SFAS No. 141.

•

Interest expense was increased nil and $1.0 million in the three and six months ended June 30, 2006, respectively, and $4.1 million and $5.6 million in the three and six months ended June 30, 2005, respectively, to reflect the SI Acquisition-related additional indebtedness in the periods prior to the acquisition.

~~Our~~Combined ~~credit~~Pro ~~arrangements~~Forma ~~with~~Results: ~~BP were cancelled concurrent with the closing of the acquisition. We replaced our affiliate credit arrangements with a new credit facility described below.~~

New Credit Facility


	Three months ended June 30,					Six months ended June 30,
	2006			2005		2006			2005
	*(in millions)*
Net revenue	$	205.5		$	233.6	$	411.7		$	462.8
Cost of sales		165.3			189.8		339.0			376.3

Gross profit		40.2			43.8		72.7			86.5

Operating expenses:
Selling, general and administrative		25.6			31.3		56.2			62.7
In-process research and development charges		—			—		3.7			—
Pension curtailment gain		(0.4	)		—		(0.4	)		—
Restructuring and similar costs		3.4			—		6.4			—
Impairment of long-lived assets		—			—		5.5			—
Gain from sale of Roanoke plant		(44.5	)		—		(44.5	)		—

Operating income		56.1			12.5		45.8			23.8
Other (income) expense		(0.5	)		1.5		24.6			4.4

Income before interest and income taxes		56.6			11.0		21.2			19.4
Interest expense, net		8.5			9.8		21.8			18.2

Income (loss) before income taxes		48.1			1.2		(0.6	)		1.2
Income tax provision		18.4			0.9		9.7			(0.1	)

Net income (loss)	$	29.7		$	0.3	$	(10.3	)	$	1.3

WeNet ~~entered~~revenue ~~into a new credit facility with a syndicate of lenders on December 1, 2004. The following description summarizes the material provisions of the new credit facility and does not purport to be complete.~~

~~The~~On ~~new~~a ~~secured~~combined ~~credit~~company ~~facility~~basis ~~provides~~ for athe three months ended June 30, 2006, net revenue decreased $~~110~~28.01 million, ~~senior~~or ~~term loan~~12.0% ~~and~~to a $65205.05 million ~~revolving~~from ~~line~~$233.6 ofmillion ~~credit,~~for ofthe ~~which~~corresponding noperiod ~~amount~~in ~~was~~the ~~outstanding~~prior asyear, ofreflecting a ~~March~~decrease ~~31,~~in ~~2005.~~North ~~The~~America ~~new~~net ~~credit~~revenue ~~facility~~of ~~also~~$27.9 ~~includes~~million, and a ~~sublimit~~decrease of $201.0 million for ~~the~~Brazil, ~~issuance~~partially ofoffset ~~letters~~by ofan ~~credit~~increase of ~~which~~ $0.58 million ~~was~~for ~~used and outstanding as of March 31, 2005~~Europe.

WeFor ~~used~~ the ~~proceeds~~six ~~of borrowings~~months ~~under~~ended ~~the~~June 30, ~~new~~2006, ~~credit~~combined ~~facility~~company net revenue decreased $51.1 million, or 11.0% to ~~finance~~$411.7 amillion ~~portion~~from of$462.8 million for the ~~purchase~~corresponding ~~price~~period ofin the ~~acquisition~~prior year, toreflecting ~~pay~~ a ~~portion~~decrease in ofNorth ~~the~~America ~~fees~~net ~~and~~revenue ~~expenses~~of ~~related~~$50.2 toand ~~the~~a ~~transactions~~decrease ~~and~~of $1.2 million for ~~working~~Brazil, ~~capital~~partially ~~and~~offset ~~other~~by ~~corporate~~an ~~purposes~~increase of $0.3 million for Europe.

~~The~~On ~~revolving~~a ~~line~~combined ofcompany ~~credit~~basis, ~~and~~for ~~term~~the ~~loan~~three months ended June 30, ~~collectively~~2006, ~~referred~~North America furnishings net revenue decreased 27.0% to as$86.9 million from $119.1 million for corresponding period in the prior year. For the six months ended ~~“loans~~June 30,” ~~may~~2006, ~~bear~~North ~~interest~~America atfurnishings ~~the~~net ~~base~~revenue ~~rate~~decreased or18.9% atto ~~LIBOR~~$188.0 million for the six months ended June 30, 2006 from $231.8 million for the corresponding period in ~~each~~the ~~case~~prior ~~plus~~year. anThe ~~applicable~~net ~~margin~~revenue decrease for both the quarter and year-to-date periods was primarily due to volume decreases in carpet backing resulting from the back integration efforts of Shaw Industries, our largest customer during 2005. The ~~default~~decrease ~~rate~~in isthe second quarter was also due to the ~~sum~~sale of the Roanoke, ~~otherwise~~Alabama ~~applicable~~carpet ~~rate~~backing ~~plus~~plant 2on April 3, 2006.0% Partially offsetting these effects was the successful pass-through of higher raw material costs.

~~All~~46 principal on the revolving line of credit is due on December 1, 2009. All principal on the term loan is due on December 1, 2011 and such term loan is subject to quarterly required amortization totaling $5.5 million in 2005, $5.5 million in 2006, $5.5 million in 2007, $5.5 million in 2008, $11.0 million in 2009, $11.0 million in 2010 and $66.0 million in 2011. Furthermore, the loans are subject to various mandatory prepayments.

Accrued interest under base rate loans is due quarterly and on the last day of the selected interest period for LIBOR loans but no less frequently than quarterly. The new credit facility allows voluntary prepayments with notice and reimbursement for various costs and payment of accrued interest.

