Patents and Trademarks

     The principal methods of competition within the carpet and rugs and ceramic tile industries are price, style, quality and service. In each ofIntellectual property is important to the Company's markets, price competitionbusiness, and market coverage are particularly important because there is limited differentiation among competing product lines. The Company's recent investments in modernized, advanced manufacturing and data processing equipment, the extensive diversity of equipment in which the Company has invested,relies on a combination of patent, copyright, trademark and trade secret laws to protect its marketing strategy and its distribution system contribute to its ability to compete primarily on the basis of performance, quality, style and service, rather than just price.

      In each of the Company's carpet and rug and ceramic tile businesses, the Company faces competition from a large number of domestic and foreign manufacturers and independent distributors of floorcovering products. Some of the Company's existing and potential competitors may be larger and have greater resources and access to capital than the Company does. Maintaining the Company's competitive position may require it to make substantial investments in its product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company's products and in the loss of market share. In addition, the Company faces, and will continue to face, pressure on sales prices of its products from competitors, as well as from large customers. As a result of any of these factors, there could be a material adverse effect on the Company's sales and profitability.

Trademarksinterests.

     The Company uses several trademarks that it considers important in the marketing of its products, including "Aladdin,"Aladdin®," "American Olean^®Olean®," "Bigelow,"Bigelow®," "Custom Weave" "Dal-Tile^®Weave®," "Durkan," "Galaxy," "Goodwin Weavers," "Helios^®"Dal-Tile®," "Home Source," "Horizon^®"Durkan®," "Karastan^®"Helios®," "Lees^®"Horizon®," "Mohawk^®"Karastan®," "Lees®," "Mohawk®," "Mohawk Home,^™" "PERSPECTIVE, ®" "Portico, ®" "Quick-Step®," "World^®"UNICLIC®," "UNILIN®," and "WundaWeve^®"WundaWeve®."

     Unilin owns a number of patent families, totaling approximately 150 patents and applications in Europe and the United States. The most important of these patent families is the UNICLIC® family, which protects Unilin's interlocking laminate flooring panel technology. The patents in the UNICLIC® family are not expected to expire until at least 2017.

Sales Terms and Major Customers

     The Company's sales terms are the same as those generally available throughout the industry. The Company generally permits its customers to return broadloom carpet, andrug, ceramic tile, and laminate flooring purchased from it within 30 daysspecified time periods from the date of sale, if the customer is not satisfied with the quality of the product. This return policy is consistent with the Company's emphasis on quality, style and performance and promotes customer satisfaction without generating enough returns to affect materially its operating results or financial position.

     During 2003,2005, no single customer accounted for more than 10% of Mohawk's total net sales, and the top ten customers accounted for less than 15% of the Company's sales. The Company believes the loss of one or a few major customers would not have a material adverse effect on its business.

Employees

     As of March 2, 2004,10, 2006, the Company employed approximately 33,300 persons, of which approximately 635 of its employees in the37,700 persons. Approximately 460  United States employees, approximately 3,500 Mexico employees, and approximately 3,100the majority of itsEuropean manufacturing employees in Mexico are members of unions. Other than with respect to these employees, the Company is not a party to any collective bargaining agreements. Additionally, the Company has not experienced any strikes or work stoppages in the United States or Mexico for over 20 years. The Company believes that its relations with its employees are good.

Available Information

      The Company's Internet address is http://mohawkind.com. The Company makes the following reports filed by it available, free of charge, on its website under the heading "Investor Information:"

• annual reports on Form 10-K;
• quarterly reports on Form 10-Q;
• current reports on Form 8-K; and
• amendments to the foregoing reports.

      The foregoing reports are made available on the Company's website as soon as practicable after they are filed with, or furnished to, the Securities and Exchange Commission ("SEC").

Item 1a. Risk Factors

Certain Factors affecting the Company's Performance

      In addition to the other information provided in this Annual Report on Form 10-K, the following risk factors should be considered when evaluating an investment in shares of Common Stock.

      If any of the events described in these risks were to occur, it could have a material adverse effect on the Company's business, financial condition and results of operations.

The floor covering industry is sensitive to changes in general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels and demand for housing. A prolonged decline in spending for replacement floor covering products or new construction activity could have a material adverse effect on the Company's business.

      The floor covering industry in which the Company participates is highly dependent on general economic conditions, such as consumer confidence and income, corporate and government spending and interest rate levels. The Company derives a majority of the Company's sales from the replacement segment of the market. Therefore, economic changes that result in a prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Company's business and results of operations.

      The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, a prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company's business and results of operations.

      The construction industry has experienced significant downturns in the past, which have adversely affected suppliers to the industry. The industry could experience similar downturns in the future, which could have a negative impact on the Company's business.

The Company may be unable to pass increases in the costs of raw materials and fuel-related costs on to its customers, which could have a material adverse effect on the Company's profitability.

      The prices of raw materials and fuel-related costs vary with market conditions. As a result of recent hurricanes and other general economic factors, the Company's costs of carpet raw materials and fuel-related costs are currently higher than historical averages and may remain so indefinitely. Although the Company generally attempts to pass on increases in the costs of raw materials and fuel-related costs to its customers, the Company's ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for the Company's products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered. During such periods of time, the Company's profitability may be materially adversely affected.

The Company faces intense competition in the industry, which could decrease demand for the Company's products or force it to lower prices, which could have a material adverse effect on the Company's profitability.

      The floor covering industry is highly competitive. The Company faces competition from a number of manufacturers and independent distributors. Some of the Company's competitors are larger and have greater resources and access to capital than the Company does. Maintaining the Company's competitive position may require substantial investments in the Company's product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for the Company's products or force the Company to lower prices. Any of these factors could have a material adverse effect on the Company's business.

The Company may not be able to successfully integrate Unilin or other acquisitions that the Company may make in the future.

      The process of combining the businesses of Unilin with the Company's existing businesses involves risks. The Company will face challenges in consolidating functions, integrating the Company's organizations, procedures, operations and product lines in a timely and efficient manner and retaining key personnel. These challenges will result principally because the two companies currently

•  maintain executive offices in different locations;

• manufacture and sell different types of products through different distribution channels;

• conduct business from various locations;

• maintain different operating systems and software on different computer hardware; and

• have different employment and compensation arrangements for their employees.

      In addition, the majority of Unilin's operating facilities are located in Europe, where the Company has not previously operated a manufacturing facility. As a result, the integration will be complex and will require additional attention from members of management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company's revenues, level of expenses and operating results. The Company may face similar challenges in combining the Company's businesses with any other businesses that the Company acquires in the future.

      Failure to successfully manage and integrate Unilin with the Company's existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new operations, the potential loss of business opportunities or other adverse consequences that could affect the Company's financial condition and results of operations. Even if integration occurs successfully, failure of the Unilin Acquisition or any future acquisition to achieve levels of anticipated sales growth, profitability or productivity or otherwise not perform as expected, may adversely impact the Company's financial condition and results of operations. The Company has incurred, and will continue to incur, certain liabilities and expenses in connection with the Unilin Acquisition or any future acquisitions.

The Company has not yet completed the testing of the adequacy of Unilin's internal control over financial reporting, and it is possible that the Company's testing or that of the Company's independent auditors in connection with the audit of the Company's financial results for the year ended December 31, 2006, will reveal material weaknesses in Unilin's internal control over financial reporting.

      As part of the integration of Unilin, the Company is in the process of documenting and testing of the Unilin's internal control over financial reporting to allow management and the Company's independent registered public accounting firm to report in 2006 on the effectiveness of the internal control over financial reporting as it pertains to Unilin's operations. The adequacy of Unilin's internal control over financial reporting has not previously been attested to by any independent accounting firm, as no such attestation was required by virtue of Unilin's status as a foreign, privately-held company. The Company anticipates completing the testing of Unilin's internal control over financial reporting by the end of 2006. The Company's testing, or the subsequent testing by the Company's independent registered public accounting firm, may reveal deficiencies in the Company's internal control over financial reporting. In that event, the Company's management may not be able to report that the Company's internal control over financial reporting is effective, and the Company's auditors will not be able to express an opinion on the Company's internal control over financial reporting, which could have a material adverse effect on the Company's business.

A failure to identify suitable acquisition candidates and to complete acquisitions could have a material adverse effect on the Company's business.

      As part of the Company's business strategy, the Company intends to continue to pursue acquisitions of complementary businesses. Although the Company regularly evaluates acquisition opportunities, the Company may not be able successfully to identify suitable acquisition candidates; to obtain sufficient financing on acceptable terms to fund acquisitions; to complete acquisitions; or to manage profitably acquired businesses.

The Company may be unable to obtain raw materials on a timely basis, which could have a material adverse effect on the Company's business.

      The principal raw materials used in the Company's manufacturing operations include nylon, polyester and polypropylene resins and fibers and carpet backings, which are used primarily in the Company's carpet and rugs business; talc, clay, nepheline syenite and various glazes, including frit (ground glass), zircon and stains, which are used exclusively in the Company's ceramic tile business; wood, paper, and resins which are used primarily in the Company's laminate flooring business; and other materials. An extended interruption in the supply of these or other raw materials used in the Company's business or in the supply of suitable substitute materials would disrupt the Company's operations, which could have a material adverse effect on the Company's business.

