UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended ~~April~~October 2928, 2006

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

Commission File Number ~~333~~000-~~88212~~22791

COLLINS & AIKMAN FLOORCOVERINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

58-2151061

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

311 Smith Industrial Boulevard

Dalton, Georgia 30721

(Address of principal executive offices)

(706) 259-9711

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer ¨ Accelerated filer ¨ Non-Accelerated filer x

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

The Registrant had 1,000 shares of Common Stock, par value $.01 per share, issued and outstanding as of ~~June~~December 98, 2006.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		~~Page~~	Page
Cautionary Statement Regarding Forward-Looking Statements
Part I.	Financial Information
	Item 1. Financial Statements
	Consolidated Statements of Financial Condition - As of April 29, 2006 and January 28, 2006	1
		Consolidated Balance Sheets - As of October 28, 2006 and January 28, 2006	1
	Consolidated Statements of Operations - Thirteen Weeks Ended April 29, 2006 and April 30, 2005	2
		Consolidated Statements of Operations - Thirteen Weeks and Thirty-nine Weeks Ended October 28, 2006 and October 29, 2005	2
	Consolidated Statement of Stockholder’s Equity - Thirteen Weeks Ended April 29, 2006	3
		Consolidated Statement of Stockholder's Equity - Thirty-nine Weeks Ended October 28, 2006	3
	Consolidated Statements of Cash Flows - Thirteen Weeks Ended April 29, 2006 and April 30, 2005	4
		Consolidated Statements of Cash Flows - Thirty-nine Weeks Ended October 28, 2006 and October 29, 2005	4
	~~Notes to Consolidated Financial Statements~~	5Notes to Consolidated Financial Statements	5
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		24
	Item 3. Quantitative and Qualitative Disclosures About Market Risk	29	33
	Item 4. Controls and Procedures	29	33
Part II.	Other Information
	Item 1. Legal Proceedings	30	33
	Item 6. Exhibits	30	34
Signature

Cautionary Statement Regarding Forward-Looking Statements

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED ~~STATEMENTS~~BALANCE OFSHEETS ~~FINANCIAL CONDITION~~

(In Thousands, Except Share Amounts)

	April 29,2006			January 28,2006
	October 28,2006			January 28,2006
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents	$	312,~~274~~272		$	5,803
Accounts Receivable, net of allowances of $647 and $579 in fiscal 2006 and 2005, respectively		48,196			46,691
Accounts Receivable, net of allowances of $677 and $579 in fiscal 2006 and 2005, respectively		44,233			46,691
Inventories		4745,~~956~~108			39,993
Deferred Tax Assets		63,~~304~~917			4,863
Prepaid Expenses and Other		43,~~294~~794			3,524
Total Current Assets		~~110~~109,~~024~~324			~~101~~100,~~564~~874
PROPERTY, PLANT AND EQUIPMENT, net		6765,~~959~~546			67,697
GOODWILL		98,378			98,378
OTHER INTANGIBLE ASSETS, net		2826,~~036~~808			28,650
OTHER ASSETS		65,~~573~~912			6,929
TOTAL ASSETS	$	~~310~~305,~~970~~968		$	302,528
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts Payable	$	2114,~~217~~719		$	16,803
Accrued Expenses		2024,~~860~~322			25,148
Current Portion of Long-term Debt		1415,~~212~~969			4,648
Total Current Liabilities		5655,~~289~~010			46,599
OTHER LIABILITIES, including post-retirement benefit obligation		5,~~195~~556			5,364
DEFERRED TAX LIABILITIES		46,~~890~~502			4,441
LONG-TERM DEBT, net of current portion		~~197~~182,~~594~~382			197,673
COMMITMENTS AND CONTINGENCIES (Note 14)
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDER’S EQUITY:
Common stock ($0.01 par value per share, 1,000 shares authorized, issued and outstanding in fiscal 2006 and fiscal 2005)		—			—
Paid-in Capital		72,648			72,648
Retained Deficit		(2414,~~049~~508	)		(22,435	)
Accumulated other comprehensive loss:
Foreign currency translation adjustment, net of tax		(388	)		(553	)
Loss on cash flow hedges		(11	)		—
Minimum pension liability adjustment, net of tax		(1,209	)		(1,209	)
Foreign currency translation adjustment		(402	)		(553	)
Total Stockholder’s equity		47,002			48,451
Minimum pension liability adjustment		(1,209	)		(1,209	)
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	310,970		$	302,528
Total Stockholder’s equity		56,518			48,451
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	305,968		$	302,528

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited And In Thousands)

	Thirteen Weeks Ended							Thirty-nine Weeks Ended
	April 29,2006				April 30,2005
	October 28,2006			October 29,2005				October 28,2006		October 29,2005
Net Sales	$	8085,~~723~~623		$	$81,746	~~68,314~~		$	274,415	$	245,134
Cost of Goods Sold		56,~~088~~676			58,822	~~49,318~~			182,161		171,832
Selling, General & Administrative Expenses		2019,~~773~~142			20,529	~~20,134~~			60,799		60,473
Amortization		~~614~~613			614	~~778~~			1,842		2,006
Operating Expenses		7776,~~475~~431			79,965	~~70,230~~			244,802		234,311
Operating Income (Loss)		3,248				(1,916	)
Operating Income		9,192			1,781				29,613		10,823
Minority Interest in Loss of Subsidiary		—				10
Minority Interest in (Income) Loss of Subsidiary		—			(15	)			—		24
Gain (Loss) on Sale of Fixed Assets		29				(117	)
Net Loss on Sale of Fixed Assets		55			31				88		125
Net Interest Expense		5,~~729~~002			5,357	~~5,076~~			15,913		15,350
Loss Before Income Taxes		(2,452	)			(7,099	)
Income (Loss) Before Income Taxes		4,135			(3,622	)			13,612		(4,628	)
Income Tax Benefit		(838	)			(1,316	)
Income Tax Expense		1,600			198				5,685		601
Net Loss	$	(1,614	)		$	(5,783	)
Net Income (Loss)	$	2,535		$	(3,820	)		$	7,927	$	(5,229	)

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

FOR THE ~~THIRTEEN~~THIRTY-NINE WEEKS ENDED ~~APRIL~~OCTOBER 2928, 2006

(Unaudited And In Thousands, Except Share Amounts)

							Accumulated OtherComprehensive Income (Loss)
							Accumulated Other Comprehensive Income (Loss)
	Common Stock(Shares)	Paid-inCapital		Retained Deficit			Foreign CurrencyTranslationAdjustment			MinimumPension LiabilityAdjustment			Total
	CommonStock (Shares)	Paid-inCapital		Retained Deficit			Loss on CashFlow Hedges			Foreign CurrencyTranslation Adjustment			MinimumPension Liability			Total
BALANCE, January 28, 2006	1,000	$	72,648	$	(22,435	)	$	~~(553~~—	)	$	(~~1,209~~553	)	$	48(1,~~451~~209	)	$	48,451
Net loss	—		—		(1,614	)		—			—			(1,614	)
Net income	—		—		7,927			—			—			—			7,927
Change in foreign currency translation adjustment, net of tax	—		—		—			165			—			165
Change in loss on cash flow hedges, net of tax	—		—		—			(11	)		—			—			(11	)
Total comprehensive loss														(1,449	)
Change in foreign currency translation adjustment, net of tax	—		—		—			—			151			—			151
BALANCE, April 29, 2006	1,000	$	72,648	$	(24,049	)	$	(388	)	$	(1,209	)	$	47,002
Total Comprehensive Income																	8,067
BALANCE, October 28, 2006	1,000	$	72,648	$	(14,508	)	$	(11	)	$	(402	)	$	(1,209	)	$	56,518

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited And In Thousands)

	Thirteen Weeks Ended
	Thirty-nine Weeks Ended
	April 29,2006			April 30,2005
	October 28,2006			October 29,2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,614	)	$	(5,783	)
Net income (loss)	$	7,927		$	(5,229	)
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and leasehold amortization		28,~~739~~453			27,~~564~~567
Amortization of intangible assets		~~614~~1,842			~~778~~2,006
Amortization and write-off of deferred financing fees		302			415
Amortization of deferred financing fees		905			1,259
Change in deferred income tax		~~(952~~3,077	)		~~975~~1,487
Minority interest in loss of subsidiary		—			(1024	)
(Gain) loss on sale of fixed assets		(29	)		117
Loss on disposal of fixed assets		88			125
Changes in operating assets and liabilities:
Accounts receivable		(12,~~505~~458	)		5(1,~~303~~652	)
Inventories		(75,~~963~~115	)		(95,~~195~~279	)
Accounts payable		4(2,~~414~~084	)		~~5,198~~(835	)
Accrued expenses		(~~4,288~~826	)		(118,~~723~~800	)
Other, net		(~~1,067~~67	)		(~~2,491~~469	)
Total adjustments		(78,~~735~~731	)		(84,~~069~~615	)
Net cash used in operating activities		(9,349	)		(13,852	)
Net cash provided by (used in) operating activities		16,658			(9,844	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposition of property, plant and equipment		3237			~~128~~172
Additions to property, plant and equipment		(2,570	)		(3,832	)
Additions to property, plant, and equipment		(6,229	)		(9,769	)
Net cash used in investing activities		(26,~~538~~192	)		(39,~~704~~597	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities		1121,~~520~~815			—18,960
Repayments of revolving credit facilities		(225,~~080~~457	)		—(8,888	)
Proceeds from issuance of long-term debt		—			~~448~~749
Repayments of long-term debt		(~~118~~400	)		(~~141~~260	)
Financing costs		—			(97	)
Net cash provided by financing activities		9,322			210
Net cash provided by (used in) financing activities		(4,042	)		10,464
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS		3645			~~119~~(117	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(26,~~529~~469	)		(179,~~227~~094	)
CASH AND CASH EQUIVALENTS, Beginning of Period		5,803			25,726
CASH AND CASH EQUIVALENTS, End of Period	$	312,~~274~~272		$	816,~~499~~632

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS

(Unaudited)

1. Organization

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

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

2. General and Critical Accounting Policies

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

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

Revenue Recognition. Revenue is recognized when goods are shipped, which is when legal title passes to the customer. For product installations subject to customer approval, revenue is recognized upon acceptance by the customer. The Company provides certain installation services to customers utilizing independent third-party contractors. The billings and expenses for these services are included in net sales and cost of goods sold, respectively. These billings and expenses were $313.24 million and $210.6 million for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively, and $5.8 million and $4.7 million for the thirteen weeks ended ~~April~~October 2928, 2006 and ~~April~~October 3029, 2005, respectively. Freight charged to customers is included in net sales. Freight fees included in net sales were $14.67 million and $14.1 million for the ~~thirteen~~thirty-nine weeks ended ~~April~~October 2928, 2006 and ~~April~~October 3029, 2005, respectively, and $1.5 million for each of the thirteen weeks ended October 28, 2006 and October 29, 2005.

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

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

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

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

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

Net foreign currency gains recognized in the consolidated statements of operations were approximately $0.25 million and $0.1 million for the ~~thirteen~~thirty-nine weeks ended ~~April~~October 2928, 2006 and October 29, 2005, respectively. The Company recognized ~~incurred~~net ~~minimal~~foreign ~~net~~currency gains of $0.2 million for the thirteen-week period ending October 28, 2006 and there was minimal foreign currency ~~losses~~loss for the thirteen-week ~~weeks~~period ended ~~April~~October 3029, 2005.