The new credit facility contains various customary restrictive covenants. Under the new credit facility, we are also required to satisfy various financial covenants, including a specified fixed charge coverage ratio, a specified interest coverage ratio, a minimum EBITDA requirement, a maximum senior secured leverage ratio, and a maximum total leverage ratio. Additionally, the new credit facility contains customary affirmative covenants.

Obligations under the new credit facility are guaranteed by Propex Fabrics Holdings Inc. and our domestic subsidiaries, and are secured by a first priority lien on our capital stock and our subsidiaries’ capital stock and on substantially all of our assets and the assets of our domestic subsidiaries, with pledges of capital stock of foreign subsidiaries limited to 66% of a foreign subsidiary’s issued and outstanding capital stock. The lien on our capital stock was established pursuant to a pledge by Propex Fabrics Holdings Inc.

For the three months ended June 30, 2006, North America geosynthetics net revenue increased 12.6% to $45.5 million from $40.4 million from the corresponding period in the prior year. For the six months ended June 30, 2006, North America geosynthetics net revenue increased 0.1% to $76.0 million from $75.9 million for the corresponding period in the prior year. The net revenue increases for both the quarter and year-to-date periods was due primarily to the successful pass-through of higher raw material costs, partially offset by two large customers being acquired and subsequently realigning their suppliers, along with other general weakness in demand.

On a combined company basis, for the three months ended June 30, 2006, North America industrial products net revenue decreased 25.0% to $18.3 million from $24.4 million from the corresponding period in the prior year. For the six months ended June 30, 2006, North America industrial products net revenue decreased 15.3% to $45.5 million from $53.7 million for the corresponding period in the prior year. The net revenue decreases for both the quarter and year-to-date periods was due primarily to lower volumes in cotton bale, performance fabrics and fiber sales, partially offset by the successful pass-through of higher raw material costs.

For the three months ended June 30, 2006 compared to the three months ended June 30, 2005, North America concrete fiber net revenue increased 37.6% to $19.4 million from $14.1 million for the corresponding period in the prior year. For the six months ended June 30, 2006 compared to the corresponding period in the prior year, North America concrete fiber net revenue increased 5.3% to $33.7 million from $32.0 million due to the successful pass-through of higher raw material costs.

For the three months ended June 30, 2006, Brazil net revenue decreased $1.0 million, or 9.9%, to $9.1 million from $10.1 million in the corresponding period of the prior year. For the six months ended June 30, 2006, Brazil net revenue decreased $1.2 million, or 6.3%, to $17.7 million from $18.9 million in the corresponding period of the prior year. The net revenue decrease for both the quarter and year-to-date periods was due to the negative impact of Brazil’s recent tight monetary policy on general commercial activity and specifically the agricultural sector into which many of our products are sold and capacity additions by our competitors. These effects are partially offset by higher unit selling prices in dollar terms due to the foreign exchange effects of Brazil’s tight monetary policy.

Cost of sales

On a combined company basis, cost of sales decreased 12.9% to $165.3 million for the three months ended June 30, 2006 from $189.8 million for the corresponding period in the prior year. The decrease in cost of sales primarily reflects generally lower North America volumes partially offset by higher resin pricing. As a percentage of net revenue, cost of sales decreased to 80.4% in the three months ended June 30, 2006 from 81.3% in the three months ended June 30, 2005, primarily due to a decrease in non-raw material manufacturing costs.

For the six months ended June 30, 2006, cost of sales decreased 9.9% to $339.0 million from $376.3 million for the corresponding period in the prior year. The decrease in cost of sales primarily reflects generally lower North America volumes partially offset by higher resin pricing and the effects of the $7.7 million inventory fair value adjustment related to the SI Acquisition purchase accounting during the first quarter, which has been recognized in cost of sales during the six month period ended June 30, 2006. As a percentage of net revenue, cost of sales decreased to 82.3% in the six months ended June 30, 2006 from 81.3% for the corresponding period in the prior year, primarily due to a decrease in non-raw material manufacturing costs.

In addition, for the three and six months ended June 30, 2006, higher margins are the result of improved average selling prices, which increased at a rate greater than that of raw material costs. Also, product mix for the three and six months ended June 30, 2006 shifted toward higher margins products.

Selling, general and administrative expenses

On a combined company basis, selling, general and administrative expenses decreased to $25.6 million for the three months ended June 30, 2006 from $31.3 million for the corresponding period in the prior year. As a percentage of net revenue, selling, general and administrative expenses decreased to 12.5% in the three months ended June 30, 2006 from 13.4% for the corresponding period in the prior year.

Selling, general and administrative expenses on a combined company basis decreased to $56.2 million for the six months ended June 30, 2006 from $62.7 million in the corresponding period in the prior year. As a percentage of net revenue, selling, general and administrative expenses increased to 13.7% for the six months ended June 30, 2006 from 13.5% for the corresponding period in the prior year. For the three and six months ended June 30, 2006, selling general and administrative expenses on a combined company basis have decreased from the comparable prior year period as a result of the continued integration of the two companies, eliminating redundant expenses.

In-process research and development charge

For the three months ended June 30, 2006 and 2005, there were no in-process research and development charges.

For the six months ended June 30, 2006, as part of the SI Acquisition during the first quarter, there was an in-process research and development charge of $3.7 million. There was no comparable amount for the corresponding period of the prior year.

Pension curtailment gain

For the three months and six months ended June 30, 3006, the Company recorded a $0.4 million curtailment gain for the reduction in the projected benefit obligation related to the U.S. pension plan for hourly employees. There was no comparable amount for the corresponding periods of the prior year.