The Company has been, and in the future may be, subject to claims and liabilities under environmental, health and safety laws and regulations, which could be significant.

      The Company's operations are subject to various environmental, health and safety laws and regulations, including those governing air emissions, wastewater discharges, and the use, storage, treatment and disposal of hazardous materials. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties.

      The nature of the Company's operations, including the potential discovery of presently unknown environmental conditions, exposes it to the risk of claims under environmental, health and safety laws and regulations. The Company could incur material costs or liabilities in connection with such claims.

Changes in international trade laws and in the business, political and regulatory environment in Mexico and Europe could have a material adverse effect on the Company's business.

      The Company's Monterrey, Mexico manufacturing facility and the Company's manufacturing facilities in Europe represent a significant portion of the Company's total manufacturing capacity for ceramic tile and laminate flooring, respectively.  In addition, as a result of the Unilin Acquisition, the Company now has more significant general operations abroad, particularly in Europe. Accordingly, an event that has a material adverse impact on the Company's Mexican operations could have a material adverse effect on the Company's tile operations as a whole.  Similarly, an event that has a material adverse impact on the Company's European operations could have a material adverse effect on the Company's laminate flooring operations, as a whole.  The business, regulatory and political environments in Mexico and in Europe differ from those in the United States, and the Company's Mexican and European operations are exposed to legal, currency, tax, political, and economic risks specific to the countries in which they occur, particularly with respect to labor regulations, which tend to be more stringent in Europe and, to a lesser extent, Mexico.  The Company cannot assure investors that the Company will succeed in developing and implementing policies and strategies to counter the foregoing factors effectively in each location where the Company does business and therefore that the foregoing factors will not have a material adverse effect on the Company's operations or upon the Company's financial condition and results of operations.

The Company could face increased competition as a result of the General Agreement on Tariffs and Trade ("GATT") and the North American Free Trade Agreement ("NAFTA").

      The Company is uncertain what effect reduced import duties under GATT may have on the Company's operations, although these reduced rates may stimulate additional competition from manufacturers that export ceramic tile to the United States.

      Although NAFTA lowers the tariffs imposed on the Company's ceramic tile manufactured in Mexico and sold in the United States and will eliminate such tariffs entirely on January 1, 2008, it may also stimulate competition in the United States and Canada from manufacturers located in Mexico.

Fluctuations in currency exchange rates may impact the Company's financial condition and results of operations and may affect the comparability of results between the Company's financial periods.

      The results of the Company's foreign subsidiaries reported in the local currency are translated into U.S. dollars for balance sheet accounts using exchange rates in effect at the balance sheet date and for the statement of earnings accounts using the Company's weighted average rates during the period.  The exchange rates between some of these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. Although the Company has not yet experienced material losses due to foreign currency fluctuation, the Company may not be able to manage effectively the Company's currency translation risks, and volatility in currency exchange rates may have a material adverse effect on the carrying value of the Company's debt and results of operations and affect comparability of the Company's results between financial periods.

If the Company is unable to protect the Company's intellectual property rights, particularly with respect to the Company's patented laminate flooring technology and the Company's registered trademarks, the Company's business and prospects could be harmed.

      The future success and competitive position of certain of the Company's businesses, particularly the Company's laminate flooring business, depend in part upon the Company's ability to obtain and maintain proprietary technology used in the Company's principal product families. The Company relies, in part, on the patent, trade secret and trademark laws of the United States and countries in Europe, as well as confidentiality agreements with some of the Company's employees, to protect that technology.

      The Company has obtained a number of patents relating to the Company's products and associated methods and has filed applications for additional patents, including the UNICLIC^® family of patents, which protects Unilin's interlocking laminate flooring panel technology. The Company cannot assure investors that any patents owned by or issued to it will provide the Company with competitive advantages, that third parties will not challenge these patents, or that the Company's pending patent applications will be approved. In addition, patent filings by third parties, whether made before or after the date of the Company's filings, could render the Company's intellectual property less valuable.

      Furthermore, despite the Company's efforts, the Company may be unable to prevent competitors and/or third parties from using the Company's technology without the Company's authorization, independently developing technology that is similar to that of the Company or designing around the Company's patents. The use of the Company's technology or similar technology by others could reduce or eliminate any competitive advantage the Company has developed, cause us to lose sales or otherwise harm the Company's business. In addition, if the Company does not obtain sufficient protection for the Company's intellectual property, the Company's competitiveness in the markets it serves could be significantly impaired, which would limit the Company's growth and future revenue.

      The Company has obtained and applied for numerous U.S. and foreign service marks and trademark registrations and will continue to evaluate the registration of additional service marks and trademarks, as appropriate. The Company cannot guarantee that any of the Company's pending or future applications will be approved by the applicable governmental authorities. Moreover, even if such applications are approved, third parties may seek to oppose or otherwise challenge the registrations. A failure to obtain trademark registrations in the United States and in other countries could limit the Company's ability to protect the Company's trademarks and impede the Company's marketing efforts in those jurisdictions.

      The Company requires third parties with access to the Company's trade secrets to agree to keep such information confidential. While such measures are intended to protect the Company's trade secrets, there can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that the Company's confidential and proprietary information and technology will not be independently developed by or become otherwise known to third parties. In any of these circumstances, the Company's competitiveness could be significantly impaired, which would limit the Company's growth and future revenue.

Companies may claim that the Company infringed their intellectual property or proprietary rights, which could cause it to incur significant expenses or prevent it from selling the Company's products.

      The Company has in the past had companies claim that certain technologies incorporated in the Company's products infringe their patent rights. There can be no assurance that the Company will not receive notices in the future from parties asserting that the Company's products infringe, or may infringe, those parties' intellectual property rights. The Company cannot be certain that the Company's products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United States and some foreign countries have not been publicly disclosed until the patent is issued (or, in some recent cases, until 18 months following submission), and the Company may not be aware of currently filed patent applications that relate to the Company's products or processes. If patents are later issued on these applications, the Company may be liable for infringement.

      Furthermore, the Company may initiate claims or litigation against parties for infringement of the Company's proprietary rights or to establish the invalidity, noninfringement, or unenforceability of the proprietary rights of others. Likewise, the Company may have similar claims brought against it by competitors. Litigation, either as plaintiff or defendant, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from operations, whether or not such litigation is resolved in the Company's favor. In the event of an adverse ruling in any such litigation, the Company might be required to pay substantial damages (including punitive damages and attorneys fees), discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses to infringing technology. There can be no assurance that licenses to disputed technology or intellectual property rights would be available on reasonable commercial terms, if at all. In the event of a successful claim against the Company along with failure to develop or license a substitute technology, the Company's business, financial condition and results of operations would be materially and adversely affected.

Forward-Looking Information

      Certain of the statements in this Annual Report on Form 10-K, particularly those anticipating future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words "believes," "anticipates," "forecast," "estimates" or similar expressions constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in industry conditions; competition; raw material prices; energy costs; timing and level of capital expenditures; integration of acquisitions; introduction of new products; rationalization of operations; litigation; and other risks identified in Mohawk's SEC reports and public announcements.

Item 1b. Unresolved Staff Comments

      None

Item 2. Properties

       The Company owns a 47,500 square foot headquarters office in Calhoun, Georgia on an eight-acre site. The Company also owns a 2,089,000 square foot manufacturing facility located in Dalton, Georgia, andused by the Mohawk segment, a 1,464,5971,773,145 square foot manufacturing facility located in Monterey, Mexico.Mexico used by the Dal-Tile segment and a 1,128,535 square foot manufacturing facility located in Wielsbeke, Belgium used by the Unilin segment. The following table summarizes the Company's facilities both owned and leased for each segment in square feet:

          The Company's properties are in good condition and adequate for its requirements. The Company also believes its principal plants are generally adequate to meet its production plans pursuant to itsthe Company's long-term sales goals. In the ordinary course of its business, the Company monitors the condition of its facilities to ensure that they remain adequate to meet long-term sales goals and production plans.

Item 3. Legal Proceedings

      The Company is involved in routine litigation from time to time in the regular course of its business. Except as noted below or under the section "-Environmental Matters," there are no material legal proceedings pending or known by the Company to be contemplated to which the Company is a party or to which any of its property is subject.

      In Shirley Williams, et al vs. Mohawk Industries, Inc., four plaintiffs filed a purported class action lawsuit in January 2004, in the United States District Court for the Northern District of Georgia, alleging that they are former and current employees of the Company and that the actions and conduct of the Company, including the employment of persons who are not permitted to work in this country, have damaged them and the other members of the purported class by suppressing the wages of the Company's hourly employees in Georgia. The plaintiffs seek a variety of relief, including (a) treble damages; (b) return of any allegedly unlawful profits; and (c) attorney's fees and costs of litigation. In February 2004, the Company filed a Motion to Dismiss the Complaint, which was denied by the Northern District in April 2004. The Company then sought and obtained permission to file an immediate appeal of the Northern District's decision to the United States Court of Appeals for the 11th Circuit. In June 2005, the 11th Circuit reversed in part and affirmed in part the lower court's decision (Williams v. Mohawk Industries, Inc., 411 F.3d 1252 (11th Cir. 2005)). In June 2005, the Company filed a motion requesting review by the full 11th Circuit, which was denied in August 2005. In October 2005, the Company filed a petition for certiorari with the United States Supreme Court, which petition was granted in December of 2005. The Company believes it has meritorious defenses and intends to continue vigorously defending itself against this action.