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

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

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

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

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

~~Income~~Derivative ~~Taxes.~~Financial ~~The provision for income taxes includes federal, state, local and foreign taxes~~Instruments. The Company ~~accounts~~recognizes ~~for~~its ~~income~~derivative ~~taxes~~instruments ~~under an~~in ~~asset~~the ~~and~~consolidated ~~liability~~balance ~~approach~~sheet ~~pursuant~~and tomeasures ~~Statement~~those ofinstruments ~~Financial~~at ~~Accounting Standards No~~fair value. ~~109,~~ ~~“Accounting~~The ~~for~~accounting ~~Income Taxes” (“SFAS No. 109”). This method requires the recognition of deferred tax assets and liabilities~~ for ~~the~~changes ~~expected future tax consequences of events that have been recognized~~ in the ~~Company’s~~fair ~~financial~~value ~~statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments~~ of ~~changes~~a inderivative ~~tax~~depends ~~laws~~on orwhether ~~rates.~~it ~~The~~has ~~effect~~been ondesignated ~~deferred tax assets~~ and ~~liabilities~~qualifies ~~of changes in tax rates will be recognized~~ as ~~income~~part orof ~~expense~~a inhedging ~~the~~relationship, ~~period~~and ~~that~~further, ~~includes~~on the ~~enactment~~type ~~date. Future tax benefits are recognized to the extent that realization~~ of ~~those~~hedging ~~benefits is considered to be more likely than not~~relationship. ATo ~~valuation~~qualify ~~allowance~~as isa ~~established~~hedging ~~for~~instrument, ~~deferred tax assets for which realization is not assured.~~ a

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

derivative must pass prescribed effectiveness tests. For those derivatives that are designated and qualify as hedging instruments, the derivative is designated, based upon the exposure being hedged, as either a fair value, cash flow or foreign currency exposure hedge. For a derivative not designated as a hedging instrument, the change in fair value is recognized in earnings during the period of change.

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

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

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

3. Inventories

Net inventory balances are summarized below (in thousands):

	April 29,2006		January 28,2006
	October 28,2006		January 28,2006
	(Unaudited)
Raw materials	$	21,463	$	17,427
Raw materials	$	22,575	$	17,427
Work in process		6,804		6,296
Work in process		7,607		6,296
Finished goods		16,841		16,270
Finished goods		17,774		16,270
	$	45,108	$	39,993
	$	47,956	$	39,993

4. Goodwill and Other Intangible Assets

The gross carrying amount and accumulated amortization of the intangible asset patent that is subject to amortization as of ~~April~~October 2928, 2006 and January 28, 2006 are as follows (in thousands):

	April 29, 2006
	October 28,2006				January 28,2006
	Gross CarryingAmount			AccumulatedAmortization
Patent:
Amortized Intangible Asset:
Gross Carrying Amount	$	27,000			$	27,000
Patent	$	27,000		$	(22,704	)
Accumulated Amortization		(23,932	)			(22,090	)
Total	$	27,000		$	(22,704	)
	$	3,068			$	4,910

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

The Company has an unamortized intangible asset with an indefinite life, other than goodwill. The carrying amount of the trade name was $23~~,613~~.6 million as of ~~April~~ October 2928, 2006. The Company also has an unamortized intangible asset related to its defined benefit plans in the amount of $~~127~~0.1 million as of ~~April~~October 2928, 2006. During the thirteen and thirty-nine week periods ended October 28, 2006, there were no changes to the carrying values of these intangible assets.

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

	Thirteen Weeks Ended
	April 29,2006		April 30,2005
Aggregate amortization expense	$	614	$	778
Estimated amortization expense:
Fiscal 2006		2,455
Fiscal 2007		2,455
Fiscal 2008		—
Fiscal 2009		—
Fiscal 2010		—

During the period ended April 29, 2006, there were no changes to the carrying value of goodwill.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

5.Actual ~~Accrued~~and ~~Expenses~~estimated amortization expense is as follows (in thousands):


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	October 28, 2006		October 29, 2005		October 28, 2006		October 29, 2005
Aggregate amortization expense	$	613	$	614	$	1,842	$	2,006

Estimated annual amortization expense:
Fiscal 2006	$	2,455
Fiscal 2007		2,455
Fiscal 2008		—
Fiscal 2009		—
Fiscal 2010		—

During the thirteen and thirty-nine week periods ended October 28, 2006, there were no changes to the carrying value of goodwill.

5. Derivative Instruments

During the second and third quarters of 2006, the Company entered into futures contracts to hedge its expected natural gas consumption for certain domestic facilities. The contracts are accounted for as cash flow hedges. During the thirteen weeks and thirty-nine weeks ended October 28, 2006, the Company recognized nominal losses in other comprehensive income. The notional amount of derivatives outstanding was $0.1 million at October 28, 2006.

6. Accrued Expenses

Accrued expenses are summarized below (in thousands):

	April 29,2006		January 28,2006
	October 28,2006		January 28,2006
	(Unaudited)
Payroll and employee benefits	$	8,141	$	6,495
Payroll and employee benefits	$	5,631	$	6,495
Customer claims		2,936		1,798
Customer claims		2,292		1,798
Accrued interest		3,889		7,796
Accrued interest		3,896		7,796
Accrued professional fees		5,968		3,323
Accrued professional fees		5,435		3,323
Other		3,388		5,736
Other		3,606		5,774
	$	24,322	$	25,148
	$	20,860	$	25,186

67. Stock-Based Compensation

Effective January 29, 2006, the Company adopted the fair value recognition provision of Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”), using the prospective transition method. This method allows the application of the provisions of SFAS No. 123(R) to share-based awards granted subsequent to adoption. For stock-based compensation effected prior to January 28, 2006, the Company applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). There were no grants of stock-based compensation during the ~~thirteen~~thirty-nine weeks ended ~~April~~October 2928, 2006.

In August 2001, Tandus adopted the 2001 Tandus Group, Inc., Executive and Management Stock Option Plan (the “2001 Plan”) under which 57,061.64 shares of Tandus Group, Inc. common stock were authorized and reserved for use in the 2001 Plan. The 2001 Plan allows the issuance of non-qualified stock options at an exercise price determined by Tandus’ board of directors. The options granted under the 2001 Plan become exercisable over five years and expire ten years from the date of grant. These options vest only upon the achievement of certain earnings targets, as defined. Accelerated vesting could occur due to a change in control. The Company will account for these options as variable options and will record expenses based on increases and decreases in the fair market value of the Company’s common stock at the end of each reporting period. As of April 29, 2006, the Company has not recorded any expense as the Company has not achieved the targets established under the program and all options granted under the 2001 Plan had an exercise price equal to the market value of the underlying common stock on the date of grant of $35.70. During the thirteen weeks ended April 29, 2006, 171 options were canceled, leaving 33,838 options outstanding as of April 29, 2006. At April 29, 2006, no shares are exercisable and the weighted average contractual life of the options outstanding is 5.25 years.

7. Recent Accounting Pronouncements

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

~~operating~~market ~~leases~~value ~~that~~of ~~are~~the ~~incurred~~Company’s ~~during~~common astock ~~construction~~at the end of each reporting period. ~~should~~As beof October 28, ~~recognized~~2006, asthe ~~rental~~Company has not recorded any expense ~~and included~~as inthe ~~income~~Company ~~from~~has ~~continuing~~not ~~operations.~~achieved ~~The~~the ~~guidance~~targets isestablished tounder bethe ~~applied~~program toand all options granted under the ~~first~~2001 ~~reporting~~Plan ~~period~~had ~~beginning~~an ~~after~~exercise ~~December 15,~~price ~~2005.~~equal ~~The~~to ~~Company~~the ~~adopted~~market value of the ~~provisions~~underlying common stock on the date of ~~FSP~~grant 13of $35.70. During the thirteen-weeks and thirty-nine weeks ended October 28, 2006, 756 and 1,797 ~~effective~~options ~~January~~were canceled leaving 32,440 options outstanding as of October 2928, 2006. ~~The~~At ~~adoption~~October 28, ~~did not~~2006, ~~have~~no ashares ~~material~~were ~~impact~~exercisable onand the ~~Company’s~~weighted ~~consolidated~~average ~~financial~~contractual ~~statements~~life of the options outstanding was 4.75 years.

8. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS No. 157 will not have a material effect on the Company’s financial position or results of operations.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income. In addition, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end. The provisions of SFAS No. 158 are effective for employers without publicly traded equity securities as of the end of the fiscal year ending after June 15, 2007. The effect of the adoption of SFAS No. 158 on the Company’s financial position is not expected to be material and the adoption will have no effect on the Company’s results of operations.

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

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

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

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

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

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

InFinancial ~~December 2004, the FASB issued SFAS No~~Statements. ~~123(R), “Share-Based Payment~~” (“SFAS No. ~~123(R)”).~~154 ~~This~~requires ~~statement~~retrospective isapplication ~~a revision~~ to ~~Statement~~prior ofperiods’ ~~Financial~~financial ~~Accounting~~statements ~~Standards No. 123 and supersedes Accounting Principles Board Opinion No. 25. This statement establishes standards~~ for ~~the~~changes ~~accounting for transactions~~ in ~~which an entity exchanges its equity instruments for goods or services, primarily focusing on the~~ accounting ~~for transactions in which an entity obtains employee services in~~ ~~share-based~~principle, ~~payment~~unless ~~transactions.~~it ~~Companies~~is ~~are~~impracticable ~~required~~ to ~~measure~~determine either the ~~cost~~period-specific ofeffects ~~employee~~or ~~services received in exchange for an award of equity instruments based on~~ the ~~grant-date~~cumulative ~~fair~~effect ~~value~~ of the ~~award~~change. ~~(with~~SFAS ~~limited exceptions)~~No. 154 ~~That~~also ~~cost~~requires ~~is recognized~~that ~~over~~a ~~the~~change ~~period~~in ~~during which an employee is required to provide service~~depreciation, ~~the~~amortization ~~requisite~~or ~~service~~depletion ~~period~~method ~~(usually the vesting period), in exchange~~ for ~~the award. The grant~~long-~~date fair value of employee share options and similar instruments~~lived, ~~will be estimated using option~~non-~~pricing~~financial ~~models.~~assets Ifbe anaccounted ~~equity~~for ~~award~~as isa ~~modified~~change ~~after~~in ~~the~~accounting ~~grant~~estimate ~~date,~~effected ~~incremental~~by ~~compensation~~a ~~cost~~change ~~is recognized~~ in anaccounting ~~amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification~~principle. SFAS No. ~~123(R)~~154 is effective for ~~fiscal~~accounting ~~years~~changes ~~beginning after June 15, 2005, due to the Securities~~ and ~~Exchange~~corrections ~~Commission’s~~of ~~Rule~~errors ~~2005-57,~~made ~~which~~in ~~amended~~fiscal ~~the~~years ~~initial~~beginning ~~effective date of~~after ~~SFAS No.~~December ~~123(R). The Company adopted the provisions of SFAS No. 123(R) effective January 29~~15, ~~2006~~2005. ~~The adoption did not have a material impact on the Company’s consolidated financial statements.~~

The Company adopted the provisions of SFAS No. 154 effective January 29, 2006. The adoption did not have a material impact on the Company’s consolidated financial statements.

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

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

910

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

“Inventory Pricing” (“ARB No. 43”), to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight and re-handling costs be recognized as as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The Company adopted the provisions of SFAS No. 151 effective January 29, 2006. The adoption did not have a material impact on the Company’s consolidated financial statements.