Restructuring and other similar costs

For the three months and six months ended June 30, 2006, restructuring and other similar costs were $3.4 million and $6.4 million, respectively, related to severance costs to eliminate redundant selling, general and administrative overhead costs created by the SI Acquisition. There was no comparable amount for the corresponding periods of the prior year.

Impairment of long-lived assets

For the three months ended June 30, 2006 and 2005, there were no impairments of long-lived assets.

Gain from sale of Roanoke plant

Income before interest and income taxes

On a combined company basis, income before interest and taxes increased 414.5% to $56.6 million for the three months ended June 30, 2006 from $11.0 million for the corresponding period in the prior year. The increase was primarily due to the $44.5 million gain on sale of the Roanoke plant which is not included within segment income. Partially offsetting the gain was a decrease of $0.6 million in Brazilian segment income, partially offset by increase of $1.7 million in European segment income.

For the six months ended June 30, 2006, income before interest and taxes increased 9.8% to $21.2 million for the six months ended June 30, 2006 from $19.4 million for the corresponding period in the prior year. The increase was primarily due to the $44.5 million gain on sale of the Roanoke plant which was not included within segment income, partially offset by $22.0 million of SI divestiture-related costs recognized by SI in their January 2006 financial results immediately prior to the SI Acquisition and $19.9 million of non-recurring acquisition and restructuring related charges in the first quarter. In addition, income decreased by $45.4 million in North American segment income and $0.7 million for Brazilian segment income, partially offset by an increase of $3.5 million for European segment income.

For the three months ended June 30, 2006, North America furnishings segment income increased $2.4 million to $11.5 million from $9.1 million for the corresponding period in the prior year. For the six months ended June 30, 2006, North America furnishings segment income decreased $12.9 million to $8.4 million from $21.3 million for the corresponding period in the prior year. The segment income decreased for both the quarter and year-to-date periods due to the lower volumes resulting from the North America carpet industry restructuring, which occurred largely in 2005, wherein the two largest carpet manufacturers back-integrated significantly into carpet backing manufacturing and in the second quarter, further volume declines due to the sale of the Roanoke plant on April 3^rd. This negative volume effect was partially offset by increasing margins. Finally, income was impacted by a $7.5 million allocation of non-recurring acquisition integration and restructuring charges in the first quarter.

For the three months ended June 30, 2006, North America geosynthetics segment income increased to $0.7 million from $0.5 million for the corresponding period in the prior year. For the six months ended June 30, 2006, North America geosynthetics segment loss increased to a $13.1 million loss from a loss of $1.7 million for corresponding period in the prior year. The segment income decreased for both the quarter and year-to-date periods due to general weakness in demand and volume losses at certain customers who changed suppliers. For the six months ended June 30, 2006, segment income was impacted by a $5.7 million allocation of non-recurring acquisition integration and restructuring charges in the first quarter partially offset by higher margins across our entire geosynthetics product line.

For the three months ended June 30, 2006, North America industrial products segment income decreased $1.4 million to a loss of $1.3 million from a loss of $0.2 million for the corresponding period in the prior year. For the six months ended June 30, 2006, North America industrial segment income decreased to a loss of $7.7 million for the six months ended June 30, 2006 from a loss of $0.7 million for the corresponding period in the prior year. For both the quarter and year-to-date periods, the decrease in segment income was due primarily to lower sales volumes in certain packaging, performance fabrics and fiber applications and in the first quarter, a $2.0 million allocation of non-recurring acquisition integration and restructuring charges, partially offset by higher product margins.

For the three months ended June 30, 2006, the North America concrete fiber segment income decreased $1.4 million to a loss of $1.2 million from income of $0.2 million for the corresponding period in the prior year. For the six months ended June 30, 2006, North America concrete fiber segment income decreased $14.1 million to a loss of $15.6 million from a loss of $1.5 million in the corresponding period of the prior year. The segment income decreased for both the quarter and year-to-date periods due to lower sales volumes. In addition, the year-to-date period was impacted by a $4.7 million allocation of the above-mentioned non-recurring acquisition integration and restructuring charges in the first quarter.

For the three months ended June 30, 2006, Europe segment income increased $1.7 million to $2.1 million from $0.4 million in the corresponding period of the prior year. For the six months ended June 30, 2006, Europe segment income increased $3.5 million to $3.7 million from $0.2 million in the corresponding period of the prior year. The segment income increased for both the quarter and year-to-date periods due to a reduction in manufacturing costs associated with the elimination of the weekend shift at our Gronau, Germany facility.

For the three months ended June 30, 2006, Brazil segment income decreased $0.6 million, or 66.7%, to $0.3 million from $0.9 million in the corresponding period of the prior

year. For the six months ended June 30, 2006, Brazil segment income decreased $0.7 million, or 41.2%, to $1.0 million from $1.7 million in the corresponding period of the prior year. The segment income decreased for both the quarter and year-to-date periods because of sales volume declines due to Brazil’s recent tight monetary policy on general commercial activity and specifically the agricultural sector into which many of our products are sold and capacity additions by our competitors. These effects are partially offset by higher unit selling prices in dollar terms due to the foreign exchange effects of Brazil’s tight monetary policy.

Interest expense, net

On a combined company basis, net interest expense decreased to $8.5 million for the three months ended June 30, 2006 from $9.8 million for the corresponding period of the prior year. The decrease in interest expense for the quarter is primarily due to the debt repayments in April 2006 from the estimated after tax proceeds from the Roanoke plant sale.

Net interest expense increased to $21.8 million for the six months ended June 30, 2006 from $18.2 million for the corresponding period of the prior year. The increase in interest expense for the year-to-date period is due an increase in interest rates.