      The Company believes that adequate provisions have been made for all pending litigation for probable losses with respect to the resolution of all claims and pending litigation and that the ultimate outcome of these actions will not have a material adverse effect on its financial condition but could have a material effect on its results of operations in a given quarter or annual period.

Environmental Matters

      The Company is subject to various federal, state, local and foreign environmental health and safety laws and regulations, including those governing air emissions, wastewater discharges, the use, storage, treatment and disposal of solid and hazardous materials, and the cleanup of contamination associated therewith.  Because of the nature of the Company's business, the Company has incurred, and will continue to incur, costs relating to compliance with such laws and regulations.  The Company is involved in various proceedings relating to environmental matters and is currently engaged in environmental investigation, remediation and post-closure care programs at certain sites. The Company has provided reservesaccruals for such activities that it has determined to be both probable and reasonably estimable. The Company does not expect that the ultimate liability with respect to such activities will have a material adverse effect on it.

      Three sites near Mohawk's Dallas facility in its Dal-Tile segment are involved in environmental cleanup projects relating principally to the disposal or alleged disposal by Dal-Tile of waste materials containing lead compounds. Dal-Tile's approved closure plansoperations, but may have been implemented and each site is now undergoing post-closure care.  Dal-Tile has been named as a potentially responsible party under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and similar state statutes for the disposal of certain hazardous substances at various other sites in the United States.  The Company does not believe that any future costs for these sites will have a material adversean effect on it.the results of operations for a given quarter or annual period.

Item 4. Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of security holders of the Company during the fourth quarter ended December 31, 2003.2005.

PART II

Item 5. Market for the Registrant's Common Equity, and Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for the Common Stock

      The Company's common stock, $.01 par value per share (the "Common Stock") is quoted on the New York Stock Exchange ("NYSE") under the symbol "MHK."  The table below shows the high and low sales prices per share of the Common Stock as reported on the NYSE Composite Tape, for each fiscal period indicated.

      As of March 2, 2004,13, 2006, there were approximately 411384 holders of record of Common Stock. The Company has not paid or declared any cash dividends on shares of its Common Stock since completing its initial public offering. The Company's policy is to retain all net earnings for the development of its business, and presently, it does not anticipate paying cash dividends on the Common Stock in the foreseeable future. The payment of future cash dividends will be at the sole discretion of the Board of Directors and will depend upon the Company's profitability, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors.

      The Company did not repurchase any of its common stock during the fourth quarter of 2005.

      On October 31, 2005, the Company entered into an agreement to issue 585,549 shares of Common Stock to certain Unilin officers for $81.00 per share, for an aggregate purchase price of $47.4 million. The shares of Common Stock purchased by the Unilin officers, 389,976 of which were issued on November 7, 2005, and 195,573 of which were issued on November 9, 2005, were issued in reliance on the exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended, as a transaction by the issuer not involving a public offering. All of these securities were acquired by the recipients for investment and with no view toward public resale or distribution of the securities without registration. There was not any public solicitation and the issued stock certificates bear restrictive legends.

Item 6. Selected Financial Data

      The following table sets forth the selected financial data of the Company for the periods indicated, which information is derived from the consolidated financial statements of the Company. On January 29, 1999, the Company acquired certain assets and assumed certain liabilities of Image Industries, Inc. ("Image"). The acquisition was recorded using the purchase method of accounting. On March 9, 1999, the Company acquired all of the outstanding capital stock of Durkan Patterned Carpets, Inc. ("Durkan") in exchange for approximately 3.1 million shares of the Company's common stock in a transaction recorded using the pooling-of-interests method of accounting. On November 14, 2000, the Company acquired certain fixed assets and inventory of Crown Crafts, Inc. ("Crown Crafts"). The acquisition was accounted for using the purchase method of accounting. On March 20, 2002, the Company acquired all the outstanding capital stock of Dal-Tile International Inc. ("Dal-Tile") in exchange for approximately of $1,469 million, consisting of approximately 12.9 million shares of the Company's common stock, options to purchase approximately 2.1 million shares of the Company's common stock and $718 million in cash. The acquisition was accounted for using the purchase method of accounting. On November 10, 2003, the Company acquired certain assets and assumed certain liabilities of the Lees Carpet division of Burlington Industries, Inc. ("Lees Carpet") for approximately $350 million in cash. The acquisition was recorded using the purchase method of accounting.  AllOn October 31, 2005 the Company acquired all the outstanding shares of Unilin Holding NV.  The total purchase price of the Unilin Acquisition, net of cash, was approximately Euro .2 billion (approximately $2.6 billion).  The acquisition was recorded using the purchase method of accounting. The consolidated financial data have been restated tostatements include the accounts and results of operationsall acquisitions from the date of Durkan.acquisition. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere herein.

(a)     TheIn 2005, the Company recorded a one-time chargenon-recurring $34,300 (net of $7.0 million in 2000, reflecting the settlementtax of two class action lawsuits.$22,300) fair value adjustment  to Unilin's acquired inventory.

(b)     In December 2002, the Company discontinued hedge accounting for its interest rate swap. The impact of discontinuing the hedge was to increase interest expense by approximately $10.7 million.

(c)     In 2002, the Company adopted the provisions of Financial Accounting Standards Board SFAS No. 142 "Goodwill and Other Intangible Assets" which required the Company to cease amortizing goodwill and evaluate such goodwill and indefinite intangibles for impairment.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

      The Company is thea leading producer of floorcoveringfloor covering products for residential and commercial applications in the United States.States and Europe with net sales in 2005 in excess of $6.6 billion. The Company is the second largest carpet and rug manufacturer, and a leading manufacturer, marketer and distributor of ceramic tile and natural stone, in the United States. Annual floorcovering sales withinStates and a leading producer of laminate flooring in the United States in 2002 were approximately $20.3 billion.and Europe.

      The Company had annual nethas three reporting segments, the Mohawk segment, the Dal-Tile segment and the Unilin segment. The Mohawk segment distributes its product lines, which include carpet, rug, pad, ceramic tile, hardwood, resilient and laminate through its network of approximately 52 regional distribution centers and satellite warehouses using its fleet of company-operated trucks, common carrier or rail transportation. The segment product lines are purchased by independent floor covering retailers, home centers, mass merchandisers, department stores, independent distributors, commercial dealers and commercial end users. The Dal-Tile segment product lines include ceramic tile, porcelain tile and stone products distributed through approximately 250 company-operated sales in 2003 in excessservice centers and regional distribution centers using primarily common carriers and rail transportation. The segment product lines are purchased by tile specialty dealers, tile contractors, floor covering retailers, commercial end users, independent distributors and home centers. The Unilin segment manufactures and markets laminate flooring products which are distributed through separate distribution channels consisting of $5.0 billion.retailers, contractors, commercial users, independent distributors and home centers. The business is organized to address the specific customer needs of each distribution channel.

      The primary categories of the floorcoveringUnited States floor covering industry include carpet and rugs (65%rug (62%), ceramic tile (12%), vinylhardwood (10%), resilient and rubber (10%), hardwood (9%) and laminate (4%(6%). Compound average growth rates in units sold (measured in square yards) for all categories, except the vinylresilient and rubber category, for the period from 19921999 through 20022004 have met or exceeded the growth raterates (measured in sales dollars) for both the gross domestic product of the United States over the same period.  Ceramic tile, laminate and hardwood continued to exceed the growth rate for housing starts over the same period. During this period, the compound average growth rate was 3.6%3.0% for carpet and rugs, 10.3%rug, 7.0% for ceramic tile, 1.3%0.6% for vinylresilient and rubber, 17.4% for laminate and 8.0%9.4% for hardwood.  Laminate, which is a relatively new product, experienced a compound average growth rate of 41.5% from 1996 through 2002.  Although beginning from a smaller base, the growth rates for hard floorcoverings may indicate increasing consumer preference for these products for certain applications.  In response to this increasing demand, the Company has increased its distribution of hard surface products, including ceramic tile, vinyl, hardwood and laminate. The acquisition of Dal-Tile provided a unique opportunity to help the Company achieve its strategic goal of becoming one of the world's leading floorcovering manufacturers and distributors.

      The Company continues to experience growth both internally and through acquisitions.

       On March 20, 2002,October 31, 2005, the Company acquired all the outstanding shares of Unilin Holding NV. The total purchase price of the outstanding capital stockUnilin Acquisition, net of Dal-Tile, a leading manufacturer and distributorcash of ceramic tile in the United States, for$167.5 million, was approximately $1,469 million in stock and cash.Euro 2.2 billion (approximately $2.6 billion).  The transaction was accounted for using the purchase method of accounting and, accordingly, the results of operations of Dal-Tilefor the Unilin segment have been included in the Company's consolidated financial statements from March 20, 2002.since that date. The primary reason for the acquisition was to expand the Company's presence in the ceramic tile and stone markets.laminate flooring market.

      On November 10, 2003, the Company acquired the assets and assumed certain liabilities of the commercial carpet division of Burlington Industries, Inc., known as Lees Carpet, from W.L. Ross & Company for approximately $350 million in cash. The results of operations for Lees Carpet have been included with the Mohawk segment results and in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the commercial carpet market.