89. Employee Benefit Plans

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

~~employees,~~Net ~~which~~periodic ~~was~~pension ~~frozen~~expense ~~during~~for ~~fiscal 2002. Accordingly, no new benefits are being accrued under~~ the ~~U.S.~~thirteen ~~Plan.~~weeks ~~Participant~~and ~~accounts~~thirty-nine ~~are~~weeks ~~credited with interest at the federally mandated rates. Company contributions are based on~~ended computations by independent actuaries, although the Company may decide to make additional contributions to the U.S. Plan beyond minimum funding requirements as is deemed appropriate by management. The U.S. Plan was funded as of January October 28, 2006 ~~such that~~and ~~no minimum contribution is required in the 2006 plan year. U.S. Plan assets at April~~October 29, ~~2006~~2005 ~~and~~was ~~January 28,~~comprised ~~2006~~of ~~were~~the ~~invested~~following ~~primarily~~components (in ~~equity~~thousands): ~~and fixed income debt securities.~~

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


	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	October 28, 2006			October 29, 2005			October 28, 2006			October 29, 2005
Interest cost on projected benefit obligations	$	57		$	57		$	176		$	177
Expected return on plan assets		(80	)		(77	)		(243	)		(243	)
Recognized net actuarial losses		28			32			82			94
Settlement losses		23			32			110			145

Net periodic pension expense	$	28		$	44		$	125		$	173

	Thirteen Weeks Ended
	April 29,2006			April 30,2005
Interest cost on projected benefit obligations	$	58		$	60
Expected return on plan assets		(79	)		(83	)
Recognized net actuarial losses		27			31
Settlement losses		58			—
Net periodic pension expense	$	64		$	8

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

Net periodic pension expense for the thirteen weeks and thirty-nine weeks ended ~~April~~October 2928, 2006 and ~~April~~October 3029, 2005 was comprised of the following components (in thousands):

	Thirteen Weeks Ended						Thirty-nine Weeks Ended
	April 29,2006			April 30,2005
	October 28,2006			October 29,2005			October 28,2006			October 29,2005
Service cost—benefits earned during the period	$	~~323~~318		$	~~263~~262		$	891		$	787
Interest cost on projected benefit obligations		~~148~~141			116			404			347
Expected return on plan assets		(~~180~~173	)		(~~134~~133	)		(492	)		(400	)
Net periodic pension expense	$	291		$	245
Recognized net actuarial losses		9			—			20			2
Net periodic pension expense	$	295		$	245		$	823		$	736

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

1011

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

Net periodic post-retirement benefits expense for the thirteen weeks ~~ended~~and ~~April~~thirty-nine weeks ended October 2928, 2006 and ~~April~~ October 3029, 2005 was comprised of the following components (in thousands):

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	April 29,2006		April 30,2005
	October 28,2006		October 29,2005		October 28,2006		October 29,2005
Service cost—benefits earned during the period	$	4439	$	4939	$	132	$	130
Interest cost on projected benefit obligations		3229		3730		95		92
Net periodic post-retirement benefits expense	$	76	$	86
Curtailment gain		—		—		—		(77	)
Net periodic post-retirement benefits expense	$	68	$	69	$	227	$	145

910. Facility Maximization Project

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

During fiscal 2005, the Company incurred costs associated with the Facility Maximization, which ~~consist~~consisted of temporary production inefficiencies, equipment movement and installation costs, professional fees, severance and other related costs. During the ~~first~~thirteen ~~quarter~~weeks ofand ~~fiscal~~thirty-nine weeks ended October 29, 2005, cost of goods sold included $20.78 million and $5.8 million, respectively, and selling, general and administrative expenses included $01.41 million ofand ~~these~~$1.9 ~~expenses~~million, inrespectively, ~~the accompanying consolidated statements~~ of ~~operations.~~these ~~The accrued Facility Maximization costs included in accrued~~ expenses in the accompanying consolidated statements of ~~financial condition amounted to $0~~operations.3 ~~million as of April 30, 2005. There were nominal costs accrued as of April 29, 2006.~~

1011. Long-Term Debt

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

	April 29,2006		January 28,2006
	October 28,2006		January 28,2006
	(Unaudited)
10% Senior Subordinated Notes, due 2006	$	250	$	250
9.75% Senior Subordinated Notes, due 2010		165,000		165,000
Senior Secured Credit Facility		30,~~518~~358		30,598
Sinking Fund Bonds		1,~~364~~141		1,335
Canadian Revolving Line of Credit		~~4,178~~—		3,642
U.S. Revolving Line of Credit		9,000		—
Other Debt		1,602		1,496
Other Debt		1,496		1,496
Total Debt		198,351		202,321
Total Debt		211,806		202,321
Less Current Maturities		15,969		4,648
Less Current Maturities		14,212		4,648
	$	182,382	$	197,673
	$	197,594	$	197,673

As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting of the remaining $1.41 million of Crossley’s outstanding sinking fund bonds over the next ~~five~~four years. The forgiveness will commence during the fourth quarter of fiscal 2006, will be over the remaining ~~five~~four- year term of the current note, and is based upon maintaining a defined level of full-time equivalent employees during the year, of which requirement the Company is in full compliance as of ~~April~~October 2928, 2006. The debt ~~will~~is ~~also be~~ non-interest bearing.

11Net interest expense was $5.0 million and $5.4 million for the thirteen week periods ended October 28, 2006 and October 29, 2005, respectively, which included nominal interest income. Net interest expense was $15.9 million and $15.4 million for the thirty-nine week periods ended October 28, 2006 and October 29, 2005, respectively, which included $0.2 million of interest income in each period. Net interest expense for the thirty-nine weeks ended October 28, 2006 includes $0.7 million related to a certain litigation verdict. See Note 15 “Commitments and Contingencies” for further discussion.

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

~~Net interest expense was $5~~12.7 ~~million~~Income ~~and~~Taxes $5.1 million for the thirteen week periods ended April 29, 2006 and April 30, 2005, respectively, which included nominal interest income. Net interest expense for the thirteen weeks ended April 29, 2006 includes $0.7 million related to a certain litigation verdict. See Note 14 “Commitments and Contingencies” for further discussion.

11The Company had income tax expense of $1.6 ~~Income~~million ~~Taxes~~and $5.7 million for the thirteen weeks and thirty-nine weeks ended October 28, 2006, respectively, compared to $0.2 million and $0.6 million for the thirteen weeks and thirty-nine weeks ended October 29, 2005, respectively.

~~The Company had an income tax benefit of $0~~13.7 ~~million~~Comprehensive ~~for~~Income the thirteen weeks ended April 29, 2006 compared to $1.3 million for the thirteen weeks ended April 30, 2005. During the first quarters of fiscal 2006 and fiscal 2005, the Company incurred net losses in its domestic operations against which tax benefits were recorded. Additional losses were incurred in its foreign operations, against which no tax benefit was recognized.

~~12.~~ Comprehensive ~~Loss~~income (loss) is as follows (in thousands):

Comprehensive loss is as follows (in thousands):


	Thirteen Weeks Ended					Thirty-nine Weeks Ended
	October 28, 2006		October 29, 2005			October 28, 2006		October 29, 2005
Net Income (Loss)	$	2,535	$	(3,820	)	$	7,927	$	(5,229	)
Other Comprehensive Income (Loss):
Foreign currency translation adjustments, net of tax		80		(333	)		151		1,079
Loss on cash flow hedges, net of tax		32		—			11		—

Total Comprehensive Income (Loss)	$	2,583	$	(4,153	)	$	8,067	$	(4,150	)

	Thirteen Weeks Ended
	April 29,2006			April 30,2005
Net Loss	$	(1,614	)	$	(5,783	)
Other Comprehensive Income:
Foreign currency translation adjustments, net of tax		165			501
Total Comprehensive Loss	$	(1,449	)	$	(5,282	)

14. Segment Information

13The Company has adopted Statement of Financial Accounting Standards No. 131, ~~Segment~~“Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). This statement addresses reporting of operating segment information and disclosures about products, services, geographic areas and major customers. Management has reviewed the requirements of SFAS No. 131 concluding that the Company operates its business as two reportable segments: Floorcoverings and Extrusion.

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

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

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

No single customer represented 10% or more of the Floorcoverings segment’s sales for any period presented in the accompanying financial statements. InThe ~~the~~ Extrusion segment,’s ~~the~~largest ~~Company~~customer ~~had~~accounted ~~two~~for 14.7% and ~~three customers~~17.6% ~~that~~of ~~represented~~sales ~~more~~and ~~than~~its 10second largest customer accounted for 18.0% ofand ~~the~~17.4% ~~segment’s~~of sales ~~during~~in the thirteen weeks ~~ended~~and ~~April 29,~~thirty-nine ~~2006~~weeks ~~and~~ended ~~April~~October 3028, ~~2005~~2006, respectively. ~~Sales~~This tosegment’s ~~these~~third ~~customers~~largest ~~represented~~customer accounted for 11.98% and 10 9.4%, ~~respectively,~~of ~~for~~sales in the thirteen weeks and thirty-nine weeks ended ~~April~~October 2928, 2006, respectively. ~~Sales~~No toother ~~these~~ customers represented ~~16.2%, 13.3% and~~ 10.40%, ~~respectively,~~or ~~for~~more ~~the~~of ~~thirteen~~this ~~weeks~~segment’s ~~ended April 30, 2005~~sales.

12The tables below provide certain unaudited financial information by segment (in thousands):


	October 28, 2006		January 28, 2006
Consolidated Assets:
Floorcoverings	$	282,958	$	276,350
Extrusion		23,010		26,178

Total Consolidated Assets	$	305,968	$	302,528

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

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


	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	October 28, 2006		October 29, 2005		October 28, 2006		October 29, 2005
Net Sales to External Customers:
Floorcoverings	$	80,207	$	75,319	$	254,257	$	225,678
Extrusion		5,416		6,427		20,158		19,456

Total Sales to External Customers	$	85,623	$	81,746	$	274,415	$	245,134

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	April 29,2006		April 30,2005
	October 28,2006		October 29,2005		October 28,2006		October 29,2005
Net Sales to External Customers:
Adjusted EBITDA:
Floorcoverings	$	7311,~~140~~220	$	625,~~115~~681	$	34,277	$	24,606
Extrusion		71,~~583~~370		61,~~199~~111		5,664		3,481
Total Sales to External Customers	$	80,723	$	68,314
Total Adjusted EBITDA	$	12,590	$	6,792	$	39,941	$	28,087
	Thirteen Weeks Ended
	April 29,2006		April 30,2005
Adjusted EBITDA:
Floorcoverings	$	4,618	$	3,339
Extrusion		2,015		1,255
Total Adjusted EBITDA	$	6,633	$	4,594
	April 29,2006		January 28,2006
	(Unaudited)
Consolidated Assets:
Floorcoverings	$	286,506	$	276,350
Extrusion		24,464		26,178
Total Consolidated Assets	$	310,970	$	302,528

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

	Thirteen Weeks Ended							Thirty-nine Weeks Ended
	April 29,2006				April 30,2005
	October 28,2006			October 29,2005				October 28,2006		October 29,2005
Reconciliation of Net Loss to Adjusted EBITDA:
Reconciliation of Net Income (Loss) to Adjusted EBITDA:
Net loss	$	(1,614	)		$	(5,783	)
Net income (loss)	$	2,535		$	(3,820	)		$	7,927	$	(5,229	)
Income tax benefit		(838	)			(1,316	)
Income tax expense		1,600			198				5,685		601
Net interest expense		5,~~729~~002			5,357	~~5,076~~			15,913		15,350
Depreciation		2,~~739~~784			2,532	~~2,564~~			8,453		7,567
Amortization		~~614~~613			614	~~778~~			1,842		2,006
Minority interest in loss of subsidiary		—				(10	)
Minority interest in income (loss) of subsidiary		—			15				—		(24	)
Facility maximization costs		—			1,865	~~3,168~~			—		7,691
Loss on sale of fixed assets		3				117
Loss on disposal of fixed assets		56			31				121		125
Adjusted EBITDA	$	612,~~633~~590		$	$6,792	~~4,594~~		$	39,941	$	28,087

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

1315. Commitments and Contingencies

During the second and third quarters of fiscal 2006, the Company entered into agreements to fix the price of natural gas. The agreements state that the Company is fixed on set amounts of natural gas from August 2006 to December 2006, ranging from 4,000 to 7,000 MMBtu per month, at a fixed, predetermined rate. See Note 5 “Derivative Instruments” for further discussion.

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

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

14Because the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, the Company filed a Notice of Appeal on August 17, 2006. ~~Commitments~~The Company intends to vigorously prosecute its appeal of the jury verdict and ~~Contingencies~~the award of attorneys’ fees and prejudgment interest. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability of approximately $2,010,000 related to this case in its accompanying statements of financial condition.

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

Should the Company’s motion to overturn the jury verdict and award of interest and attorneys’ fees not be granted, the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, and the Company intends to vigorously prosecute an appeal of the jury verdict and the award of attorneys’ fees and prejudgment interest granted by the Appellate Court. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability of approximately $2,010,000 related to this case in its accompanying statements of financial condition.