Income taxes

The provision for income taxes increased to $18.4 million for the three months ended June 30, 2006 from $0.9 million for the corresponding period of the prior year. The provision for income taxes increased to $9.7 million for the six months ended June 30, 2006, from a benefit of $0.1 million for the corresponding period of the prior year. The increase in income taxes for both the quarter and year-to-date periods relates primarily to taxes related to the sale of the Roanoke facility.

Liquidity and Capital Resources as of June 30, 2006

The information discussed below is presented based on the Company’s historical results, which include the results of SI for the period following the January 31, 2006 SI Acquisition date.

Our primary cash needs are for working capital, capital expenditures, tax payments, debt payments or debt retirement, and future acquisition integration activity costs. Our forecasted capital spending for 2006 is approximately $15.0 to $18.0 million with $4.0 to $6.0 million relating to ongoing operations and the balance pertaining to acquisition-related integration and restructuring expenditures. We believe we have adequate liquidity to meet these cash needs. We may use excess cash balances to repay or retire debt. We finance these cash requirements through cash generated from operations and funds borrowed from our revolving credit facility. As of June 30, 2006, we had no borrowings from our revolving credit facility.

Net working capital is comprised of current assets, minus current liabilities, excluding current maturities of long-term debt and accrued interest. We had net working capital of $232.7 million at June 30, 2006, and $218.5 million at December 31, 2005. Working capital increased $14.2 million from December 31, 2005 due to increases associated with the SI Acquisition and normal seasonal increases partially offset by decreases in cash, which was used to fund a portion of the SI Acquisition, and decreases in assets held for sale.

At June 30, 2006, working capital includes $26.2 million of cash and cash equivalents.

The Company had net cash outflows from operations of $8.7 million in the six months ended June 30, 2006 compared to net cash inflows from operations of $4.4 million in the six months ended June 30, 2005. The decrease in cash from operations is due to decreased operating income exclusive of the Roanoke plant sale gain. Proceeds from the sale of our Roanoke plant are included in cash flows from investing activities.

Cash used in investing activities was $159.0 million in the six months ended June 30, 2006 versus $1.3 million in the three months ended June 30, 2005.

Capital expenditures increased to $2.3 million in the six months ended June 30, 2006 from $1.3 million in the six months ended June 30, 2005. The increase in cash used in investing activities relates primarily to the SI Acquisition in January 2006 partially offset by proceeds from the sale of our Roanoke, Alabama carpet backing facility in April 2006.

Cash generated from financing activities was $135.7 million in the six months ended June 30, 2006 compared to cash used in financing activities of $3.3 million for the six months ended June 30, 2005. In 2006, the cash generated relates to additional indebtedness acquired to fund the SI Acquisition partially offset by debt repayments with the after-tax proceeds from sale of our Roanoke facility, whereas in 2005, cash used was primarily related to schedule debt principal repayments.

Senior Credit Facility

On January 31, 2006, the Company entered into a new Credit Agreement to refinance our credit facility and to raise additional funds for the SI Acquisition. The new Credit Agreement provides for a $360.0 million senior credit facility, comprised of a $260.0 million term loan facility, a $50.0 million revolving credit facility and a $50.0 million bridge loan facility. This Credit Agreement replaces the credit agreement dated as of December 1, 2004, among the Company, Amoco Fabrics and Fibers Company, the lenders named therein and BNP Paribas, as Administrative Agent. Similar to the prior credit facility, the new credit facility is guaranteed by Propex Holdings Inc., our parent corporation, and our domestic subsidiaries. It is also secured by a first priority lien on our domestic subsidiaries’ real and personal property including a pledge of all the capital stock of our domestic subsidiaries and 66.0% of the capital stock of our foreign subsidiaries.

At management’s discretion, the loan bears interest at either LIBOR plus 2.25% or a base rate plus 1.25%, where the base rate equals the higher of the prime rate or the Federal Funds interest rate. Mandatory prepayments are required under certain conditions and voluntary prepayments are allowed at no premium. Certain financial covenants must be met on a quarterly basis including a specified fixed charge coverage ratio, a specified interest coverage ratio, a minimum EBITDA requirement, maximum senior secured and total leverage ratios, and a maximum capital expenditures test. We were in compliance with the financial covenants of this agreement as of June 30, 2006 and through the date of this filing.

The credit facility also included a sublimit of $20.0 million for the issuance of letters of credit, of which $5.8 million was issued and outstanding as of June 30, 2006.

The initial use of funds from the new credit facility were as follows: $198.7 million in partial payment toward the SI Acquisition purchase price, $105.2 million to repay the outstanding principal and interest amounts under the prior credit facility and $6.1 million in related transaction costs.

In April 2006, as required by the terms of the new credit facility, we used the estimated after-tax proceeds from the sale of our Roanoke, Alabama plant to repay the entire $50.0 million bridge loan and to repay $11.5 million of the $260.0 million term loan.

The prior credit agreement was entered into with a syndicate of lenders on December 1, 2004. The prior credit agreement provided for a $110.0 million senior term loan and a $65.0 million revolving line of credit, which had a $104.5 million balance outstanding on the term loan and no balance on the revolving line of credit as of the January 31, 2006 refinancing date. The credit facility also included a sublimit of $20.0 million for the issuance of letters of credit, of which $0.5 million was issued and outstanding as of the January 31, 2006 refinancing date.

10% Senior Notes due 2012

On December 1, 2004, we issued an aggregate of $150.0 million of 10% Senior Notes pursuant to an indenture among us, the subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. These notes will mature on December 1, 2012. Interest on these notes accrues at 10% per annum and is payable on June 1 and December 1 of each year. All of our domestic subsidiaries jointly and severally guarantee the 10% Senior Notes. We used the proceeds from the issuance of the 10% Senior Notes to finance a portion of the ~~acquisition~~BP Acquisition.