     The Company has two operating segments,reported net earnings of $358.2 million or diluted earnings per share ("EPS") of $5.30, compared to net earnings of $368.6 million and $5.46 EPS for 2004. The decrease in EPS resulted from a non-recurring $34.3 million (net of tax of $22.3 million) fair value adjustment applied to Unilin's acquired inventory, continuing raw material and energy cost increases, offset by sales growth and better leveraging of selling, general and administrative costs when compared to the year ended December 31, 2004.

Results of Operations

Following are the results of operations for the last three years:

Year Ended December 31, 2005, as Compared with Year Ended December 31, 2004

      Net sales for the year ended December 31, 2005, were $6,620.1 million, reflecting an increase of $739.7 million, or approximately 12.6%, over the $5,880.4 million reported for the year ended December 31, 2004. The increased net sales are primarily attributable to price increases and internal sales growth and the Unilin Acquisition. The Mohawk segment recorded net sales of $4,716.7 million in 2005 compared to $4,368.8 million in 2004, representing an increase of $347.9 million or approximately 8.0%. The increase was attributable to price increases and internal growth within the nylon filament and polyester carpets, commercial carpet tile, and hard surface flooring offset by declines in nylon staple and polypropylene carpets and home products. The Dal-Tile segment recorded net sales of $1,734.8 million in 2005, reflecting an increase of $223.3 million or 14.8%, over the $1,511.5 million reported in the year ended December 31, 2004. The increase was mostly attributable to strong internal growth in all product categories with stone and floor tile reflecting the strongest growth.

      Quarterly net sales and the percentage changes in net sales by quarter for 2005 versus 2004 were as follows (dollars in thousands)

      Gross profit was $1,723.1 million (26.0% of net sales) for 2005 and $1,620.8 million (27.6% of net sales) for 2004. The reduction in percentage was primarily attributable to increased raw material costs, energy costs, transportation costs, an increase in the LIFO reserve requirement, a non-recurring fair value adjustment applied to Unilin's acquired inventory, and higher import costs.

      Selling, general and administrative expenses for 2005 were $1,095.9 million (16.6% of net sales) compared to $985.3 million (16.8% of net sales) for 2004. The reduction in percentage was attributable to better leveraging of selling, general and administrative expenses.

      Operating income for 2005 was $627.3 million (9.5% of net sales) compared to $635.6 million (10.8% of net sales) in 2004. Operating income attributable to the Mohawk segment was $381.7 million (8.1% of segment net sales) in 2005 compared to $424.3 million (9.7% of segment net sales) in 2004. The percentage decrease in operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $260.2 million (15.0% of segment net sales) in 2005, compared to $219.8 million (14.5% of segment net sales) in 2004. The increase in operating income as a percentage of net sales is primarily attributable to product mix shift and implementing increased pricing to help offset increased raw material, energy, transportation, and higher import costs.

      Interest expense for 2005 was $66.8 million compared to $53.4 million in 2004. The increase in interest expense was attributable to the debt raised to fund the Unilin Acquisition.

      Income tax expense was $198.8 million, or 35.7% of earnings before income taxes for 2005 compared to $208.8 million, or 36.2% of earnings before income taxes for 2004. The improved rate was primarily attributable to the utilization of tax credits and the one-time effect of state tax law changes.

Year Ended December 31, 2004, as Compared with Year Ended December 31, 2003

      Net sales for the year ended December 31, 2004, were $5,880.4 million, reflecting an increase of $881.0 million, or approximately 17.6%, over the $4,999.4 million reported for the year ended December 31, 2003. The increased net sales are primarily attributable to strong internal sales growth from both the Mohawk and Dal-Tile segment.segments. The Mohawk segment sellsrecorded net sales of $4,368.8 million in 2004 compared to $3,730.8 million in 2003, representing an increase of $638.0 million or approximately 17.1%. The increase was attributable to strong internal growth in all product categories and distributes its product lines, which include broadloom carpet, rugs, pad, ceramic tile, hardwood, vinyl and laminate through independent floor covering retailers, home centers, mass merchandisers, department stores, commercial dealers and commercial end users.the Lees Carpet acquisition. The Dal-Tile segment recorded net sales of $1,511.5 million in 2004, reflecting an increase of $243.0 million or 19.2%, over the $1,268.5 million reported in the year ended December 31, 2003. The increase was mostly attributable to strong internal growth in all product categories with stone and floor tile reflecting the strongest growth.

      Quarterly net sales and the percentage changes in net sales by quarter for 2004 versus 2003 were as follows (dollars in thousands):

      Sales in the first and fourth quarters of 2004 were impacted by a shift of four days from the fourth to the first quarter when compared to 2003.

      Gross profit was $1,620.8 million (27.6% of net sales) for 2004 and $1,393.8 million (27.9% of net sales) for 2003. The reduction in percentage was primarily attributable to increased raw material costs, energy costs, transportation costs and higher import costs.

      Selling, general and administrative expenses for 2004 were $985.3 million (16.8% of net sales) compared to $851.8 million (17.0% of net sales) for 2003. The reduction in percentage was attributable to better leveraging of selling, general and administrative expenses.

      Operating income for 2004 was $635.6 million (10.8% of net sales) compared to $542.0 million (10.9% of net sales) in 2003. Operating income attributable to the Mohawk segment was $424.3 million (9.7% of segment net sales) in 2004 compared to $364.0 million (9.8% of segment net sales) in 2003. The percentage decrease in operating income was attributable to higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $219.8 million (14.5% of segment net sales) in 2004, compared to $187.2 million (14.8% of segment net sales) in 2003. The decrease in operating income as a percentage of net sales is primarily attributable to higher energy costs, import costs and transportation costs.

      Interest expense for 2004 was $53.4 million compared to $55.6 million in 2003. The decrease in interest expense was attributable to a larger benefit from a fair value adjustment related to an interest rate swap during 2004 when compared to 2003.

      Income tax expense was $208.8 million, or 36.2% of earnings before income taxes for 2004 compared to $178.3 million, or 36.5% of earnings before income taxes for 2003. The improved rate was a result of the utilization of tax credits.

Liquidity and Capital Resources

      The Company's primary capital requirements are for working capital, capital expenditures and acquisitions.  The Company's capital needs are met primarily through a combination of internally generated funds, bank credit lines, include ceramic tile, porcelain tileterm and stone products soldsenior notes, the sale of receivables and credit terms from suppliers.

      Cash flows generated by operations for 2005 were $561.5 million compared to $242.8 million for 2004. The increase was primarily attributable to an increase in accounts payable and accrued expenses, which increased from $623.1 million at the beginning of 2005 to $998.1 million at December 31, 2005.  In addition, inventory turnover increased during 2005. The increases were primarily attributable to sales growth within both the Mohawk and Dal-Tile segments and the Unilin Acquisition.

      Net cash used in investing activities in 2005 was $2.9 billion compared to $121.6 million for 2004. The increase was primarily attributable to the Unilin Acquisition and higher capital expenditures. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment. Capital expenditures, including $3.0 billion for acquisitions, have totaled $3.5 billion over the past three years. Capital spending during 2005 for the Mohawk, Dal-Tile and Unilin segments combined, excluding acquisitions, is expected to range from $290 million to $310 million, and will be used primarily to purchase equipment and to add manufacturing and distribution capacity.

      Net cash provided by financing activities for 2005 was $2,440.7 million compared to cash provided in 2004 of $121.2 million. The primary reason for the change was an increase in debt levels as a result of the Unilin Acquisition in 2005 when compared to 2004.

      On October 28, 2005, the Company entered into a $1.5 billion 364-day senior, unsecured, bridge term loan facility, which is referred to as the bridge credit facility, and a $1.5 billion five-year, senior, unsecured, revolving credit and term loan facility, which is referred to as the new senior unsecured credit facilities.  The new senior unsecured credit facilities replaced a then-existing credit facility and various uncommitted credit lines.  The Company entered into both the bridge credit facility and the new senior unsecured credit facilities to finance the Unilin Acquisition and to provide for working capital requirements.

      The senior multi-currency unsecured credit facility consists of (i) a $750 million revolving credit facility, (ii) a $389.2 million term loan facility and (iii) a Euro 300 million term loan facility, all of which mature on October 28, 2010. Availability under the revolving credit facility is reduced by the amount of letters of credit issued under this facility. At December 31, 2005, the amount of these letters of credit was $78.3 million.  At the Company's election, both the credit facility and the new senior credit facilities bear interest at (i) the greater of (x) prime rate or (y) the overnight federal funds rate plus 0.50%, or (ii) LIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating.

      On November 8, 2005, one of the Company's subsidiaries entered into a Euro 130 million , or approximately $156 million (based on the then prevailing exchange rate), five-year unsecured, revolving credit facility, maturing on November 8, 2010, which is referred to as the Euro revolving credit facility. This revolving credit facility bears interest at EURIBOR plus an indexed amount based on the Company's senior, unsecured, long-term debt rating. The Company guaranteed the obligations of that subsidiary under this revolving credit facility and of any of the Company's other subsidiaries that become borrowers under this credit facility. As of December 31, 2005, the Company had no borrowings outstanding under this facility.

      The Company's new senior unsecured credit facilities and the Euro revolving credit facility both contain debt to capital ratio requirements and other customary covenants. The Company was in compliance with these covenants at December 31, 2005. Under both of these credit facilities, the Company must pay an annual facility fee ranging from 0.06% to 0.25%, depending upon the Company's senior unsecured long-term debt rating as determined by certain credit rating agencies.