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

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

1516. Seasonality

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

1417. Subsequent Events

~~Table~~Effective November 30, 2006, the “Executive Employment Period” (as defined in the Employment and Separation Agreement dated August 31, 2006 between the Company, its parent, Tandus Group, Inc., and Edgar M. Bridger (the “Agreement”)) of ~~Contents~~the “Employment Period” (as defined in the Agreement) ceased.

~~COLLINS~~On &December 4, ~~AIKMAN~~2006, ~~FLOORCOVERINGS~~the Company and its parent, ~~INC~~Tandus Group, Inc., ~~AND~~announced ~~SUBSIDIARIES~~its intent to exit manufacturing in the United Kingdom. The Company is currently attempting to sell the manufacturing facility. If the Company is unable to sell the facility, it will likely cease production near the end of January 2007. The Company intends to maintain a sales presence in the United Kingdom, but has determined that supplying the European market from production in its United States or Asian manufacturing facilities provides greater economic feasibility. Due to the uncertainty associated with the potential sale of the facility, the Company is unable at this time to make a determination as to any estimated costs expected to be incurred in connection with the closure.

~~NOTES~~18. TOCondensed ~~CONSOLIDATED~~Consolidated ~~FINANCIAL~~Financial Statements ~~STATEMENTS – (continued)~~

The 9.75% Notes of the Company (~~Unaudited~~the “Issuer”) are guaranteed by certain of the Company’s domestic subsidiaries (the “guarantor subsidiaries”). The guarantee of the guarantor subsidiaries is full and unconditional and joint and several and arose in conjunction with the Company’s issuance of the 9.75% Notes on February 20, 2002 and the $109.0 million Senior Credit Facility which was amended by the Company on February 20, 2002, May 1, 2004, August 18, 2004 and October 29, 2005. The guarantees’ terms match the terms of the 9.75% Notes and the Senior Credit Facility. The maximum amount of future payments the guarantors would be required to make under the guarantees as of October 28, 2006 is $198.7 million. This amount represents the principal amount

16. Condensed Consolidated Financial Statements

The 9.75% Notes of the Company (the “Issuer”) are guaranteed by certain of the Company’s domestic subsidiaries (the “guarantor subsidiaries”). The guarantee of the guarantor subsidiaries is full and unconditional and joint and several and arose in conjunction with the Company’s issuance of the 9.75% Notes on February 20, 2002 and the $109.0 million Senior Credit Facility which was amended by the Company on February 20, 2002, May 1, 2004, August 18, 2004 and October 29, 2005. The guarantees’ terms match the terms of the 9.75% Notes and the Senior Credit Facility. The maximum amount of future payments the guarantors would be required to make under the guarantees as of April 29, 2006 is $208.6 million. This amount represents the principal amount outstanding of the Company’s Senior Credit Facility, the 9.75% Notes and accrued interest on both obligations. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of April 29, 2006 and January 28, 2006, and for each of the thirteen weeks ended April 29, 2006 and April 30, 2005, is presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

outstanding of the Company’s Senior Credit Facility, the 9.75% Notes and accrued interest on both obligations. Separate consolidated financial statements of the guarantor subsidiaries have not been presented because management believes that such information would not be material to investors. However, condensed consolidating financial information as of October 28, 2006 and January 28, 2006, and for each of the thirteen weeks and thirty-nine weeks ended October 28, 2006 and October 29, 2005, is presented. The condensed consolidating financial information of the Company and its subsidiaries is as follows:

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

~~April~~October 2928, 2006

(In Thousands)

	Issuer			GuarantorSubsidiaries			~~Eliminations~~	Eliminations			~~SubtotalIssuer &Guarantors~~	SubtotalIssuer &Guarantors			~~Non-GuarantorSubsidiaries~~	Non-GuarantorSubsidiaries			~~Eliminations~~	Eliminations			~~ConsolidatedTotal~~	ConsolidatedTotal
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	19,~~219~~210		$	1		$	—$	—		$	~~1,220~~$	9,211		$	~~2,054~~$	3,061		$	—$	—		$	~~3,274~~$	12,272
Accounts receivable, net		~~195~~96			3833,~~430~~089			—	—			~~38,625~~	33,185			~~9,571~~	11,048			—	—			~~48,196~~	44,233
Inventories		2625,~~899~~048			23,~~753~~632			—	—			~~29,652~~	28,680			~~18,304~~	16,428			—	—			~~47,956~~	45,108
Deferred tax assets		2,~~889~~871			8223			—	—			~~2,971~~	2,894			~~3,333~~	1,023			—	—			~~6,304~~	3,917
Prepaid expenses and other		3,~~475~~087			—			—	—			~~3,475~~	3,087			~~819~~	707			—	—			~~4,294~~	3,794
Total current assets		3440,~~667~~312			4136,~~266~~745			—	—			~~75,943~~	77,057			~~34,081~~	32,267			—	—			~~110,024~~	109,324
PROPERTY, PLANT AND EQUIPMENT, net		3534,~~332~~613			1211,~~158~~320			—	—			~~47,490~~	45,933			~~20,469~~	19,613			—	—			~~67,959~~	65,546
GOODWILL		62,386			5,631			—	—			~~68,017~~	68,017			~~30,361~~	30,361			—	—			~~98,378~~	98,378
OTHER INTANGIBLE ASSETS, net		2726,~~910~~682			—			—	—			~~27,910~~	26,682			~~126~~	126			—	—			~~28,036~~	26,808
INVESTMENT IN SUBSIDIARIES		98110,~~097~~585			—			~~(34,185~~	)(49,503	)		~~63,912~~	61,082			—	—			~~(63,912~~	)(61,082	)		—	—
OTHER ASSETS		5,~~767~~136			93			—	—			~~5,860~~	5,229			~~3,730~~	3,700			~~(3,017~~	)(3,017	)		~~6,573~~	5,912
TOTAL ASSETS	$	~~264~~279,~~169~~714		$	5953,~~148~~789		$	~~(34,185~~$	)(49,503	)	$	~~289,132~~$	284,000		$	~~88,767~~$	86,067		$	~~(66,929~~$	)(64,099	)	$	~~310,970~~$	305,968
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable	$	116,~~891~~658		$	31,~~412~~693		$	—$	—		$	~~15,303~~$	8,351		$	~~5,914~~$	6,368		$	—$	—		$	~~21,217~~$	14,719
Accrued expenses		1417,~~631~~200			23,~~240~~410			—	—			~~16,871~~	20,610			~~3,989~~	3,712			—	—			~~20,860~~	24,322
Current portion of long-term debt		915,~~571~~509			—			—	—			~~9,571~~	15,509			~~4,641~~	460			—	—			~~14,212~~	15,969
Total current liabilities		3639,~~093~~367			5,~~652~~103			—	—			~~41,745~~	44,470			~~14,544~~	10,540			—	—			~~56,289~~	55,010
INTERCOMPANY (RECEIVABLE) PAYABLE		(2610,~~384~~454	)		18(2,~~108~~085	)		—	—			~~(8,276~~	)(12,539	)		~~7,851~~	12,099			~~425~~	440			—	—
OTHER LIABILITIES, including post-retirement obligation		5,~~132~~493			—			—	—			~~5,132~~	5,493			63	63			—	—			~~5,195~~	5,556
DEFERRED TAX LIABILITIES		68,~~704~~251			1,~~203~~268			—	—			~~7,907~~	9,519			—	—			~~(3,017~~	)(3,017	)		~~4,890~~	6,502
LONG-TERM DEBT, net of current portion		~~195~~180,~~197~~099			—			—	—			~~195,197~~	180,099			~~2,397~~	2,283			—	—			~~197,594~~	182,382
STOCKHOLDER’S EQUITY:
Preferred stock		—			—			—	—			—	—			~~133~~	133			~~(133~~	)(133	)		—	—
Common stock		—			—			—	—			—	—			~~11,117~~	11,117			~~(11,117~~	)(11,117	)		—	—
Paid-in capital		72,648			—			—	—			~~72,648~~	72,648			~~52,064~~	52,064			~~(52,064~~	)(52,064	)		~~72,648~~	72,648
Retained earnings (deficit)		(2414,~~049~~508	)		3449,~~185~~503			~~(34,185~~	)(49,503	)		~~(24,049~~	)(14,508	)		~~925~~	(1,888	)		~~(925~~	)1,888			~~(24,049~~	)(14,508	)
Accumulated other comprehensive income		(1,~~172~~182	)		—			—	—			~~(1,172~~	)(1,182	)		~~(327~~	)(344	)		~~(98~~	)(96	)		~~(1,597~~	)(1,622	)
Total stockholder’s equity		4756,~~427~~958			3449,~~185~~503			~~(34,185~~	)(49,503	)		~~47,427~~	56,958			~~63,912~~	61,082			~~(64,337~~	)(61,522	)		~~47,002~~	56,518
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	~~264~~279,~~169~~714		$	5953,~~148~~789		$	~~(34,185~~$	)(49,503	)	$	~~289,132~~$	284,000		$	~~88,767~~$	86,067		$	~~(66,929~~$	)(64,099	)	$	~~310,970~~$	305,968

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Balance Sheets

January 28, 2006

(In Thousands)


	Issuer			Guarantor Subsidiaries		Eliminations			Subtotal Issuer & Guarantors			Non-Guarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	2,655		$	1	$	—		$	2,656		$	3,147		$	—		$	5,803
Accounts receivable, net		37			38,508		—			38,545			8,146			—			46,691
Inventories		20,251			2,906		—			23,157			16,836			—			39,993
Deferred tax assets		5,451			76		—			5,527			—			(664	)		4,863
Prepaid expenses and other		2,573			—		—			2,573			951			—			3,524

Total current assets		30,967			41,491		—			72,458			29,080			(664	)		100,874

PROPERTY, PLANT AND EQUIPMENT, net		34,124			12,744		—			46,868			20,829			—			67,697
GOODWILL		62,386			5,631		—			68,017			30,361			—			98,378
OTHER INTANGIBLE ASSETS, net		28,524			—		—			28,524			126			—			28,650
INVESTMENT IN SUBSIDIARIES		91,994			—		(27,540	)		64,454			—			(64,454	)		—
OTHER ASSETS		6,471			93		—			6,564			3,382			(3,017	)		6,929

TOTAL ASSETS	$	254,466		$	59,959	$	(27,540	)	$	286,885		$	83,778		$	(68,135	)	$	302,528

LIABILITIES AND STOCKHOLDER’S EQUITY

CURRENT LIABILITIES:
Accounts payable	$	8,485		$	2,349	$	—		$	10,834		$	5,969		$	—		$	16,803
Accrued expenses		19,077			1,777		—			20,854			4,294			—			25,148
Current portion of long-term debt		571			—		—			571			4,077			—			4,648

Total current liabilities		28,133			4,126		—			32,259			14,340			—			46,599

INTERCOMPANY (RECEIVABLE) PAYABLE		(30,352	)		27,237		—			(3,115	)		2,525			590			—
OTHER LIABILITIES, including post-retirement obligation		5,301			—		—			5,301			63			—			5,364
DEFERRED TAX LIABILITIES		7,066			1,056		—			8,122			—			(3,681	)		4,441
LONG-TERM DEBT, net of current portion		195,277			—		—			195,277			2,396			—			197,673

STOCKHOLDER’S EQUITY:
Preferred stock		—			—		—			—			133			(133	)		—
Common stock		—			—		—			—			11,117			(11,117	)		—
Paid-in capital		72,648			—		—			72,648			52,064			(52,064	)		72,648
Retained earnings (deficit)		(22,435	)		27,540		(27,540	)		(22,435	)		1,483			(1,483	)		(22,435	)
Accumulated other comprehensive income		(1,172	)		—		—			(1,172	)		(343	)		(247	)		(1,762	)

Total stockholder’s equity		49,041			27,540		(27,540	)		49,041			64,454			(65,044	)		48,451

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	254,466		$	59,959	$	(27,540	)	$	286,885		$	83,778		$	(68,135	)	$	302,528