We may redeem the 10% Senior Notes at any time on or after December 1, 2008, at specified redemption prices. We are not required to make mandatory redemption or sinking fund payments with respect to the 10% Senior Notes. We will be required to offer to repurchase the 10% Senior Notes from holders if we undergo a change of control or sell our assets in specified circumstances.

The indenture governing the 10% Senior Notes restricts, among other things, our ability to pay dividends, redeem capital stock or prepay certain subordinated debt; incur additional debt or issue preferred stock; grant liens; merge, consolidate or transfer substantially all of our assets; enter into certain transactions with affiliates; impose restrictions on any subsidiary’s ability to pay dividends or transfer assets to us; enter into certain sale and leaseback transactions; and permit subsidiaries to guarantee debt.

Critical Accounting Policies

In preparing our financial statements in conformity with GAAP, management must make decisions that impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, our management evaluates its estimates, including those related to retirement benefits, allowance for doubtful accounts, impairment of long-lived assets, impairment of ~~goodwill~~intangibles, income taxes, litigation and contingencies. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes monitoring changes in critical accounting policies is important to the fair presentation of our financial condition and results orof operations because they can require management’s more significant judgments and estimates in the preparation of our consolidated financial statements. Information regarding our accounting policies and ~~combined~~estimates ~~financial~~that ~~statements~~we consider to be “critical” can be found in our annual report on Form 10-K for the year ended December 31, 2005. There have not been any significant changes in these policies or estimates since December 31, 2005.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK

We are exposed to various market risks such as fluctuating raw material costs, fluctuating interest rates and changes in foreign currency exchange rates. At ~~present~~As of June 30, 2006, we dodid not utilize any derivative instruments to manage these raw material pricing or foreign exchange risks. However, as discussed in greater detail below, we entered into an interest rate swap agreement to lock in the interest rate on at least 50% of our bank term loan and 10% Senior Notes due 2012 over the initial three years of the new Credit Agreement.

Raw material risk. The cost of our commodity raw materials is volatile and could have a significant impact on our profitability. In particular, our business requires the purchase of large volumes of polypropylene, a petroleum derivative. Increases in the cost of this raw material could materially adversely affect our business, results of operations and financial condition if we are unable to pass these increases through to our customers. ~~Prices of polypropylene increased in 2004 and again in the first quarter of 2005.~~ We believe we will be successful in increasing prices to pass along much of this increase in polypropylene costs consistent with historical experience; however, we may not be able to successfully recover such increases in cost.

InOur polypropylene is purchased from multiple suppliers. We believe ~~addition~~there are generally adequate sources of polypropylene; however, unanticipated termination or interruption of our arrangements with third-party suppliers of polypropylene could have a material adverse effect on us. ~~Polypropylene~~Extreme ~~resin~~weather isconditions such as the ~~principal~~2005 ~~raw~~hurricanes ~~material~~affecting ~~used~~the inU.S. ~~our~~Gulf ~~woven~~Coast ~~and~~can ~~non-woven fabrics.~~adversely ~~Our~~affect ~~polypropylene~~our isability ~~purchased~~to ~~from~~supply ~~multiple~~products ~~suppliers.~~to Weour ~~believe~~customers ~~there~~and ~~are~~negatively ~~generally~~impact ~~adequate~~the ~~sources~~availability of polypropylene, ~~however,~~for ancertain ~~unanticipated~~time ~~termination~~periods. orIn ~~interruption~~the ofpast, our ~~supply~~long-term ~~arrangements~~relationships ~~could~~with ~~adversely~~a broad ~~affect~~base ~~our~~of ~~ability~~suppliers ~~to supply~~has ~~products~~enabled us to obtain all our ~~customers~~needed ~~and~~polypropylene ~~could~~supply, ~~have~~even anduring ~~adverse~~the ~~impact~~aftermath onof the ~~business~~2005 U.S. WeGulf ~~have~~Coast ~~contracted~~hurricanes; ~~with~~however, ~~multiple~~there ~~suppliers~~may ofbe ~~polypropylene~~future ~~for~~situations upwhen we may not be able to ~~120%~~do ofso. We currently have established relationships with multiple polypropylene suppliers for all our expected raw material needs ~~through 2005~~, where most pricing is determined by ~~a combination~~monthly ofnegotiations ~~formulas~~about ~~based on~~ market ~~indices and monthly negotiated~~ pricing.

Currency translation. The results of operations of our foreign companies are translated into U.S. dollars at the average exchange rates for each period concerned. This translation has no impact on cash flow. ~~The~~ After re-measuring any non-local currency balances into the local functional currency, the balance sheets of our foreign companies are translated into U.S. dollars at the closing exchange rates. ~~Any~~Remeasured ~~adjustments~~or ~~resulting~~transactional ~~from~~foreign ~~the~~exchange ~~translation~~gains or losses are recorded asto other ~~comprehensive~~ income. ~~Foreign~~and ~~currency~~expense ~~exchange~~and ~~rate~~balance ~~exposure~~sheet istranslation ~~most significant~~adjustments ~~with~~are ~~respect~~recorded toas ~~the~~other ~~euro.~~comprehensive ~~For~~income ~~the~~or ~~first quarter of 2005, the U~~loss.S. ~~dollar weakened approximately 5% against the euro.~~

Currency transaction exposure. Currency transaction exposure arises where sales and purchases are made by a company in a currency other than its own functional currency. The majority of our companies ~~(except for Hungary)~~ source raw materials and sell their products within their local markets in their functional currencies and therefore have limited transaction exposure. Hungary sells most of its products in euros to the European market through its German affiliate. As a result, we do incur limited ~~transaction~~transactions exposure between the euro and the Hungarian forint.