      At December 31, 2005, a total of approximately $507.9 million was available under the new senior unsecured credit facilities, and the Euro revolving credit facility, compared to $234.1 million available under both the then-existing credit facility and uncommitted credit lines at December 31, 2004. The amount used under the new senior unsecured credit facilities at December 31, 2005, was $1.1 billion. The amount used under the unsecured credit facilities is composed of $1.1 billion in borrowings, $55.6 million in letters of credit guaranteeing the Company's industrial revenue bonds and $22.7 million in standby letters of credit related to various insurance contracts and foreign vendor commitments.

      On January 17, 2006, the Company issued $500 million aggregate principal amount of 5.750% notes due 2011 and $900 million aggregate principal amount of 6.125% notes due 2016. The net proceeds from the issuance of these notes were used to pay off the outstanding balance of the bridge credit facility and accordingly the Company reclassified the bridge credit facility as long-term debt. Interest payable on each series of notes will be increased in the event of a downgrade in the Company's debt rating determined by certain rating agencies. The maximum increase in the event of a downgrade is 2%. If the Company's debt rating subsequently improves, then the interest rates would be reduced accordingly.

      The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to $350 million based on available accounts receivable. At December 31, 2005, the Company had $40 million outstanding compared to $90 million at December 31, 2004. The Securitization Facility is secured with trade receivables. During the third quarter of 2005, the Company extended the term of its Securitization Facility until August 2006.

      The Company's Board of Directors has authorized the repurchase of up to 15 million shares of the Company's outstanding common stock. For the year ended December 31, 2005, a total of approximately 186,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $14.5 million. Since the inception of the program in 1999, a total of approximately 11.4 million shares have been repurchased at an aggregate cost of approximately $326.1 million. All of these repurchases have been financed through company-operated sales service centers, independent distributorsthe Company's operations and home centers.banking arrangements.

      The outstanding checks in excess of cash represent trade payables checks that have not yet cleared the bank. When the checks clear the bank, they are funded by the revolving credit facility. This policy does not impact any liquid assets on the consolidated balance sheets.

      The following is a summary of the Company's future minimum payments under contractual obligations as of December 31, 2005 (in thousands):

(1)     For fixed rate debt, the Company calculated interest based on the applicable rates and payment dates. For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect at December 31, 2005 to these balances.
(2)     Includes commitments for natural gas, foreign currency, and raw material purchases.

Critical Accounting Policies

      The Company's discussion and analysis of financial condition and results of operations are based on itsIn preparing the consolidated financial statements that were prepared in accordanceconformity with accounting principles generally accepted in the United States of America.

      TheAmerica, the Company makes estimates and assumptions when preparing financial statements. These estimates and assumptions affect various matters, including:

• must make decisions which impact the reported amounts of assets, and liabilities, in the Company's Consolidated Balance Sheets at the dates of the financial statements,
• disclosure of contingent assets and liabilities at the dates of the financial statements, and

• reported amounts of revenues and expenses, inand related disclosures. Such decisions include the Company's Consolidated Statementsselection of Earnings duringappropriate accounting principles to be applied and the reporting periods. These estimates involve judgments with respectassumptions on which to among other things, future economic factors that are difficult to predictbase accounting estimates. In reaching such decisions, the Company applies judgment based on its understanding and are beyond management's control. As a result, actualanalysis of the relevant circumstances and historical experience. Actual amounts could differ from these estimates.

      The SEC issued disclosure guidance forCompany's significant accounting policies that management believes are most "critical." The SEC defines these criticaldescribed in Note 1 to the Consolidated Financial Statements included elsewhere in this report. Some of those significant accounting policies require the Company to make subjective or complex judgments or estimates. Critical accounting policies are defined as those that are both most important to the portrayal of a company's financial condition and results and require management's most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

      The Company believes the following accounting policies require it to use judgments and estimates in preparing its consolidated financial statements and could represent critical accounting policies as defined by the SEC. The Company discusses its significant accounting policies, including those that do not require management to make difficult, subjective, or complex judgments or estimates, in Note 1 to the Consolidated Financial Statements.policies.

• Accounts receivable and revenue recognition. Revenues are recognized when goods are shippedthere is persuasive evidence of an arrangement, delivery has occurred, the price has been fixed or is determinable, and legal title passes to the customer.collectibility can be reasonably assured. The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical bad debt and claims experience and periodic evaluation of specific customer accounts and the aging of accounts receivable. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

• Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the last-in, first-out method (LIFO) predominantlyfor approximately 86% (69% of total consolidated inventory) of the inventory within the Mohawk segment, which matches current costs with current revenues, and the first-in, first-out method (FIFO), which is used to value inventory within both the Dal-Tile and Unilin segments and inventory not valued under the LIFO method in the Mohawk segment. Inventories on hand are compared against anticipated future usage, which is a function of historical usage and anticipated future selling price, in order to evaluate obsolescence,expected sales below cost, excessive quantities and expected sales below cost.an evaluation for obsolescence. Actual results could differ from assumptions used to value obsolete, excessive inventory or inventory expected to be sold below cost and additional reserves may be required.

• Goodwill and indefinite life intangible assets are subject to annual impairment testing. The impairment tests are based on determining the fair value of the specified reporting units and indefinite life intangible assets based on management judgments and assumptions using estimated future cash flows. These judgments and assumptions could materially change the value of the specified reporting units and indefinite life intangible assets and, therefore, could materially impact the Company's consolidated financial statements. Intangible assets with definite lives are amortized over their useful lives. The useful life of a definite-lived intangible asset is based on assumptions and judgments made by management at the time of acquisition. Changes in these judgments and assumptions that could include a loss of customers, a change in the assessment of future operations or a prolonged economic downturn could materially change the value of the definite-lived intangible assets and, therefore, could materially impact the Company's financial statements.

• Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in earnings in the period that includes the enactment date. Additionally, taxing jurisdictions could retroactively disagree with the Company's tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner.

• Results of Operations

        FollowingEnvironmental and legal accruals are the results of operations for the last three years:

  	At or for the Years Ended December 31,
  	2003				2002			2001
  	(In thousands)
  Statement of earnings data:
  Net sales	$ 5,005,053		100.0%		4,522,336	100.0%		3,445,945	100.0%
  Cost of sales	3,645,677		72.8%		3,282,269	72.6%		2,613,043	75.8%
  Gross profit	1,359,376		27.2%		1,240,067	27.4%		832,902	24.2%
  Selling, general and administrative
  expenses	817,347		16.3%		718,002	15.9%		505,745	14.7%
  Operating income	542,029		10.9%		522,065	11.5%		327,157	9.5%
  Interest expense	55,575		1.1%		68,972	1.5%		29,787	0.9%
  Other (income) expense, net	(1,980)		0.0%		9,464	0.2%		5,954	0.2%
  	53,595		1.1%		78,436	1.7%		35,741	1.1%
  Earnings before income taxes	488,434		9.8%		443,629	9.8%		291,416	8.4%
  Income taxes	178,285		3.6%		159,140	3.5%		102,824	3.0%
  Net earnings	$    310,149		6.2%		284,489	6.3%		188,592	5.4%

        During 2003, specifically the first half of 2003,estimates based on judgments made by the Company relating to ongoing environmental and industry performancelegal proceedings, as a whole was impacted negatively by the overall weak conditionsdisclosed in the U.S. economyCompany's consolidated financial statements. In determining whether a liability is probable and cautious consumer and commercial spending.reasonably estimable, the Company consults with its internal experts. The Company believes that the residential replacement business is recovering in response to improved economic conditions. The Company believes that the commercial business is also beginning to show signs of improvement at certain price points and anticipates the higher end business will improve later in 2004. The Company is implementing a price increase in both the Mohawk and Dal-Tile segment during the first quarter of 2004 to compensate for increased raw material prices resulting from higher oil and natural gas prices and higher import prices.

  Year Ended December 31, 2003, as Compared with Year Ended December 31, 2002

        Net sales for the year ended December 31, 2003, were $5,005.1 million, reflecting an increase of $482.7 million, or approximately 10.7%, over the $4,522.3 million reportedamounts recorded in the year ended December 31, 2002. The increased net sales were attributable to the acquisition of Dal-Tile and Lees Carpet and internal growth. The Mohawk segment recorded net sales of $3,736.5 million in 2003 compared to $3,624.2 million in 2002, representing an increase of $112.4 million or approximately 3.1%. The growth was attributable to the Lees Carpet acquisition and internal growth of product lines. The Dal-Tile segment recorded net sales of $1,268.5 million in 2003, reflecting an increase of $370.4 million or 41.2%, over the $898.2 million reported in the year ended December 31, 2002. The Dal-Tile results are not included in the Company's consolidatedaccompanying financial statements prior to the March 20, 2002, acquisition. However, when the Dal-Tile net sales for the year ended December 31, 2003, are compared to the Dal-Tile pro forma net sales of $1,134.2 million for the year ended December 31, 2002 (derived by combining Dal-Tile net sales of $236.0 million prior to the March 20, 2002, acquisition date, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile net sales of $898.2 million for the period ending December 31, 2002), an increase of approximately 11.8% for the period was realized. The growth was primarily attributable to growth within residential products. The Company believes this pro forma net sales information will be useful to investors because it allows investors to compare the results of the two periods.