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended ~~April~~ October 2928, 2006

(In Thousands)

	Issuer			GuarantorSubsidiaries		Eliminations			SubtotalIssuer &Guarantors			Non-GuarantorSubsidiaries	~~Non-GuarantorSubsidiaries~~			Eliminations	~~Eliminations~~			ConsolidatedTotal	~~ConsolidatedTotal~~
Net Sales	$	3746,~~023~~325		$	6867,~~887~~375	$	(3337,~~133~~087	)	$	7276,~~777~~613		$	$24,879	~~22,312~~		$	$(15,869	~~(14,366~~)	)	$	$85,623	~~80,723~~
Cost of Goods Sold		34,~~815~~665			4954,~~397~~219		(3337,~~133~~087	)		51,~~079~~797			20,748	~~19,375~~			(15,869	~~(14,366~~)	)		56,676	~~56,088~~
Selling, General & Administrative Expenses		87,~~900~~502			8,~~469~~174		—			1715,~~369~~676			3,466	~~3,404~~			—	—			19,142	~~20,773~~
Amortization		~~614~~613			—		—			~~614~~613			—	—			—	—			613	~~614~~
Operating Expenses		4442,~~329~~780			5762,~~866~~393		(3337,~~133~~087	)		6968,~~062~~086			24,214	~~22,779~~			(15,869	~~(14,366~~)	)		76,431	~~77,475~~
Operating Income (Loss)		(7,306	)		11,021		—			3,715				(467	)			—				3,248
Operating Income		3,545			4,982		—			8,527			665				—				9,192
Equity in Earnings of Subsidiaries		63,~~087~~373			—		—(3,019	)		~~6,087~~354			—	—			(354	~~(6,087~~)	)		—	—
Gain on Sale of Fixed Assets		29			—		—			29				—				—				29
Gain (Loss) on Sale of Fixed Assets		1			—		—			1			(56	)			—				(55	)
Net Interest Expense		54,~~653~~933			—		—			54,~~653~~933			69	76			—	—			5,002	~~5,729~~
Income (Loss) Before Income Taxes		(61,~~843~~986	)		114,~~021~~982		—(3,019	)		43,~~178~~949			540	~~(543~~	)		(354	~~(6,087~~)	)		4,135	~~(2,452~~	)
Income Tax Expense (Benefit)		(~~5,229~~549	)		41,~~376~~963		—			~~(667~~1,414	)		186	15			—	—			1,600	~~(838~~	)
Net Income (Loss)	$	(12,~~614~~535	)	$	63,~~645~~019	$	—(3,019	)	$	42,~~845~~535		$	$354	~~(558~~	)	$	$(354	~~(6,087~~)	)	$	$2,535	~~(1,614~~	)

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Operations

For the Thirteen Weeks Ended ~~April~~ October 3029, 2005

(In Thousands)

	Issuer			GuarantorSubsidiaries		Eliminations			SubtotalIssuer &Guarantors			Non-GuarantorSubsidiaries	~~Non-GuarantorSubsidiaries~~			Eliminations	~~Eliminations~~			ConsolidatedTotal	~~ConsolidatedTotal~~
Net Sales	$	2937,~~390~~960		$	5766,~~674~~579	$	(2530,~~628~~455	)	$	6174,~~436~~084		$	$21,873	~~18,540~~		$	$(14,211	~~(11,662~~)	)	$	$81,746	~~68,314~~
Cost of Goods Sold		2635,~~296~~339			4147,~~187~~626		(2530,~~628~~455	)		4152,~~855~~510			20,523	~~19,125~~			(14,211	~~(11,662~~)	)		58,822	~~49,318~~
Selling, General & Administrative Expenses		7,~~265~~387			87,~~745~~729		—			1615,~~010~~116			5,413	~~4,124~~			—	—			20,529	~~20,134~~
Amortization		614			~~164~~—		—			~~778~~614			—	—			—	—			614	~~778~~
Operating Expenses		3443,~~175~~340			5055,~~096~~355		(2530,~~628~~455	)		5868,~~643~~240			25,936	~~23,249~~			(14,211	~~(11,662~~)	)		79,965	~~70,230~~
Operating Income (Loss)		(45,~~785~~380	)		711,~~578~~224		—			25,~~793~~844			(4,063	~~(4,709~~)	)		—	—			1,781	~~(1,916~~	)
Minority Interest in Income of Subsidiary		—			—		—			—			(15	~~(10~~)	)		—	—			(15	~~(10~~)	)
Equity in Earnings of Subsidiaries		~~297~~3,101			—		—			~~297~~3,101			—	—			(3,101	~~(297~~)	)		—	—
Loss on Sale of Fixed Assets		—26			—		—			—26			5	~~117~~			—	—			31	~~117~~
Net Interest Expense		5,~~029~~316			—		—			5,~~029~~316			41	47			—	—			5,357	~~5,076~~
Income (Loss) Before Income Taxes		(97,~~517~~621	)		711,~~578~~224		—			(13,~~939~~603	)		(4,124	~~(4,863~~)	)		(3,101	~~(297~~)	)		(3,622	~~(7,099~~)	)
Income Tax Expense (Benefit)		(3,~~734~~366	)		34,~~032~~456		—			~~(702~~1,090	)		(892	~~(614~~)	)		—	—			198	~~(1,316~~	)
Net Income (Loss)	$	(54,~~783~~255	)	$	46,~~546~~768	$	—		$	(12,~~237~~513	)	$	$(3,232	~~(4,249~~)	)	$	$(3,101	~~(297~~)	)	$	$(3,820	~~(5,783~~)	)

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

Guarantor Financial Statements

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

For the ~~Thirteen~~Thirty-nine Weeks Ended ~~April~~ October 2928, 2006

(In Thousands)

	Issuer			GuarantorSubsidiaries			Eliminations	~~Non-GuarantorSubsidiaries~~			SubtotalIssuer &Guarantors	~~ConsolidatedTotal~~			Non-GuarantorSubsidiaries			Eliminations			ConsolidatedTotal
CASH FLOWS FROM OPERATING ACTIVITIES	$	(7,950	)	$	3			$	(1,402	)		$	(9,349	)
Net Sales	$	136,250		$	231,771		$	(119,267	)		$	248,754			$	70,368		$	(44,707	)	$	274,415
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of Goods Sold		114,823			170,227			(119,267	)			165,783				61,085			(44,707	)		182,161
Proceeds from disposition of property, plant and equipment		32			—				—				32
Selling, General & Administrative Expenses		25,222			25,106			—				50,328				10,471			—			60,799
Additions to property, plant and equipment		(2,438	)		(3	)			(129	)			(2,570	)
Amortization		1,842			—			—				1,842				—			—			1,842
Net cash used in investing activities		(2,406	)		(3	)			(129	)			(2,538	)
Operating Expenses		141,887			195,333			(119,267	)			217,953				71,556			(44,707	)		244,802
CASH FLOWS FROM FINANCING ACTIVITIES:
Operating Income (Loss)		(5,637	)		36,438			—				30,801				(1,188	)		—			29,613
Proceeds from revolving credit facilities		11,000			—				520				11,520
Equity in Earnings of Subsidiaries		18,592			—			(21,963	)			(3,371	)			—			3,371			—
Repayments of revolving credit facilities		(2,000	)		—				(80	)			(2,080	)
Gain (Loss) on Sale of Fixed Assets		27			—			—				27				(115	)		—			(88	)
Repayments of long-term debt		(80	)		—				(38	)			(118	)
Net Interest Expense		15,711			—			—				15,711				202			—			15,913
Net cash provided by financing activities		8,920			—				402				9,322
Income (Loss) Before Income Taxes		(2,729	)		36,438			(21,963	)			11,746				(1,505	)		3,371			13,612
Effect of exchange rate changes on cash and cash equivalents		—			—				36				36
Income Tax Expense (Benefit)		(10,656	)		14,475			—				3,819				1,866			—			5,685
NET CHANGE IN CASH AND CASH EQUIVALENTS		(1,436	)		—				(1,093	)			(2,529	)
Net Income (Loss)	$	7,927		$	21,963		$	(21,963	)		$	7,927			$	(3,371	)	$	3,371		$	7,927
CASH AND CASH EQUIVALENTS, beginning of period		2,655			1				3,147				5,803
CASH AND CASH EQUIVALENTS, end of period	$	1,219		$	1			$	2,054			$	3,274

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO ~~CONSOLIDATED~~THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

Guarantor Financial Statements

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

For the ~~Thirteen~~Thirty-nine Weeks Ended ~~April~~ October 3029, 2005

(In Thousands)

	Issuer			GuarantorSubsidiaries			Eliminations	~~Non-GuarantorSubsidiaries~~			SubtotalIssuer &Guarantors	~~ConsolidatedTotal~~		Non-GuarantorSubsidiaries			Eliminations			ConsolidatedTotal
CASH FLOWS FROM OPERATING ACTIVITIES	$	(12,799	)	$	1			$	(1,054	)		$	(13,852	)
Net Sales	$	112,079		$	208,858		$	(97,084	)		$	223,853		$	61,304		$	(40,023	)	$	245,134
CASH FLOWS FROM INVESTING ACTIVITIES:
Cost of Goods Sold		100,582			148,404			(97,084	)			151,902			59,953			(40,023	)		171,832
Proceeds from disposition of property, plant and equipment		28			—				100				128
Selling, General & Administrative Expenses		22,522			24,518			—				47,040			13,433			—			60,473
Additions to property, plant and equipment		(1,743	)		(1	)			(2,088	)			(3,832	)
Amortization		1,842			164			—				2,006			—			—			2,006
Net cash used in investing activities		(1,715	)		(1	)			(1,988	)			(3,704	)
Operating Expenses		124,946			173,086			(97,084	)			200,948			73,386			(40,023	)		234,311
CASH FLOWS FROM FINANCING ACTIVITIES:
Operating Income (Loss)		(12,867	)		35,772			—				22,905			(12,082	)		—			10,823
Proceeds from revolving credit facilities		—			—				—				—
Minority Interest in Loss of Subsidiary		—			—			—				—			24			—			24
Repayments of revolving credit facilities		—			—				—				—
Equity in Earnings of Subsidiaries		10,604			—			—				10,604			—			(10,604	)		—
Repayments of long-term debt		—			—				448				448
Loss on Sale of Fixed Assets		3			—			—				3			122			—			125
Dividends to parent		—			—				(141	)			(141	)
Net Interest Expense		15,214			—			—				15,214			136			—			15,350
Financing costs		(97	)		—				—				(97	)
Income (Loss) Before Income Taxes		(17,480	)		35,772			—				18,292			(12,316	)		(10,604	)		(4,628	)
Net cash provided by (used in) financing activities		(97	)		—				307				210
Income Tax Expense (Benefit)		(11,816	)		14,278			—				2,462			(1,861	)		—			601
Effect of exchange rate changes on cash and cash equivalents		—			—				119				119
Net Income (Loss)	$	(5,664	)	$	21,494		$	—			$	15,830		$	(10,455	)	$	(10,604	)	$	(5,229	)
NET CHANGE IN CASH AND CASH EQUIVALENTS		(14,611	)		—				(2,616	)			(17,227	)
CASH AND CASH EQUIVALENTS, beginning of period		23,110			—				2,616				25,726
CASH AND CASH EQUIVALENTS, end of period	$	8,499		$	—			$	—			$	8,499

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Thirty-nine Weeks Ended October 28, 2006

(In Thousands)


	Issuer			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	11,946		$	213		$	4,499		$	16,658

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of property, plant and equipment		36			—			1			37
Additions to property, plant and equipment		(5,186	)		(213	)		(830	)		(6,229	)

Net cash used in investing activities		(5,150	)		(213	)		(829	)		(6,192	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities		20,000			—			1,815			21,815
Repayments of revolving credit facilities		(20,000	)		—			(5,457	)		(25,457	)
Repayments of long-term debt		(241	)		—			(159	)		(400	)

Net cash used in financing activities		(241	)		—			(3,801	)		(4,042	)