~~Interest~~The ~~rate~~United ~~risk.~~Kingdom Welocation ~~have~~of ~~incurred~~SI aconcrete ~~significant~~purchases ~~amount~~raw ofmaterials ~~debt~~from ~~in connection with~~ the ~~acquisition,~~North ~~with~~America alocation ~~portion being at variable rates. Of our current and total long-term debt~~ of ~~$258.6~~SI ~~million~~concrete, ~~(including~~while ~~$150.0 million of~~ the ~~Notes~~North ~~and~~American ~~$108.6~~location ~~million~~ of ~~the~~SI ~~senior~~concrete ~~secured~~purchases ~~term~~steel ~~loan),~~from ~~$150.0~~SI ~~million~~concrete ~~bears~~in ~~interest at a fixed rate and~~ the ~~remaining debt bears~~United ~~interest at variable rates~~Kingdom. ASettlement ~~hypothetical 10.0% increase or decrease in the applicable interest rates as~~ of ~~March~~purchases ~~31,~~is ~~2005~~handled ~~would~~through ~~change~~intercompany ~~the~~accounts ~~quarterly~~and ~~cost~~not ofwith ~~financing~~payment ~~on our variable rate debt by $0.1 million. In addition, as~~ of ~~March 31, 2005, we had $5~~cash.7 ~~million of accrued interest.~~

3054

~~Seasonality~~Interest rate risk. We have incurred a significant amount of debt in connection with the BP and SI Acquisitions, with a significant portion being at variable rates. As required by our new Credit Agreement, on May 1, 2006, we entered into an interest rate swap agreement to lock in the interest rate on at least 50 percent of our bank term loan and 10% Senior Notes due 2012 over the initial three years of the new Credit Agreement. The notional amount of the interest rate swap equals $49.2 million on May 1 and gradually declines consistent with the Credit Agreement repayment schedule to be notional amount of $30.6 million in June 2009 when the swap contract expires. We have not applied hedge accounting treatment to the interest rate swap under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, but rather are recording all interest rate swap related income and expenses to interest expense in the Condensed Consolidated Statement of Operations as they occur. After taking into consideration our $61.5 million debt repayment on April 4, 2006 and the $47.7 million interest rate swap principal as of June 30, 2006 (discussed earlier), $197.7 million of our total $395.4 million indebtedness, or 50%, is subject to a variable interest rate.

WeA ~~have~~hypothetical ~~historically~~10.0% ~~experienced,~~increase ~~and~~or ~~expect~~decrease ~~to continue to experience, seasonal and quarterly fluctuations~~ in ~~net revenue and operating income. Homebuilding, civil engineering projects and~~ the ~~agricultural~~applicable ~~cycle~~interest ~~all~~rates ~~are~~as ~~subject~~of ~~to seasonal influences~~June 30, ~~characterized~~2006 bywould ~~strong~~change ~~sales for~~ the ~~spring~~quarterly ~~and~~cost ~~summer~~of ~~months.~~financing ~~Pre-season~~on ~~inventory builds along with strong sales during this period~~our ~~combine~~variable torate ~~favorably~~debt ~~impact~~by ~~the first and second quarter results~~$0.4 ~~In addition, our European operations typically experience lower third quarter sales due to the traditional late-summer holiday~~million.

~~Taxes~~Seasonality. We have historically experienced, and expect to continue to experience, seasonal and quarterly fluctuations in net revenue and operating income. Homebuilding, civil engineering projects and the agricultural cycle all are subject to seasonal influences, characterized by strong sales for the spring and summer months. Pre-season inventory builds along with strong sales during this period combine to favorably impact the first and second quarter results. In addition, our European operations typically experience lower third quarter sales due to the traditional late-summer holiday.

Taxes. We are subject to taxation in multiple jurisdictions throughout the world. Our effective tax rate and tax liability will be affected by a number of factors, such as the amount of taxable income in particular jurisdictions, the tax rates in such jurisdictions, tax treaties between jurisdictions, the extent to which we transfer funds between jurisdictions and ~~repatriate~~ repatriate income, ~~and~~ changes in law and the potential challenge of tax positions taken in our various tax filings.

Inflation. Inflation can affect the costs of goods and services we use. In the more mature economies in which we operate, from either a manufacturing or sales viewpoint, we have experienced relatively low price inflation in recent years. In more emerging economies, such as Hungary, we experience more moderate inflation, but in a lower cost environment.

Inflation can affect the costs of goods and services we use. In the more mature economies in which we operate, from either a manufacturing or sales viewpoint, we have experienced relatively low price inflation in recent years. In more emerging economies, such as Brazil and Hungary, we experience moderate inflation, but in a lower cost environment.

Litigation

From time to time, we are subject to lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental, health and safety, and employment matters. In addition, we may occasionally resort to litigation or make claims in order to enforce or protect our property and contract rights. Such litigation, claims, investigations and proceedings are handled and defended in the ordinary course of business. While no assurance can be given, the Company believes that, taking into account the indemnification by BP Amoco Chemical Holding Company, (as discussed in Note 9 to the condensed consolidated financial statements included elsewhere in this report) and our current insurance coverage, none of the litigation or legal proceedings in which the Company is currently involved could reasonably be expected to have a material adverse effect on our business, financial condition or results of operations.