  
  

        Quarterly net sales and the percentage changes in net sales by quarter for 2003 versus 2002 were as follows (dollars in thousands):

  		2003		2002		Change
  First quarter		$     1,084,715		866,710		25.2	%
  Second quarter		1,247,181		1,227,747		1.6
  Third quarter		1,303,166		1,224,403		6.4
  Fourth quarter		1,369,991		1,203,476		13.8
  Total year		$     5,005,053		4,522,336		10.7	%

        Gross profit was $1,359.4 million (27.2% of net sales) for 2003 and $1,240.1 million (27.4% of net sales) for 2002. The reduction in percentage was primarily attributable to a change in the selling mix, increased raw material prices resulting from higher oil and natural gas prices, higher import prices and start up costs related to the new Dal-Tile manufacturing facility.

        Selling, general and administrative expenses for 2003 were $817.3 million (16.3% of net sales) compared to $718.0 million (15.9% of net sales) for 2002. The increased percentage was primarily attributable to the acquisition of Dal-Tile, which has higher selling, general and administrative expenses.

        Operating income for 2003 was $542.0 million (10.9% of net sales) compared to $522.1 million (11.5% of net sales) in 2002. Operating income attributable to the Mohawk segment was $364.0 million (9.7% of segment net sales) in 2003 compared to $390.9 million (10.8% of segment net sales) in 2002. The percentage decrease in operating income was attributable to the higher costs associated with oil and natural gas prices and a change in the selling mix. Operating income attributable to the Dal-Tile segment was $187.2 million (14.8% of segment net sales) in 2003, compared to $139.9 million (15.6% of segment net sales) in 2002. The decrease in operating income as a percentage of net sales is primarily attributable to a change in product mix, higher import prices and start up costs of a new manufacturing facility. On a pro forma combined basis, the Dal-Tile segment operating income was $171.7 million (15.1% of pro forma segment net sales) for 2002 (derived by combining Dal-Tile operating income of $31.8 million prior to the March 20, 2002 acquisition, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile operating income of $139.9 million for the period ended December 31, 2002). The Company believes that presentation of this pro forma combined operating income information will be useful to investors because it allows investors to compare the results between the two periods.

        Interest expense for 2003 was $55.6 million compared to $69.0 million in 2002.  The decrease in interest expense was attributable to lower average debt levels during 2003 when compared to 2002, offset by an increase in the average borrowing rate due to a change in the mix of fixed and variable rate debt in 2003 when compared to 2002. Additionally, interest expense for 2002 included $10.7 million related to the write-off of an interest rate swap previously accounted for as a cash flow hedge.

        Income tax expense was $178.3 million, or 36.5% of earnings before income taxes for 2003 compared to $159.1 million, or 35.9% of earnings before income taxes for 2002. The change in tax rate resulted from the use of fewer available tax credits in 2003 when compared to 2002.

  Year Ended December 31, 2002, as Compared with Year Ended December 31, 2001

        Net sales for the year ended December 31, 2002, were $4,522.3 million, reflecting an increase of $1,076.4 million, or approximately 31.2%, over the $3,445.9 million reported in the year ended December 31, 2001. The increased net sales were attributable to the Dal-Tile acquisition and internal growth of the Mohawk segment product lines. The Mohawk segment recorded net sales of $3,624.2 million in 2002 compared to $3,445.9 million in 2001, representing an increase of $178.2 million or approximately 5.2%. The growth was attributable to all segment product lines. Since the completion of the Dal-Tile acquisition, the Dal-Tile segment recorded net sales of $898.2 million in 2002. On a pro forma combined basis, the Dal-Tile segment net sales were $1,134.2 million (derived by combining Dal-Tile net sales of $236.0 million prior to the March 20, 2002 acquisition date, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile net sales of $898.2 million for the period ending December 31, 2002) for 2002. This compares to Dal-Tile net sales of $1,036.8 million

  
  

  (derived from net sales prior to the March 20, 2002 acquisition) for 2001, resulting in an increase of approximately 9.4% for the period. The growth was primarily attributable to growth within residential products. The Company believes this pro forma net sales information will be useful to investors because it allows investors to compare the results of the two periods.

        Quarterly net sales and the percentage changes in net sales by quarter for 2002 versus 2001 were as follows (dollars in thousands):

  		2002		2001		Change
  First quarter		$        866,710		777,339		11.5	%
  Second quarter		1,227,747		864,958		41.9
  Third quarter		1,224,403		907,850		34.9
  Fourth quarter		1,203,476		895,798		34.3
  Total year		$     4,522,336		3,445,945		31.2	%

        Gross profit was $1,240.1 million (27.4% of net sales) for 2002 and $832.9 million (24.2% of net sales) for 2001. Gross profit as a percentage of net sales in 2002 was favorably impacted when compared to 2001 by Dal-Tile's higher gross profit percentage and improved manufacturing efficiencies within the Mohawk segment.

        Selling, general and administrative expenses for 2002 were $718.0 million (15.9% of net sales) compared to $505.7 million (14.7% of net sales) for 2001. The increased percentage was attributable to the Dal-Tile segment which has higher selling, general and administrative expenses but also has higher gross profit as a percentage of net sales. The Mohawk and Dal-Tile (including selling, general and administrative costs prior to the acquisition of Dal-Tile) segments selling, general and administrative expenses reflected improvements over 2001, when compared to 2002. The improvements were due to better control of operating costs as net sales increased.

        Operating income for 2002 was $522.1 million (11.5% of net sales) compared to $327.2 million (9.5% of net sales) in 2001. Operating income attributable to the Mohawk segment was $390.9 million (10.8% of segment net sales) in 2002 compared to $336.7 million (9.8% of segment net sales) in 2001. Operating income attributable to the Dal-Tile segment was $139.9 million (15.6% of segment net sales) in 2002. On a pro forma combined basis, the Dal-Tile segment operating income was $171.7 million (15.1% of pro forma segment net sales) for 2002 (derived by combining Dal-Tile operating income of $31.8 million prior to the March 20, 2002 acquisition, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile operating income of $139.9 million for the period ended December 31, 2002). This compares to Dal-Tile operating income of $154.6 million (14.9% of Dal-Tile net sales) for 2001. The Company believes that presentation of this pro forma combined operating income information will be useful to investors because it allows investors to compare the results between the two periods.

        Interest expense for 2002 was $69.0 million compared to $29.8 million in 2001.  The increase in interest expense was attributable to additional debt incurred in March 2002 to finance the acquisition of Dal-Tile, the write-off of approximately $10.7 million relating to an interest rate swap previously accounted for as a cash flow hedge and an increase in the average borrowing rate due to a change in the mix of fixed rate and variable rate debt, when compared to 2001.

        Income tax expense was $159.1 million, or 35.9% of earnings before income taxes for 2002 compared to $102.8 million, or 35.3% of earnings before income taxes for 2001.

  Liquidity and Capital Resources

        The Company's primary capital requirements are for working capital, capital expenditures and acquisitions.  The Company's capital needs are met primarily through a combination of internally generated funds, bank credit lines, term and senior notes, the sale of receivables and credit terms from suppliers.

        The level of accounts receivable increased from $501.1 million at the beginning of 2003 to $573.5 million at December 31, 2003.  The $72.4 million increase was primarily attributable to the acquisition of Lees Carpet and internal sales growth.  Inventories increased from $678.0 million at the beginning of 2003 to $832.4 million at December 31, 2003, due primarily to building inventory for hard surface product categories within the Mohawk and Dal-Tile segments and the acquisition of Lees Carpet.

  
  

        The outstanding checks in excess of cash represent trade payables checks that have not yet cleared the bank. When the checks clear the bank, they are funded by the revolving credit facility. This policy does not impact any liquid assetsbased on the consolidated balance sheets.

        Excluding acquisitions, capital expenditures totaled $114.6 million during 2003. The capital expenditures made during 2003 were incurred primarilybest estimates and judgments available to modernize and expand manufacturing facilities and equipment.  The Company's capital projects are primarily focused on increasing capacity, improving productivity and reducing costs.  Capital expenditures, including $1,101.8 million for acquisitions, have totaled $1,381.2 million over the past three years. The Company's capital spending during 2004, excluding acquisitions, is expected to range from $140 million to $160 million, and will be used primarily to purchase equipment to increase production capacity and productivity.

        On September 30, 2003, the Company entered into a new revolving line of credit agreement providing up to $300 million with interest rates of either (i) LIBOR plus 0.4% to 1.5%, depending upon the Company's performance measured against certain financial ratios, or (ii) the base rate plus 0-0.6% depending upon the Company's performance measured against certain financial ratios. The new facility replaces a $450 million facility that was due to expire in January 2004. The facility is comprised of two tranches, a $200 million tranche expiring in September 2008 and a $100 million tranche expiring in September 2004. The  $100 million tranche of the facility is renewable annually. The credit agreement contains customary financial and other covenants.  The Company must pay an annual facility fee ranging from .15% to .50% of the total credit commitment, depending upon the Company's performance measured against specific coverage ratios, under the revolving credit line. Additionally, at December 31, 2003, the Company had credit facilities of $300 million under its revolving credit facility and $50 million under various short-term uncommitted credit lines. At December 31, 2003, a total of $237.3 million was unused under the combined revolving credit facility and uncommitted credit lines. The revolving credit facility and uncommitted lines of credit are unsecured.