Effect of exchange rate changes on cash and cash equivalents		—			—			45			45

NET CHANGE IN CASH AND CASH EQUIVALENTS		6,555			—			(86	)		6,469
CASH AND CASH EQUIVALENTS, beginning of period		2,655			1			3,147			5,803

CASH AND CASH EQUIVALENTS, end of period	$	9,210		$	1		$	3,061		$	12,272

COLLINS & AIKMAN FLOORCOVERINGS, INC. AND SUBSIDIARIES

NOTES TO THE FINANCIAL STATEMENTS – (continued)

(Unaudited)

Guarantor Financial Statements

Condensed Consolidating Statements of Cash Flows

For the Thirty-nine Weeks Ended October 29, 2005

(In Thousands)


	Issuer			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidated Total
CASH FLOWS FROM OPERATING ACTIVITIES	$	(9,374	)	$	80		$	(550	)	$	(9,844	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant, and equipment		(5,734	)		(79	)		(3,784	)		(9,597	)

Net cash used in investing activities		(5,734	)		(79	)		(3,784	)		(9,597	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities		15,000			—			3,960			18,960
Repayments of revolving credit facilities		(8,000	)		—			(888	)		(8,888	)
Proceeds from long-term debt		—			—			749			749
Repayments of long-term debt		(241	)		—			(19	)		(260	)
Financing costs		(97	)		—			—			(97	)

Net cash provided by financing activities		6,662			—			3,802			10,464

Effect of exchange rate changes on cash and cash equivalents		—			—			(117	)		(117	)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(8,446	)		1			(649	)		(9,094	)
CASH AND CASH EQUIVALENTS, beginning of period		23,110			—			2,616			25,726

CASH AND CASH EQUIVALENTS, end of period	$	14,664		$	1		$	1,967		$	16,632

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

GENERAL

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

Overview

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

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

Recent Events

On December 1, 2006, the Company announced the resignation of Edgar M. Bridger, Chief Executive Officer, effective November 30, 2006. The Company is currently participating in an employment search to identify a new chief executive officer. The principal executive officers of the Company are Ralph H. Grogan, who serves as its principal operations officer, and Leonard F. Ferro, who serves as the principal financial officer.

Results of Operations

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

	Thirteen Weeks Ended				Thirty-nine Weeks Ended
	April 29,2006		April 30,2005
	October 28,2006		October 29,2005		October 28,2006		October 29,2005
Net Sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of Goods Sold	6966.52	%	72.20	%	66.4	%	70.1	%
Gross Profit	3033.58	%	2728.80	%	33.6	%	29.9	%
Selling, General and Administrative Expenses	25.7	%	29.5	%
Selling, General & Administrative Expenses	22.4	%	25.1	%	22.1	%	24.7	%
Amortization	0.87	%	10.17	%	0.7	%	0.8	%
Operating Income (Loss)	4.0	%	-2.8	%
Operating Income	10.7	%	2.2	%	10.8	%	4.4	%
Net Interest Expense	75.18	%	76.46	%	5.8	%	6.3	%
Net Loss	-2.0	%	-8.5	%
Net Income (Loss)	3.0	%	-4.7	%	2.9	%	-2.1	%
Adjusted EBITDA	814.27	%	68.73	%	14.6	%	11.5	%

Thirteen Weeks Ended ~~April~~October 2928, 2006 as Compared with the Thirteen Weeks Ended ~~April~~October 3029, 2005

Net Sales. Net sales for the thirteen weeks ended ~~April~~October 2928, 2006 were $8085.76 million, an increase of 184.28% from $6881.37 million for the thirteen weeks ended ~~April~~October 3029, 2005. Net sales of the Company’s Floorcoverings segment were $7380.12 million for the thirteen weeks ended ~~April~~October 2928, 2006 as compared to $6275.13 million for the thirteen weeks ended ~~April~~ October 3029, 2005, an increase of $114.09 million or 176.75%, primarily attributable to the North American operations. Within these operations, the Company’s Floorcoverings segment’s net sales experienced a 14.5% increase in broadloom sales combined with a 17.9% increase in sales of structure-backed carpets (six-foot and carpet tile). The current quarter results reflect an increase in both Institutional sales (Healthcare, Education and Government) and Corporate sales, including Retail, of 17.9% and 15.6%, respectively. The overall increase in the Floorcoverings segment sales is primarily volume driven across all of its markets. In addition, in the thirteen weeks ended April 30, 2005, the Floorcoverings segment experienced lower sales in part due to complications related to the Facility Maximization. Net sales of the Extrusion segment were $7.6 million for the thirteen weeks ended April 29, 2006 as compared to $6.2 million for the thirteen weeks ended April 30, 2005, an increase of $1.4 million or 22.6%. The increase in sales for the Extrusion segment was due to overall higher demand from the Extrusion segment’s external customers.

2224

~~Cost~~segment’s ofnet ~~Goods~~sales ~~Sold.~~experienced ~~Cost~~a of3.1% ~~goods~~increase ~~sold~~in ~~was~~broadloom ~~$56.1~~sales ~~million,~~combined orwith 69a 5.5% ofincrease in sales, ~~for~~of structure-backed ~~the~~carpets ~~thirteen~~(six-foot ~~weeks ended~~and ~~April 29,~~carpet ~~2006~~tile). asThe ~~compared~~current toquarter ~~$49.3~~results ~~million~~reflect an increase in both Institutional sales (Healthcare, orEducation ~~72.2%~~and ofGovernment) and Corporate sales, ~~for~~including ~~the~~Retail, ~~thirteen~~of ~~weeks~~1.2% ~~ended~~and ~~April 30~~11.2%, ~~2005~~respectively. The overall increase in ~~cost~~the ofFloorcoverings ~~goods~~segment ~~sold~~sales ~~was~~is primarily ~~due~~volume todriven ~~increased~~across ~~sales.~~all Inof ~~addition,~~its ~~the~~markets ~~Company~~coupled ~~experienced~~with ~~increases~~an increase in ~~the~~ ~~prices~~average ofselling ~~several~~prices. ~~key~~In ~~raw~~addition, ~~materials~~ in the ~~latter~~thirteen ~~half~~weeks ofended ~~fiscal~~October 29, 2005, ~~which~~the ~~have~~Floorcoverings ~~not~~segment experienced ~~been~~lower ~~fully~~sales ~~absorbed~~ in ~~the~~part ~~market~~due ~~through~~to ~~increased~~complications ~~selling~~related ~~prices~~to the Facility Maximization. ~~Included~~Net insales of the ~~2005~~Extrusion ~~period~~segment ~~expenses~~were ~~was~~ $25.84 million offor ~~costs related to~~ the ~~Facility Maximization.~~thirteen ~~Excluding~~weeks ~~these~~ended ~~costs~~October 28, ~~cost~~2006 ofas ~~goods~~compared ~~sold~~to $6.4 million for the thirteen weeks ended ~~April~~October 3029, 2005, ~~was~~a decrease of $461.50 million, or 6815.16%. ofThe decrease in sales for the Extrusion segment was due to lower sales volume.

~~Selling,~~Cost ~~General~~of ~~and~~Goods ~~Administrative Expenses~~Sold. ~~Selling,~~Cost ~~general~~of ~~and~~goods ~~administrative~~sold ~~expenses~~was ~~for the thirteen weeks ended April 29, 2006 were~~ $2056.87 million, anor ~~increase of 3~~66.52% ~~from~~of ~~$20.1~~sales, ~~million~~ for the thirteen weeks ended ~~April~~October 3028, ~~2005.~~2006 Asas acompared ~~percentage~~to of$58.8 ~~sales~~million, ~~total~~or ~~selling, general and administrative costs were 25~~72.70% ~~and~~of ~~29.5%~~sales, for the thirteen weeks ended ~~April~~ October 2928, ~~2006 and April 30,~~ 2005~~, respectively~~. ~~During~~The ~~the~~decrease ~~2006~~in ~~period,~~cost ~~the Company~~of ~~incurred~~goods ansold ~~increase~~was ofprimarily ~~$1.8~~due ~~million~~to inproduct ~~legal~~mix ~~expense~~ and ~~professional~~manufacturing ~~services~~efficiencies inclusive of ~~which~~the ~~$0.4~~benefits ~~million~~of ~~relates~~the tocompletion ~~an award~~ of ~~plaintiff legal fees in~~ the ~~Thomason~~Facility ~~litigation~~Maximization. ~~verdict~~Partially ~~(see~~offsetting ~~Liquidity~~these ~~and~~cost ~~Capital Resources contained herein)~~improvements, the ~~increased~~Company ~~commissions~~has ofexperienced ~~$0.9~~increases ~~million and an increase~~ in ~~its~~the ~~samples~~prices ~~expense~~ of ~~$0.7~~certain ~~million.~~raw ~~These~~materials ~~increases~~in ~~were~~the ~~partially~~current ~~offset~~year byquarter ~~lower~~as ~~salaries,~~compared ~~taxes~~to ~~and~~the ~~benefits~~prior ofyear $1quarter.2 ~~million~~Included ~~and a decrease~~ in ~~company~~the ~~meetings~~2005 ~~expense~~period ofexpenses was $0.68 million. ~~In addition,~~of ~~the~~costs ~~Company~~related ~~experienced~~to ~~an increase in~~ the ~~foreign~~Facility ~~currency~~Maximization. Excluding ~~transaction~~these ~~gain~~costs, cost of ~~$0.2~~goods ~~million.~~sold ~~Included~~for in the ~~2005~~thirteen ~~period~~weeks ~~expense~~ended October 29, 2005 was $058.30 million, ofor ~~costs~~71.0% ~~related~~of ~~to the Facility Maximization~~sales.

~~Amortization~~Selling, General and Administrative Expenses. ~~Intangible~~Selling, ~~asset~~general ~~amortization~~and ~~decreased~~administrative toexpenses for the thirteen weeks ended October 28, 2006 were $019.1 million, a decrease of 6.8% from $20.5 million for the thirteen weeks ended ~~April~~October 29, ~~2006~~2005. As asa ~~compared~~percentage toof $0sales, total selling, general and administrative costs were 22.84% ~~million~~ and 25.1% for the thirteen weeks ended ~~April~~October 3028, 2006 and October 29, 2005, respectively. During the 2006 period, salaries, taxes and benefits decreased approximately $0.5 million, offset by an increase of approximately $0.4 million in legal and professional expenses (see “Liquidity and Capital Resources” contained herein), higher samples expense of approximately $0.2 million, increased commissions expense of $0.2 million and higher travel and entertainment expenses of $0.4 million. The ~~decrease~~Company ~~was~~experienced ~~due~~a foreign currency transaction gain of $0.2 million in the thirteen-week period ended October 28, 2006, as compared to a loss of $0.1 million in the ~~Company’s~~thirteen-week ~~supply~~period ~~agreement~~ended ~~becoming~~October 29, ~~fully~~2005. ~~amortized~~Included ~~during~~in the ~~first~~2005 ~~quarter~~period expense was $1.1 million of ~~fiscal~~costs ~~2005~~related to the Facility Maximization.

~~Interest Expense~~Amortization. ~~Net~~Intangible ~~interest~~asset ~~expense~~amortization was $50.76 million ~~and~~for ~~$5.1~~each ~~million~~of ~~for~~ the thirteen week periods ended ~~April~~October 2928, 2006 and ~~April~~October 3029, 2005~~, respectively, which included nominal interest income~~. Net interest expense for the thirteen weeks ended April 29, 2006 includes $0.7 million related to a certain litigation verdict. See Note 14 “Commitments and Contingencies” contained herein in Item 1 and Part II, Item 1 for further discussion.

~~Income~~Interest ~~Taxes~~Expense. ~~The~~Net ~~Company~~interest ~~had~~expense anwas ~~income~~$5.0 ~~tax~~million ~~benefit~~and of $05.84 million for the thirteen ~~weeks~~week periods ended ~~April~~ October 2928, 2006 ~~compared~~and October 29, to2005, ~~$1.3~~respectively, ~~million~~which ~~for~~included ~~the~~nominal ~~thirteen~~interest ~~weeks ended April 30, 2005~~income.