Item 4. CONTROLS AND PROCEDURES

AsAn ofevaluation ~~March~~was ~~31,2005,~~performed ~~our management,~~ under the supervision and with the participation of ~~our~~the ~~Chief~~Company’s ~~Executive~~management, ~~Officer~~including the chief executive officer and ~~Chief~~the ~~Financial~~chief ~~Officer~~financial officer, ~~evaluated~~of the effectiveness of ~~our~~the Company’s disclosure controls and procedures (as defined in Rules 13a-15(de) and 15d-15(e) of the ~~Securities~~ Exchange Act) as of ~~1934,~~the asend ~~amended).~~of ~~Based~~the onperiod ~~that~~covered ~~evaluation,~~by ~~our~~this ~~Chief~~report. ~~Executive~~Based ~~Officer~~on ~~and~~such evaluation, the ~~Chief~~Company’s ~~Financial Officer~~management, ~~together~~including ~~with~~its ~~the~~chief ~~other~~executive ~~members~~officer ofand ~~management~~chief ~~participating~~financial ~~in the evaluation~~officer, concluded that ~~our~~the Company’s disclosure controls and procedures ~~are~~were effective inas ~~all~~of ~~material respects to ensure that information required to be disclosed in~~ the ~~reports~~date ~~that we file or submit under the Securities Exchange Act~~ of ~~1934, as amended, is recorded, processed, summarized, and reported within~~ the ~~time periods specified in the Securities and Exchange Commission’s rules and forms~~evaluation.

~~Section~~55 404 of the Sarbanes Oxley Act of 2002, and the rules and regulations thereunder, will require our management to furnish a report on our internal controls over financial reporting beginning with our annual report on Form 10-K for the year ending December 31, 2006. This internal control report will contain an assessment by our management of the effectiveness of controls and the significance of deficiencies. Management is working to complete all process documentation, controls definition and testing and remediation, if necessary, within the Sarbanes Oxley Act deadline.

ThereTable were no changes in our internal control over financial reporting that occurred during the first quarter of 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Contents

Separately, the Company has engaged specialized consultants to assist the Company in preparing for the requirements of Section 404 of the Sarbanes-Oxley Act. The Company will first be required to comply with such requirements in its Annual Report on Form 10-K for the fiscal year ending December 31, 2007.

Because of their inherent limitations, the Company’s disclosure controls and procedures and its internal control over financial reporting may not prevent or detect all misstatements. In designing and evaluating the Company’s internal control over financial reporting, management recognizes that any such controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives; management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Any evaluation of the effectiveness of the Company’s disclosure controls and procedures and internal control over financial reporting is subject to the risk that controls and procedures may become inadequate in the future as result of changes in the business environment in which we operate.

Note Regarding Forward-Looking Statements

This document contains forward-looking statements. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management, based on information currently available to management. Forward-looking statements are those that do not relate strictly to historical or current facts, and can be identified by the use of the future tense or other forward-looking words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “should,” “may,” “objective,” “projection,” “forecast,” “management believes,” “continue,” “strategy,” “position” or the negative of those terms or other variations of them or by comparable terminology. In particular, statements express or implied, concerning future actions, conditions or events, future operating results or the ability to generate sales, income or cash flow are forward-looking statements. Forward-looking statements include the information concerning possible or assumed future results of our operations set forth under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future actions, conditions or events and future results of operations may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results are beyond management’s ability to control or predict. Specific factors that could cause actual results to vary from those in the forward-looking statements include:

•

changes in the price of polypropylene resin, our primary raw material;

32• changes in levels of building construction and remodeling that affect the demand for carpet;

•

our reliance on a limited number of product lines;

• changes in ~~building~~the ~~construction~~structure ~~and~~of ~~remodeling~~the ~~that~~North ~~affect~~American ~~the~~carpet ~~demand~~backing ~~for~~industry ~~carpet~~as a result of back integration and domestic and foreign competition;

• our ~~reliance~~ability onto aacquire ~~small~~new ~~number~~businesses ofand ~~key~~assets, ~~customers~~and integrate those operations into our existing operations;

• our ~~reliance~~ability onto aachieve ~~relatively~~cost ~~small~~savings ~~number~~and ofrevenue ~~polypropylene~~growth ~~suppliers~~in acquired and existing operations;

• additional costs necessary to operate as a stand-alone entity;

•

changes in laws or regulations, third party relations and approvals and decisions of courts, regulators and governmental bodies that may adversely affect our business or the business of the customers we serve;

•

our ability to retain a skilled labor force;

•

economic, competitive and regulatory conditions and developments;

•

technological developments;

•

capital markets conditions;

•

inflation;

•

foreign currency exchange rates;

• ~~the~~interest ~~ability to achieve cost savings and revenue growth~~rates;

• ~~interest~~other ~~rates;~~factors affecting business plans, including the timing and success of business development efforts;

• ~~other~~our ~~factors~~ability ~~affecting~~to ~~business~~successfully ~~plans~~integrate the SI Acquisition, ~~including~~which ~~the~~occurred ~~timing~~on January 31, 2006, and ~~success~~to ofrealize ~~business~~the ~~development~~significant ~~efforts~~projected synergies related to the acquisition.

You are cautioned not to put undue reliance on any forward-looking statements, and we undertake no obligation to update those statements.