        In connection with the Dal-Tile acquisition during 2002, the Company entered into a 364-day term loan facility (the "Bridge Facility") to finance a portion of the acquisition. On April 2, 2002, the Company sold $300 million of its 6.50% senior notes due 2007, Series A and $400 million of its 7.20% senior notes due 2012, Series B through institutional private placements and used the proceeds to repay outstanding indebtedness of approximately $601 million under the Bridge Facility and approximately $90 million under the Company's revolving credit facility. On June 13, 2002, the Company exchanged $295 million of its registered 6.50% senior notes due 2007, Series C for an equal amount of its Series A senior notes and $397.8 million of its registered 7.20% senior notes due 2012, Series D for an equal amount of its Series B senior notes. Interest on each series is payable semiannually.

        On August 4, 2003, the Company entered into an on-balance sheet trade accounts receivable securitization agreement ("Securitization Facility") replacing two previous facilities that were due to expire in October 2003. The Securitization Facility allows the Company to borrow up to $350 million based on available accounts receivable. The Company sells, on a non-recourse revolving basis, its accounts receivable to a special purpose entity, which in turn obtains loan advances that are secured by the receivable pool from a third-party commercial paper conduit sponsored by financial institutions. The Securitization Facility is subject to annual renewal. At December 31, 2003, the Company had approximately $182 million outstanding secured by approximately $649.0 million of trade receivables.

        The Company's Board of Directors has authorized the repurchase of up to 15 million shares of its outstanding common stock. For the year ended December 31, 2003, a total of approximately 593,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $27.8 million. Since the inception of the program, a total of approximately 11 million shares have been repurchased at an aggregate cost of approximately $293.1 million. All of these repurchases have been financed through the Company's operations and banking arrangements.

        The Company believes that the combined total of the revolving credit facility, short-term uncommitted credit lines and the Securitization Facility of $700 million is adequate to support its capital and working capital requirements.

  
  

        The following is a summary of the Company's future minimum payments under contractual obligations as of December 31, 2003 (in thousands):

  		Payments due by period
  		2004		2005		2006		2007		2008		Thereafter		Total
  Long-term debt		$ 248,795		9,445		6,500		300,000		-		447,673		1,012,413
  Operating leases		72,857		57,202		44,517		31,183		22,602		45,363		273,724
  Purchase commitments (1)		66,481		48,968		48,000		48,000		48,000		-		259,449
  		$ 388,133		115,615		99,017		379,183		70,602		493,036		1,545,586

  
  it.(1) Includes commitments for natural gas and foreign currency and fiber purchases.

Recent Accounting Pronouncements

     In January 2003,December 2004, the Financial Accounting Standards Board ("FASB")FASB issued FASB InterpretationStaff Position 109-1, Application of FASB Statement No. 46109, "Accounting for Income Taxes" ("FIN 46"SFAS No. 109") to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act"), "Consolidationenacted October 22, 2004, provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. FSP 109-1 is effective prospectively as of Variable Interest Entities,January 1, 2005. The adoption of FSP 109-1 did not have a significant impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. FSP 109-2 states that an Interpretationenterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The adoption of FSP 109-2 did not have a significant impact on the Company's consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 51,43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," which addresses consolidation by business enterprisesto clarify the accounting for abnormal amounts of variable interest entities ("VIEs") either: (1)idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that do not have sufficient equity investment at riskitems 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 151 requires that the allocation of fixed production overhead to permit the entity to finance its activities without additional subordinated financial support, or (2) in which the equity investors lack an essential characteristiccosts of a controlling financial interest. In December 2003, the FASB issued modifications to FIN 46 ("Revised Interpretations") resulting in multiple effective datesconversion be based on the nature as well as the creation datenormal capacity of the VIE. VIEs createdproduction facilities. SFAS 151 is effective for fiscal years beginning after January 31, 2003, but prior toJune 15, 2005. The Company will adopt SFAS 151 effective January 1, 2004, may be accounted for either based on the original interpretation or the Revised Interpretations. However, the Revised Interpretations must be applied no later than the first quarter of 2004. VIEs created after January 1, 2004 must be accounted for under the Revised Interpretations. Non-Special Purpose Entities created prior to February 1, 2003, should be accounted for under the revised interpretation's provisions no later than the first quarter of fiscal 2004. The Company has adopted FIN 46, which did not have,2006 and the Company does not expect the Revised Interpretations toits adoption will have a material impact on the Company's consolidated financial statements.

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Transition may be accomplished using either the prospective or retrospective method. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25. In April 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R should be no later than the beginning of the first fiscal year beginning after June 15, 2005. The Company will adopt SFAS 123R in the first quarter of 2006 after completing its evaluation.

      In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143" ("FIN 47"), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Effective December 31, 2005, the Company adopted FIN 47 which did not have a material impact on the Company's consolidated financial statements.

      In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No. 20, "Accounting Changes," and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS 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 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 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact of this standard, if any, will depend upon accounting changes or errors that may occur in future periods. The Company adopted SFAS 154 effective December 31, 2005.

Impact of Inflation

     Inflation affects the Company's manufacturing costs, distribution costs and operating expenses. The carpet, tile and laminate industry have experienced significant inflation in the prices of raw materials and fuel-related costs beginning in the first quarter of 2004. For the period from 1999 through 2005 the carpet and tile industry has experienced moderate inflation in the prices of raw materials and fuel-related costs. In the past, the Company has generally passedbeen able to pass along these price increases to its customers and has been able to enhance productivity to help offset increases in costs resulting from inflation in both the United States and Mexico.its operations.

Seasonality

     The Company is a calendar year-end companycompany. With respect to its Mohawk and Dal-Tile segments, its results of operations for the first quarter tend to be the weakest.  The second, third and fourth quarters typically produce higher net sales and operating income.income in these segments.  These results are primarily due to consumer residential spending patterns for floorcovering,floor covering, which historically have decreased during the first two months of each year following the holiday season.

Certain Factors affecting The Unilin segment second and fourth quarters typically produce higher net sales and earnings followed by a moderate first quarter and a weaker third quarter. The third quarter is traditionally the Company's Performance

      In additionweakest due to the other information providedEuropean holiday in this Annual Report on Form 10-K, the following risk factors should be considered when evaluating an investment in shares of Common Stock.late summer,

      If any of the events described in these risks were to occur, it could have a material adverse effect on the Company's business, financial condition and results of operations.

The floorcovering industry is cyclical and prolonged declines in residential or commercial construction activity could have a material adverse effect on the Company's business.

      The U.S. floorcovering industry is highly dependent on residential and commercial construction activity, including new construction as well as remodeling which are cyclical in nature. A prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company's business.

      The U.S. construction industry has experienced significant downturns in the past, which have adversely affected suppliers to the industry. The industry could experience similar downturns in the future, which could have a negative impact on the Company's business.

The Company faces intense competition in its industry, which could decrease demand for its products and could have a material adverse effect on its profitability.

      The industry is highly competitive. The Company faces competition from a large number of manufacturers and independent distributors. Some of its competitors may be larger and have greater resources and access to capital.  Maintaining the Company's competitive position may require: substantial investments in its product development efforts, manufacturing facilities, distribution network and sales and marketing activities. Competitive pressures may also result in decreased demand for its products.  Any of these factors could have a material adverse effect on the Company.

A failure to identify suitable acquisition candidates, to complete acquisitions and to integrate successfully the acquired operations could have a material adverse effect on the Company's business.

      As part of its business strategy, the Company intends to pursue acquisitions of complementary businesses.  Although it regularly evaluates acquisition opportunities, it may not be able to successfully identify suitable acquisition candidates; obtain sufficient financing on acceptable terms to fund acquisitions; complete acquisitions; or profitably manage acquired businesses.

      Acquired operations may not achieve expected performance levels and may involve a number of special risks, including among others an inability to successfully integrate acquired operations and the diversion of management resources.

The Company may be unable to obtain raw materials on a timely basis, which could have a material adverse effect on its business.

      The principal raw materials used in the Company's manufacturing operations include: nylon fiber and polypropylene resin, which are used exclusively in its carpet and rug business; talc, clay, nepheline syenite and various glazes, including frit (ground glass), zircon and stains, which are used exclusively in its ceramic tile business and other materials. The Company has a single source supplier for all of its nepheline syenite requirements.  An extended interruption in the supply of these or other raw materials used in the Company's business or in the supply of suitable substitute materials would disrupt the Company's operations, which could have a material adverse effect on its business.

The Company may be unable to pass on to its customers increases in the costs of raw materials and energy, which could have a material adverse effect on its profitability.

      The prices of raw materials and natural gas vary with market conditions. Although the Company generally attempts to pass on increases in the costs of raw materials and natural gas to its customers, the Company's ability to do so is, dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for its products.  There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered.  During such periods of time, there could be a material adverse effect on the Company's profitability.

The Company has been, and in the future may be subject to claims and liabilities under environmental, health and safety laws and regulations, which could be significant.

      The Company's operations are subject to various environmental, health and safety laws and regulations, including those governing air emissions, wastewater discharges, and the use, storage, treatment and disposal of hazardous materials.  The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. The Company could incur material expenditures to comply with new or existing regulations, including fines and penalties.