~~Net~~Income ~~Loss~~Taxes. The Company ~~incurred~~had aincome ~~net~~tax ~~loss~~expense of $1.6 million for the thirteen weeks ended ~~April~~October 2928, 2006 compared to $50.82 million for the thirteen weeks ended ~~April~~October 3029, 2005.

~~Adjusted~~Net ~~EBITDA~~Income. ~~Adjusted~~The ~~EBITDA~~Company ~~represents~~had ~~earnings~~net before interest, taxes, depreciation, amortization, non-cash charges or expenses (other than the write-down of current assets), costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, plus Chroma cash dividends and minority interest in income ~~(loss)~~ of ~~subsidiary less equity in earnings of Chroma~~$2.5 ~~Adjusted~~million ~~EBITDA~~ for ~~the~~ thirteen weeks ended ~~April~~October 2928, 2006 ~~increased~~compared to ~~$6.6 million~~a ~~from~~net loss of $43.68 million for the thirteen weeks ended ~~April~~October 3029, 2005. As a percentage of sales, Adjusted EBITDA was 8.2% for the first quarter of 2006 compared to 6.7% in the first quarter of 2005. The increase was principally due to higher sales volume in the Floorcoverings segment. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. Consolidated EBITDA as defined under the Company’s Senior Credit Facility provides for additional adjustments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income (loss) or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.

23Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, non-cash charges or expenses (other than the write-down of current assets), costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, plus Chroma cash dividends and minority interest in income (loss) of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirteen weeks ended October 28, 2006 increased to $12.6 million from $6.8 million for the thirteen weeks ended October 29, 2005. As a percentage of sales, Adjusted EBITDA was 14.7% for the third quarter of 2006 compared to 8.3% in the third quarter of 2005. The increase was principally due to higher sales volume in the Floorcoverings segment, coupled with the achievement of certain cost containment initiatives. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. Consolidated EBITDA as defined under the Company’s Senior Credit Facility provides for additional adjustments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.

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

	Thirteen Weeks Ended
	April 29,2006				April 30,2005
	October 28,2006			October 29,2005
Net Loss	$	(1,614	)		$	(5,783	)
Net Income (Loss)	$	2,535		$	(3,820	)
Income Tax Benefit		(838	)			(1,316	)
Income Tax Expense		1,600			198
Net Interest Expense		5,~~729~~002			5,357	~~5,076~~
Depreciation		2,~~739~~784			2,532	~~2,564~~
Amortization		~~614~~613			614	~~778~~
Minority Interest in Loss of Subsidiary		—				(10	)
Minority Interest in Income of Subsidiary		—			15
Facility Maximization Costs		—			1,865	~~3,168~~
Loss on Sale of Fixed Assets		3				117
Loss on Disposal of Fixed Assets		56			31
Adjusted EBITDA	$	612,~~633~~590		$	$6,792	~~4,594~~

Thirty-nine Weeks Ended October 28, 2006 as Compared with the Thirty-nine Weeks Ended October 29, 2005

Net Sales. Net sales for the thirty-nine weeks ended October 28, 2006 were $274.4 million, an increase of 12.0% from $245.1 million for the thirty-nine weeks ended October 29, 2005. Net sales of the Company’s Floorcoverings segment were $254.3 million for the thirty-nine weeks ended October 28, 2006 as compared to $225.7 million for the thirty-nine weeks ended October 29, 2005, an increase of $28.6 million or 12.7%, primarily attributable to the North American operations. Within these operations, the Company’s Floorcoverings segment’s net sales experienced a 1.3% increase in broadloom sales combined with a 17.8% increase in sales of structure-backed carpets (six-foot and carpet tile). The current period results reflect an increase in both Institutional sales (Healthcare, Education and Government) and Corporate sales, including Retail, of 9.9% and 12.8%, respectively. The overall increase in the Floorcoverings segment sales is primarily volume driven across all of its markets coupled with increases in average selling prices. In addition, in the thirty-nine weeks ended October 29, 2005, the Floorcoverings segment experienced lower sales in part due to complications related to the Facility Maximization. Net sales of the Extrusion segment were $20.2 million for the thirty-nine weeks ended October 28, 2006 as compared to $19.4 million for the thirty-nine weeks ended October 29, 2005, an increase of $0.8 million or 4.1%. The increase in sales for the Extrusion segment was due to overall higher demand.

Cost of Goods Sold. Cost of goods sold was $182.2 million, or 66.4% of sales, for the thirty-nine weeks ended October 28, 2006 as compared to $171.8 million, or 70.1% of sales, for the thirty-nine weeks ended October 29, 2005. The increase in cost of goods sold was primarily due to increased sales. In addition, the Company has experienced increases in the prices of several key raw materials commencing in the second half of fiscal 2005 through the first half of fiscal 2006. Included in the 2005 period expenses was $5.8 million of costs related to the Facility Maximization. Excluding these costs, cost of goods sold for the thirty-nine weeks ended October 29, 2005 was $166.0 million, or 67.7% of sales.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the thirty-nine weeks ended October 28, 2006 were $60.8 million, an increase of 0.5% from $60.5 million for the thirty-nine weeks ended October 29, 2005. As a percentage of sales, total selling, general and administrative costs were 22.1% and 24.7% for the thirty-nine weeks ended October 28, 2006 and October 29, 2005, respectively. During the 2006 period, the Company incurred an increase of $4.2 million in legal and professional expenses (see “Liquidity and Capital Resources” contained herein) in addition to increased commissions of $1.5 million and an increase in travel and entertainment expense of $0.7 million. These increases were partially offset by lower salaries, taxes and benefits of $1.6 million, a decrease in company meetings expense of $0.7 million and lower advertising and trade shows expenses of $0.3 million. In addition, the Company experienced an increase in the foreign currency transaction gain of $0.5 million. Included in the 2005 period expense was $1.9 million of costs related to the Facility Maximization.

Amortization. Intangible asset amortization decreased to $1.8 million for the thirty-nine weeks ended October 28, 2006 as compared to $2.0 million for the thirty-nine weeks ended October 29, 2005. The decrease was due to the Company’s supply agreement becoming fully amortized during the first quarter of fiscal 2005.

Interest Expense. Net interest expense was $15.9 million and $15.4 million for the thirty-nine week periods ended October 28, 2006 and October 29, 2005, respectively, which included $0.2 million of interest income in each period. Net interest expense for the thirty-nine weeks ended October 28, 2006 includes $0.7 million related to a certain litigation verdict. See Note 15 “Commitments and Contingencies” contained herein in Item 1 and Part II, Item 1 for further discussion.

Income Taxes. The Company had income tax expense of $5.7 million for the thirty-nine weeks ended October 28, 2006 compared to $0.6 million for the thirty-nine weeks ended October 29, 2005.

Net Income. The Company had net income of $7.9 million for the thirty-nine weeks ended October 28, 2006 compared to a net loss of $5.2 million for the thirty-nine weeks ended October 29, 2005.

Adjusted EBITDA. Adjusted EBITDA represents earnings before interest, taxes, depreciation, amortization, non-cash charges or expenses (other than the write-down of current assets), costs related to acquisitions and attempted acquisitions, expenses related to the Facility Maximization, plus Chroma cash dividends and minority interest in income (loss) of subsidiary less equity in earnings of Chroma. Adjusted EBITDA for the thirty-nine weeks ended October 28, 2006 increased to $39.9 million from $28.1 million for the thirty-nine weeks ended October 29, 2005. As a percentage of sales, Adjusted EBITDA was 14.6% for the 2006 year-to-date period compared to 11.5% in the related 2005 period. The increase was principally due to higher sales volume in the Floorcoverings segment. Adjusted EBITDA is presented because it is commonly used by certain investors and analysts to analyze a company’s ability to service debt. Consolidated EBITDA as defined under the Company’s Senior Credit Facility provides for additional adjustments. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States of America and should not be considered an alternative to operating income or net income (loss) as a measure of operating performance or to net cash provided by (used in) operating activities as a measure of liquidity. Because Adjusted EBITDA is not calculated identically by all companies, the presentation in these statements may not be comparable to those disclosed by other companies.

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


	Thirty-nine Weeks Ended
	October 28, 2006		October 29, 2005
Net Income (Loss)	$	7,927	$	(5,229	)
Income Tax Expense		5,685		601
Net Interest Expense		15,913		15,350
Depreciation		8,453		7,567
Amortization		1,842		2,006
Minority Interest in Loss of Subsidiary		—		(24	)
Facility Maximization Costs		—		7,691
Loss on Disposal of Fixed Assets		121		125

Adjusted EBITDA	$	39,941	$	28,087

Liquidity and Capital Resources

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

Net cash ~~used~~provided inby operating activities for the ~~thirteen~~thirty-nine weeks ~~ended~~ ~~April~~ended October 2928, 2006 was $916.37 million compared to net cash used of $149.08 million for the ~~thirteen~~thirty-nine weeks ended ~~April~~October 3029, 2005. The change was primarily due to athe ~~decrease~~generation inof ~~the~~ net ~~loss~~income ~~incurred~~ for the period coupled with lower working capital requirements of $211.54 million.

Net cash used in investing activities for the ~~thirteen~~thirty-nine weeks ended ~~April~~October 2928, 2006 and ~~April~~October 3029, 2005 was $26.52 million and $39.6 million, respectively, primarily representing capital expenditures. Included in capital expenditures for the 2005 period is $02.31 million related to the Facility Maximization. Capital expenditures during the remainder of fiscal 2006 are expected to be approximately $51 million to $73 million.

Net cash ~~provided~~used byin financing activities for the ~~thirteen~~thirty-nine weeks ended ~~April~~ October 2928, 2006 ~~and April 30, 2005~~ was $94.30 million ~~and~~as compared to net cash provided by financing activities of $010.25 million for the thirty-nine weeks ended October 29, ~~respectively~~2005. During the 2006 period, the Company repaid its revolving credit facilities in full. The ~~increase~~cash ~~primarily~~inflow ~~represents~~in athe ~~borrowing~~2005 ~~against~~period was the result of net proceeds of $10.0 million from the Company’s U.Canadian S. revolving credit facility ~~during~~and ~~the~~a ~~first~~$0.7 ~~quarter~~million issuance of ~~fiscal~~long-term debt. No long-term debt issuances have been made by the Company during the 2006 period.

~~The~~27 Company has significant indebtedness which, as of April 29, 2006, consists of $175.0 million of 9.75% senior subordinated notes due 2010 (the “9.75% Notes”) of which $165.0 million is outstanding, a $109.0 million credit facility which had an outstanding balance of $30.6 million in term loan borrowings (the “Senior Credit Facility”), $1.7 million in purchase money and other indebtedness, and $1.4 million in sinking fund bonds under Crossley. The sinking fund bonds are subject to forgiveness beginning in fiscal 2006 given certain requirements are met. See further discusssion contained herein and Note 10 of the “Notes to Consolidated Financial Statements” contained herein in Item 1. As of April 29, 2006, the Company’s $50.0 million U. S. revolving line of credit had outstanding borrowings of $9.0 million and $4.0 million of letters of credit outstanding leaving total availability of $37.0 million. Crossley has a $4.5 million revolving line of credit agreement with a Canadian bank which had $4.2 million in borrowings outstanding as of April 29, 2006.

The Company has significant indebtedness which, as of October 28, 2006, consists of $175.0 million of 9.75% senior subordinated notes due 2010 (the “9.75% Notes”) of which $165.0 million is outstanding, a $109.0 million credit facility which had an outstanding balance of $30.4 million in term loan borrowings (the “Senior Credit Facility”), $1.9 million in purchase money and other indebtedness, and $1.1 million in sinking fund bonds under Crossley. The sinking fund bonds are subject to forgiveness beginning in the fourth quarter of fiscal 2006 given certain requirements are met. See Note 11 of the “Notes to Consolidated Financial Statements” contained herein in Item 1. As of October 28, 2006, the Company’s $50.0 million U.S. revolving line of credit had no outstanding borrowings and $4.1 million of letters of credit outstanding leaving total availability of $45.9 million. Crossley has a $4.5 million revolving line of credit agreement with a Canadian bank, which had no outstanding borrowings as of October 28, 2006.