PART II

Item 1. LEGAL PROCEEDINGS

~~From time~~As topreviously ~~time~~disclosed, as of the end of the first quarter, SI Concrete Systems Corporation, one of the SI companies we ~~are~~acquired on January 31, 2006, was a ~~party~~named todefendant ~~litigation~~in ~~and~~three ~~legal~~pending ~~proceedings~~lawsuits ~~that~~filed wein ~~consider~~southern ~~generally~~California relating to beFibermesh® apolypropylene ~~part~~fibers, one of ~~the~~its ~~ordinary~~concrete ~~course~~fiber ofproduct ~~business~~lines. ~~While~~The Company nohas ~~assurance~~recently ~~can~~settled betwo ~~given,~~of wethe ~~believe~~three ~~that,~~pending ~~taking~~lawsuits. ~~into~~The ~~account~~settlement amounts do not have a material effect on the ~~indemnification~~Company’s byfinancial BPresults. ~~Amoco~~One pending lawsuit remains outstanding. The outstanding lawsuit alleges Fibermesh® ~~Chemical~~polypropylene ~~Holding~~fibers ~~Company,~~are asdefective ~~discussed~~when inused ~~Note~~as 9a tosubstitute ~~the~~for ~~condensed~~steel ~~consolidated~~wire ~~financial~~mesh ~~statement~~as ~~included~~a ~~elsewhere~~secondary reinforcement in ~~this~~concrete, ~~report~~ and ~~current~~that ~~insurance~~SI ~~coverage~~Concrete Systems Corporation, ~~none~~falsely ofrepresented its suitability for that use. Although the ~~litigation~~defense orcosts ~~legal~~for ~~proceedings~~the pending incase ~~which~~are partially covered by insurance; we are ~~currently~~responsible ~~involved~~for ~~could reasonably~~the bedifference ~~expected~~between the attorney’s standard billing rate and the lower rate agreed to by the insurers. At this time, we believe it is unlikely that resolution of this lawsuit will have a material ~~adverse~~ effect on our business, financial condition or results of operations.

We are subject to potential loss contingencies pursuant to various federal, state, and local environmental laws and regulations. These include possible obligations to remove or mitigate the effects of the environment of the placement, storage, disposal, or release of certain chemical or petroleum substances by us or other parties.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

Item 3. DEFAULTS UPON SENIOR SECURITIES

None

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

~~None~~In May 2006, Propex Fabrics Inc.’s shareholder approved the change of the Company’s name to Propex Inc. This name change became effective on June 13, 2006. A copy of the certificate of amendment is attached as Exhibit 3.3 to this Form 10-Q.

Item 5. OTHER INFORMATION

None

3458

Item 6. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ExhibitNumber	Description	~~Description~~
3.1	—Certificate of Ownership and Merger Merging Propex Fabrics Inc. into Amoco Fabrics and Fibers Company, filed with the Secretary of State of the State of Delaware on December 1, 2004 (filed as Exhibit 3.1 to Propex Fabrics Inc.’s Form S-4, Registration No. 333-122829, and incorporated herein by reference).	Certificate of Ownership and Merger Merging Propex Fabrics Inc. into Amoco Fabrics and Fibers Company, filed with the Secretary of State of the State of Delaware on December 1, 2004 (filed as Exhibit 3.1 to Propex Fabrics Inc.’s Form S-4, Registration No. 333-122829, and incorporated herin by reference).
3.2	—Amended Bylaws of Propex Fabrics Inc. (filed as Exhibit 3.2 to Propex Fabrics Inc.’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference).	~~Bylaws of Propex Fabrics Inc. (filed as Exhibit 3.2 to Propex Fabrics Inc.’s Form S-4, Registration No. 333-122829, and incorporated herein by reference).~~
4.1	—	Indenture, dated as of December 1, 2004, among Propex Fabrics Inc., the guarantors named therein and Wells Fargo Bank, N.A., as Trustee (filed as Exhibit 4.1 to Propex Fabrics Inc.’s Form S-4, Registration No. 333-122829, and incorporated herein by reference).
3.3	Certificate of Amendment, effective June 13, 2006, filed with the Delaware Secretary of State.
4.2	—	Form of 10% Senior Note due 2012 (contained in the Indenture filed as Exhibit 4.1 to Propex Fabrics Inc.’s Form S-4, Registration No. 333-12829, and incorporated herein by reference).
4.1	Indenture, dated as of December 1, 2004, among Propex Fabrics Inc., the guarantors named therein and Wells Fargo Bank, N.A., as Trustee (filed as Exhibit 4.1 to Propex Fabrics Inc.’s Form S-4, Registration No. 333-122829, and incorporated herein by reference).
10.1	—	Credit Agreement, dated as of December 1, 2004, among Propex Fabrics Inc., Amoco Fabrics and Fibers Company, the lenders named therein and BNP Paribas, as Administrative Agent (filed as Exhibit 10.1 to Propex Fabrics Inc.’s Form S-4, Registration No. 333-122829, and incorporated herein by reference).
4.2	Form of 10% Senior Notes due 2012 (contained in the Indenture filed as Exhibit 4.1 to Propex Fabrics Inc.’s Form S-4, Registration No. 333-12829, and incorporated herein by reference).
31.1	—	Certification of Chief Executive Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934.
4.3	First Supplemental Indenture, dated as of June 23, 2006, among Propex, Inc., and the guarantors names therein and Wells Fargo Bank, N.A. as Trustee.
31.2	—	Certification of Chief Financial Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934.
10.1	Separation Agreement and General Release, dated May 3, 2006, among Propex Fabrics Inc., Propex Fabrics Holdings Inc., and Philip D. Barnes (filed as Exhibit 10.1 to Propex Fabrics Inc.’s Form 8-K filed on May 8, 2006 and incorporated herein by reference).
32.1	—	Certification by the Chief Executive Officer and 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.
31.1	Certification of Chief Executive Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification by the Chief Executive Officer and 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.

3559

SIGNATURE

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

	PROPEX FABRICS INC.
Date: May 16, 2005	By:	/-s-/ PHILIP D. BARNES
		Philip D. Barnes Chief Financial Officer and Treasurer (Principal Financial Officer)


PROPEX INC.

By:		/s/ PHILIP D. BARNES
		Philip D. Barnes
		Vice President, Chief Financial Officer and Treasurer

36Date: August 14, 2006

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