      The nature of the Company's operations, including the potential discovery of presently unknown environmental conditions, exposes the Company to the risk of claims under environmental, health and safety laws and regulations. The Company could incur material costs or liabilities in connection with such claims.

Changes in international trade laws and in the business, political and regulatory environment in Mexico could have a material adverse effect on the Company's business.

      The Company's Monterrey, Mexico manufacturing facility represents a significant portion of the Company's total manufacturing capacity for ceramic tile. Accordingly, an event that has a material adverse impact on the Company's Mexican operations could have a material adverse effect on the tile operations as a whole. The business, regulatory and political environments in Mexico differ from those in the United States, and the Company's Mexican operations are exposed to legal, currency, tax, political, and economic risks, specific to Mexico.

The Company could face increased competition as a result of the General Agreement on Tariffs and Trade ("GATT") and the North American Free Trade Agreement ("NAFTA").

      The Company is uncertain what effect reduced import duties under GATT may have on its operations, although these reduced rates may stimulate additional competition from manufacturers that export ceramic tile to the United States.

      Although NAFTA lowers the tariffs imposed on the Company's ceramic tile manufactured in Mexico and sold in the United States and will eliminate such tariffs entirely on January 1, 2008, it may also stimulate competition in the United States and Canada from manufacturers located in Mexico.

Forward-Looking Information

      Certain of the statements in this Annual Report on Form 10-K, particularly anticipating of future performance, business prospects, growth and operating strategies, proposed acquisitions, and similar matters, and those that include the words "believes," "anticipates," "forecast," "estimates" or similar expressions constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended.  For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. There can be no assurance that the forward-looking statements will be accurate because they are based on many assumptions, which involve risks and uncertainties. The following important factors could cause future results to differ: changes in industry conditions; competition; raw material prices; timing and level of capital expenditures; integration of acquisitions; introduction of new products; rationalization of operations; and other risks identified in Mohawk's SEC reports and public announcements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      Financial exposures are managed as an integral part of the Company's risk management program, which seeks to reduce the potentially adverse effect that the volatility of the interest rate, exchange rate and natural gas markets may have on its operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes.

Natural Gas Risk Management

      The Company uses a combination of natural gas futures contracts and long-term supply agreements to manage unanticipated changes in natural gas prices. The contracts are based on forecasted usage of natural gas measured in Million British Thermal Units ("MMBTU").

      The Company has designated the natural gas futures contracts as cash flow hedges. The outstanding contracts are valued at market with the offset goingapplied to other comprehensive income, net of applicable income taxes and any hedge ineffectiveness.

      Any gain or loss is reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. At December 31, 2003,2005, the Company had natural gas contracts that mature from January 20042006 to December 2004October 2006 with an aggregate notional amount of approximately 3.9 million660,000 MMBTU's. The fair value of these contracts was an asset of $3.6$1.9 million. At December 31, 2002,2004, the Company had natural gas contracts outstandingthat matured from January 2005 to March 2005 with aan aggregate notional amount of approximately 1.41 million MMBTU's. The fair value of these contracts was an asseta liability of $1.9$1.3 million. The offset to these assets is recorded in other comprehensive income, net of applicable income taxes. The ineffective portion of the derivative is recognized directly in the cost of goods sold within the consolidated statements of earnings and was not significant for the periods reported. The amount that the Company anticipates will be reclassified out of accumulated other comprehensive income in the next twelve months is a gain of approximately $1.9 million.

      The Company's natural gas long-term supply agreements are accounted for under the normal purchases provision within SFAS No. 133 and its amendments. At December 31, 2003,2005, the Company hashad normal purchase commitments of approximately 3.11.8 million MMBTU's for periods maturing from January 20042006 through September 2005.October 2006. The contracted value of these commitments was approximately $13.8$17.2 million and the fair value of these commitments was approximately $17.0$20.5 million, at December 31, 2003.2005. At December 31, 2002,2004, the Company had normal purchase commitments of approximately 4.61.9 million MMBTU's.MMBTU's for periods maturing from January 2005 through March 2006. The contracted value of these commitments was approximately $17.4$9.9 million and the fair value of these commitments was approximately $19.7 million.$11.9 million, at December 31, 2004.

Foreign Currency Rate Management

      The Company enters into foreign exchange forward contracts to hedge foreign denominated costs associated with its operations in Mexico. The objective of these transactions is to reduce volatility of exchange rates where these operations are located by fixing a portion of their costs in U.S. currency. Accordingly, these contracts have been designated as cash flow hedges. Gains and losses are reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. Accordingly, these contracts have been designated as cash flow hedges. The Company had forward contracts to purchase approximately 145.3 million and 357.58 million Mexican pesos at December 31, 2003 and 2002, respectively.2005. The aggregate U.S. Dollardollar value of these contracts at December 31, 2003 and 20022005 was approximately $12.7 million and $34,581, respectively.$0.7 million. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses for the year ended December 31, 2005 were not significant. The Company had no forward contracts outstanding at December 31, 2003 and 2002 respectively, were not significant.2004.

Interest Rate Management

      In 2002, the Company determined that its $100 million interest rate swap was ineffective. Consequently, the $10.7 million unrealized loss associated with the swap was recorded as a realized loss in interest expense during the fourth quarter of 2002.      The Company continuesalso had forward exchange contracts to carrysell the liability on its consolidated balance sheetsBritish Pound and the interest rate swap isCanadian Dollar for a notional amount of $5.6 million at December 31, 2005. The contracts do not qualify for hedge accounting and are marked to market in other expenses at the end of each reporting period. The change in fair value is recorded in other expense and the contracts do not qualify for hedge accounting. The impact of the change in fair value on the statements of operations was not significant for the yearperiod ended December 31, 2003 was not significant.2005.

Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

INDEPENDENT AUDITORS' REPORTReport of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Mohawk Industries, Inc.:

      We have audited the accompanying consolidated financial statementsbalance sheets of Mohawk Industries, Inc. and subsidiaries as listedof December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the accompanying index.  In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in Item 15(a)2.three-year period ended December 31, 2005. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.  We did not audit the combined consolidated financial statements of Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (Unilin Group), which financial statements reflect total assets constituting approximately 41 percent and total revenues constituting approximately 3 percent in 2005, of the related consolidated totals.  Those financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Unilin Group, is based solely on the report of the other auditors.

      We conducted our audits in accordance with auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.

      In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mohawk Industries, Inc. and subsidiaries as of December 31, 20032005 and 2002,2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003,2005, in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Mohawk Industries, Inc.'s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

/s/: KPMG
      KPMG

Atlanta, Georgia
March 15, 2006

Report of Independent Registered Public Accounting Firm

The Shareholders and the Board of Directors
Unilin Flooring BVBA and Unilin Holding Inc.
Ooigem, Belgium

      We have audited the accompanying combined consolidated financial statements of Unilin Flooring BVBA and Unilin Holding Inc. and their subsidiaries (the Unilin Group) as of December 31, 2005 and the related combined consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for the two month period then ended. These financial statements are the responsibility of the combined Companies' management. Our responsibility is to express an opinion on these combined consolidated financial statements based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The combined Companies are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the combined Companies' internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Unilin Group at December 31, 2005 and the results of their operations and their cash flows for the two month period then ended in conformity with accounting principles generally accepted in the United States of America.

February 17, 2006

/s/: BDO Atrio Bedrijfsrevisoren Burg. CVBA
      BDO Atrio Bedrijfsrevisoren Burg. CVBA

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Mohawk Industries, Inc.:

      We have audited management's assessment, included in the "Management's Report on Internal Control over Financial Reporting" set forth in Item 9A of Mohawk Industries, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2005, that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Mohawk Industries, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management's assessment that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly,Mohawk Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the information set forth therein.Committee of Sponsoring Organizations of the Treadway Commission (COSO).

      As discusseddescribed in notes 1the Management's Report on Internal Control Over Financial Reporting, management excluded from  its assessment of the effectiveness of Mohawk Industries, Inc.'s internal control over financial reporting as of December 31, 2005, Unilin Flooring BVBA and 5 toUnilin Holding Inc. and their subsidiaries (Unilin Group), which  businesses were acquired on October 31, 2005 and whose financial statements reflect total assets constituting approximately 14% (excluding goodwill and identified intangible assets of approximately 27%) and revenues of approximately 3% of the related consolidated financial statement amounts as of and for the year ended December 31, 2005.  Accordingly, our audit of internal control over financial reporting of Mohawk Industries, Inc. also excluded an evaluation of the internal control over financial reporting of the Unilin Group.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mohawk Industries, Inc., and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated March 15, 2006expressed an unqualified opinion on those consolidated financial statements the Company changed its method of accounting for goodwill and other intangible assets in 2002..

 /s//s/: KPMG  LLP
      KPMG LLP

Atlanta, Georgia
February 5, 2004March 15, 2006

31

MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2003 and 2002

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Consolidated Statements of Earnings
Years Ended December 31, 2003, 2002 and 2001

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC.  AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2003,  2002 and 2001

(In thousands)

See accompanying notes to consolidated financial statements.
26

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash FlowsBalance Sheets
Years Ended December 31, 2003,  20022005 and 2001

2004

(In thousands)thousands, except per share data)

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements of Earnings
Years Ended December 31, 2003,  20022005, 2004 and 2001

2003

(In thousands, except per share data)