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

As is customary in debt agreements, in the event the Company is not in compliance with the covenants of the Senior Credit Facility, the Company will also be subject to the provisions of a cross-default for the 9.75% Notes. The Company was in compliance with all covenants as of ~~April~~October 2928, 2006, and expects to remain in compliance throughout fiscal 2006, although no assurances to that effect can be given.

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

24Management believes that cash generated by its operations and availability under its $50.0 million revolving credit line will be sufficient to fund the Company’s current commitments and planned requirements. The Company’s current revolving credit facility is set to expire in January 2007. As part of the senior credit facility refinancing, the Company has chosen a lender and is in process of completing the lender requests and documents. Closing on the new credit facility is expected during the fourth quarter of fiscal 2006.

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

~~borrowings~~On ~~will~~June 21, be2005, ~~available~~the Company filed in anthe ~~amount~~United ~~sufficient~~States toDistrict ~~enable~~Court for the ~~Company~~Northern toDistrict ~~service~~of ~~its~~Georgia, ~~indebtedness~~Rome, Georgia, orDivision to(the ~~make necessary~~“Court”) ~~capital~~a ~~expenditures~~joint lawsuit with Shaw Industries Group, Inc. ~~Potential~~(“Shaw”) ~~acquisitions~~and Mohawk Industries, Inc. (“Mohawk”) against Interface, Inc. (“Interface”), regarding a patent on a particular pattern of ~~businesses~~carpet tile that ~~complement~~Interface ~~existing~~recently ~~operations~~received ~~are~~(the ~~periodically~~“Rome ~~evaluated~~Action”). ~~Depending~~The onRome ~~various~~Action ~~factors~~asks the Court to declare that the Interface patent is invalid, ~~including~~unenforceable and not infringed. Interface and certain of its affiliated companies, ~~among~~on ~~others~~the same day, filed separate suits in Atlanta, Georgia against the ~~cash~~Company ~~consideration~~and ~~required~~other carpet manufacturers asserting infringement of the aforementioned patent. In response to motions filed both in ~~such~~the ~~potential~~Rome Action and with the court in ~~acquisitions~~Atlanta, Interface’s suits against the Company, ~~may~~Shaw ~~determine~~and Mohawk were transferred to ~~finance~~Rome, ~~any~~Georgia ~~such~~and ~~transaction~~consolidated with ~~existing~~the ~~sources~~Rome ofAction. ~~liquidity~~The Company, Shaw and Mohawk remain as plaintiffs in the Rome Action. To date, no substantive issues have been resolved by the Court. The Company denies liability and intends to vigorously defend this matter.

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

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

On ~~August~~December 104, ~~2004~~2006, the Company and its parent, Tandus Group, Inc., announced ~~plans~~its intent to ~~consolidate~~exit ~~its~~manufacturing ~~broadloom~~in ~~operations~~the byUnited ~~closing~~Kingdom. ~~its~~The ~~Santa~~Company ~~Ana,~~is ~~California~~currently ~~production~~attempting to sell the manufacturing facility. ~~and moving~~If ~~equipment~~the ~~and~~Company ~~production~~is unable to ~~its~~sell ~~manufacturing~~the facility, init ~~Truro,~~will ~~Nova~~likely ~~Scotia~~cease production (near the ~~“Facility~~end ~~Maximization”)~~of January 2007. The ~~Facility~~Company ~~Maximization~~intends ~~was~~to ~~approved~~maintain bya ~~the~~sales ~~Company’s~~presence ~~Board~~in ofthe ~~Directors~~United ~~on August 9~~Kingdom, ~~2004,~~but ~~and~~has ~~was~~determined ~~completed during~~that supplying the ~~fourth~~European ~~quarter~~market offrom ~~fiscal~~production ~~year~~in ~~2005~~its United States or Asian manufacturing facilities provides greater economic feasibility. ~~The~~Due ~~Facility~~to ~~Maximization~~the ~~will~~uncertainty ~~increase~~associated ~~utilization~~with inthe potential sale of the ~~Truro~~facility, ~~Nova~~the ~~Scotia~~Company ~~facility.~~is unable at this time to make a determination as to any estimated costs expected to be incurred in connection with the closure.

During fiscal 2005, the Company incurred costs associated with the Facility Maximization, which consist of temporary production inefficiencies, equipment movement and installation costs, professional fees, severance and other related costs. During the first quarter of fiscal 2005, cost of goods sold included $2.7 million and selling, general and administrative expenses included $0.4 million of these

expenses in the accompanying consolidated statements of operations. The accrued Facility Maximization costs included in accrued expenses in the accompanying consolidated statements of financial condition amounted to $0.3 million as of April 30, 2005. There were nominal costs accrued as of April 29, 2006.

As part of the Facility Maximization, the Company negotiated with the Nova Scotia government the forgiveness of debt consisting of the remaining $1.4 million of Crossley’s outstanding sinking fund bonds over the next five years. The forgiveness will commence during fiscal 2006, will be over the remaining five-year term of the current note, and is based upon maintaining a defined level of full-time equivalent employees during the year, of which requirement the Company is in full compliance as of April 29, 2006. The debt will also be non-interest bearing.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements as of ~~April~~October 2928, 2006 and January 28, 2006.

Critical Accounting Policies

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

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

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

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

~~Assets~~29 and liabilities of the U.K. and Asian subsidiaries are translated to U.S. dollars at period-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the period. Translation adjustments are accumulated as a separate component of shareholders’ equity. Foreign currency gains (losses) are recognized in the statement of operations.

Impairment of Goodwill and Indefinite Lived Intangible Asset. In addition to the annual impairment tests required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company may periodically evaluate the carrying value of its goodwill and indefinite lived intangible asset for potential impairment. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance. Future events could

~~cause~~Canadian subsidiary. The financial information of the Company’s toCanadian ~~conclude~~subsidiary ~~that~~for ~~impairment~~the ~~indicators~~quarter ~~exist~~ended July 30, 2005 and ~~that~~prior periods have been presented in U.S. dollars in accordance with a translation of convenience method using the ~~goodwill~~exchange ~~and~~rate ~~indefinite~~at ~~lived~~July 30, ~~intangible~~2005 of US$1.00 being equal to CDN$1.2241, the Bank of Canada closing buying ~~asset~~rate ~~associated~~at ~~with~~July 30, ~~acquired~~2005. ~~businesses~~For isperiods ~~impaired~~subsequent to July 30, 2005, the Canadian dollar amounts are remeasured into the U.S. ~~Any~~dollar ~~resulting~~reporting ~~impairment~~currency ~~loss~~using ~~could~~the ~~have~~temporal method. When the temporal method is used to translate the local currency of a ~~material~~foreign ~~adverse~~entity ~~impact~~into onits functional currency, the ~~Company’s~~resulting ~~financial~~translation ~~condition~~adjustment ~~and~~is ~~results~~reported in the current period’s statement of operations.

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

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

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

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

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

Effects of Inflation

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

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

Seasonality

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

Reliance on Primary Third-Party Supplier of Nylon Yarn

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

~~While~~30 Invista is an important vendor, it is believed that there are adequate alternative sources of supply from which the synthetic fiber requirement could be fulfilled including, but not limited to, nylon yarn produced by Extrusion. In addition to Invista, there are at least three major third party suppliers to the commercial carpet industry from whom the Company acquires yarn.

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

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

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

Recent Accounting Pronouncements

In ~~October~~September ~~2005~~2006, the Financial Accounting Standards Board (“FASB”) issued ~~FASB~~Statement ~~Staff~~of ~~Position~~ Financial Accounting ~~Standard 123~~Standards No. 157, “Fair Value Measurements” (R“SFAS No. 157”)-2. SFAS No. 157 defines fair value, ~~“Practical~~establishes ~~Accommodation~~a toframework ~~the~~for ~~Application~~measuring offair ~~Grant~~value, ~~Date~~and asexpands ~~Defined~~disclosures inabout ~~FASB~~fair ~~Statement~~value measurements. The provisions of SFAS No. ~~123(R)”~~157 ~~(“FSP~~are ~~123(R)-2”).~~effective ~~FSP~~for ~~123(R)-2~~fiscal ~~provides~~years anbeginning ~~exception~~after toNovember 15, ~~the~~2007, ~~application~~and ofinterim ~~the~~periods within ~~concept~~those offiscal ~~“mutual understanding”~~years. asThe ~~expressed~~adoption inof SFAS No. ~~123(R),~~157 will not have a material effect on the Company’s financial position or results of operations.

27In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income. In addition, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end. The provisions of SFAS No. 158 are effective for employers without publicly traded equity securities as of the end of the fiscal year ending after June 15, 2007. The effect of the adoption of SFAS No. 158 on the Company’s financial position is not expected to be material and the adoption will have no effect on the Company’s results of operations.

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

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

regarding the determination of whether a grant date or measurement date, as applicable, has occurred. The exception permits companies to measure compensation cost for equity awards to employees on the Board approval date if certain conditions are met, provided that the communication to the employees occurs within a “relatively short period of time” from the approval date. The guidance in FSP 123(R)-2 is to be applied upon initial adoption of SFAS No. 123(R), or to the first reporting period after October 18, 2005, for which financial statements or interim reports have not been issued should an entity have previously adopted the provisions of SFAS No. 123(R). The Company adopted the provisions of FSP 123(R)-2 effective January 29, 2006. The adoption did not have a material impact on the Company’s consolidated financial statements.

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

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

28In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, “Inventory Costs-An Amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing” (“ARB No. 43”), to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There was no material change during the thirteen ~~weeks~~ weeks ended ~~April~~October 2928, 2006 in the information provided in response to Part I, Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2006.

Item 4. Controls and Procedures

As of ~~April~~October 2928, 2006, the Company carried out an evaluation, under the ~~supervision~~ supervision and with the participation of the Company’s ~~Chief~~principal ~~Executive~~executive ~~Officer and the Chief Financial Officer~~officers, of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on this evaluation, the Company’s ~~Chief~~principal ~~Executive~~executive ~~Officer~~officers ~~and Chief Financial Officer~~ concluded that the Company’s disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms. The ~~Chief~~principal ~~Executive~~executive ~~Officer~~officers ~~and Chief Financial Officer~~ also concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings. InThe ~~connection with the new rules, the~~ Company is in the process of further reviewing and documenting its disclosure controls and procedures, including its internal controls and procedures for financial reporting, and may from time to time make changes designed to enhance their effectiveness and to ensure that the Company’s systems evolve with its business. There were no changes in the Company’s internal controls over financial reporting that occurred during the period covered by this report that have materially affected or that are reasonably likely to materially affect the Company’s internal controls over financial reporting, except as noted below.

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

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

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

~~Should~~33 the Company’s motion to overturn the jury verdict and award of interest and attorneys’ fees not be granted, the Company believes it has meritorious grounds to seek reversal of the judgment on appeal, and the Company intends to vigorously prosecute an appeal of the jury verdict and the award of attorneys’ fees and prejudgment interest granted by the Appellate Court. The prosecution of the appeal could result in several possible outcomes: a reversal of the jury verdict, a reversal and remand for a new trial, a modification of the judgment striking all or a portion of the jury verdict, attorneys’ fees or prejudgment interest awarded by the Appellate Court or an affirmation of the judgment as entered by the Appellate Court. The Company has recorded an accrued liability of approximately $2,010,000 related to this case in its accompanying statements of financial condition.

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

Item 6. Exhibits

(a) Exhibits

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.1		Certification of the Senior Vice President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.

~~31.2~~34 ~~Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

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

SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on ~~June~~December 1312, 2006.

COLLINS & AIKMAN FLOORCOVERINGS, INC. (Registrant) By: /s/ Leonard F. Ferro Leonard F. Ferro Vice President, ~~and~~Secretary, Treasurer & Chief Financial Officer (duly authorized officer and principal financial and accounting officer)

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

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