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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 30, 2006

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

COMMISSION FILE NUMBER 1-7023

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QUAKER FABRIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 04-1933106
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

941 GRINNELL STREET 02721
FALL RIVER, MASSACHUSETTS (ZIP CODE)
(ADDRESS PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (508) 678-1951

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $.01 The Nasdaq Stock Market LLC

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark if the Registrant is a well-known seasoned issuer
as defined in Rule 405 of the Securities Act.

Yes: |_| No: |X|

Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes: |_| No: |X|

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|

Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or non-accelerated filer. (as defined in Exchange
Act Rule 12b-2). Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |X|

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

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant, computed by reference to the closing sales
price as quoted on NASDAQ on July 1, 2006 was approximately $18.0 million.

As of March 29, 2007, 16,876,918 shares of the Registrant's common
stock, par value $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

DESCRIPTION OF DOCUMENT PART OF THE FORM 10-K
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Portions of the Proxy Statement to be Part III (Item 10 through Item 14)
used in connection with the Registrant's
2007 Annual Meeting of Stockholders.

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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS)

FISCAL FISCAL PERCENT
2006 2005 CHANGE
---------- ---------- -----------
(52 weeks) (52 weeks)

STATEMENT OF OPERATIONS DATA
Net sales .............................................. $ 151,664 $ 224,684 (32.5)%
Gross profit ........................................... 14,855 28,920 (48.6)%
Operating loss ......................................... (48,656) (33,791) 44.0 %
Net loss ............................................... $ (37,632) $ (26,256) 43.3 %

SELECTED OPERATING DATA
Depreciation and amortization .......................... $ 14,903 $ 17,255 (13.6)%
Capital expenditures ................................... 1,222 5,402 (77.4)%
Cash flow provided by operating activities ............. 3,239 5,845 (19.8)%
Fabric unit volume (in yards) 23,560 34,593 (31.9)%
Weighted average gross sales price per yard of fabric .. $ 6.21 $ 5.88 5.6 %

BALANCE SHEET DATA
Working capital ........................................ $ 23,297 $ 18,661 24.8 %
Total assets ........................................... 160,844 219,862 (26.8)%
Total debt, less cash .................................. 32,996 37,155 (11.2)%
Shareholders' equity ................................... $ 102,929 $ 141,164 (27.1)%

PER SHARE DATA
Loss per share (basic) ................................. $ (2.23) $ (1.56) 42.9 %
Loss per share (diluted) ............................... $ (2.23) $ (1.56) 42.9 %
Book value per diluted share ........................... $ 6.10 $ 8.39 (27.3)%

RATIOS
Gross margin ........................................... 9.8% 12.9% (24.0)%
Operating loss margin .................................. (32.1)% (15.0)% 114.0 %
Net loss margin ........................................ (24.8)% (11.7)% 112.0 %
Current ratio .......................................... 1.7 TO 1 1.3 to 1 30.8 %
Net debt to total capitalization ....................... 24.3% 20.8% 16.8 %

TO OUR SHAREHOLDERS

The market for upholstery fabric in the United States is continuing to
experience unprecedented change. Imported fabrics, in both roll and kit form,
now represent more than half of the market - and a number of domestic furniture
manufacturers and retailers are bringing fully-upholstered furniture into the
U.S. market from China. For us, these dramatic changes led to a 29% drop in last
year's domestic fabric sales and an 18% drop in export fabric sales. Net yarn
sales for the year were down 79.2%. This large sales decline outpaced the speed
at which we were able to take costs out of our operation. At the end of the day,
net sales for the year were $151.7 million, with a net loss of ($37.6 million),
and diluted and basic losses per share of ($2.23); compared to net sales of
$224.7 million, a net loss of ($26.3 million), and diluted and basic losses per
share of ($1.56) for fiscal 2005.

One-time charges related to the Company's ongoing restructuring plan
also had a significant effect on our 2006 results - with pre-tax restructuring
and asset impairment charges accounting for $26.5 million, or more than half, of
last year's $48.5 million operating loss. These charges were primarily non-cash
and include the write-down of assets, including manufacturing plants and
machinery and equipment, that we have put up for sale as part of our
consolidation strategy. Excluding these charges, last year's net loss would have
been ($17.4 million), or ($1.03) per share.

Despite last year's results, we believe that the steps we have taken to
reshape and restructure the Company represent significant progress toward
returning the Company to profitability - and everyone at the Company is fully
focused on the transformation of Quaker into a design, product development,
sales, marketing, sourcing and specialized manufacturing powerhouse. The key
elements of our restructuring plan call for us to:

o Ensure that our operating costs are consistent with our revenue
expectations;

o Stabilize revenues from our U.S.-based residential fabric business by
concentrating our marketing efforts on those market segments least
sensitive to imported products - such as the jobber, upper-end and
specialty retailer categories - and where prompt delivery is critical;

o Generate additional sales by penetrating the outdoor and contract fabric
markets;

o Develop commercial relationships with a limited number of carefully
chosen non-U.S. fabric mills so that we can strike the right balance
between domestic production and offshore sourcing - with these
complementary offshore sourcing programs intended to allow us to
recapture at least a portion of the domestic residential business that
we have lost to imported products over the past several years; and

o Consolidate our manufacturing operations into fewer facilities and sell
off real estate and machinery and equipment we no longer need.

Using this plan as our roadmap, during 2006, we sold two manufacturing
plants and about $4.0 million of machinery and equipment. We cut SG&A costs by
approximately $10.0 million - and manufacturing costs by approximately $20.0
million - both on an annualized basis. We reduced inventory by about $9.7
million and senior debt by a little over $4.0 million. And we put new financing
agreements in place last November which we believe to be consistent with
Quaker's strategic objectives and current operating and working capital needs.
In addition, the Company's independent registered public accounting firm's
unqualified opinion on the Company's Fiscal 2006 financial statements does not
contain a reference expressing substantial doubt about the Company's ability to
continue as a going concern.

To counter the decline in our sales, we have carefully focused our
marketing efforts on market segments less vulnerable to Chinese imports -
including the development and introduction of new products for the outdoor,
jobber, contract, upper-end residential and specialty retailer markets. This
effort will remain a major focus for us again this year. To further our dual
strategy of striking the right balance between domestic production and global
sourcing, we also developed and implemented a China program last year that is
intended to give us a competitive advantage in the global sourcing arena - and
the long-term alliance we put in place with our China-based partner is on its
way to becoming the strong, effective outsourcing arrangement we had hoped it
would be.

Our primary focus during 2007 will be on rebuilding our top line and
aligning our costs with our sales. We continue to bring significant competitive
strengths to this industry - our design talent, our product development
expertise, the close working relationships we have built with our customers, our
sourcing capabilities, our technological edge, and our ability to find and make
the most of new market opportunities. We intend to use those competitive
strengths to aggressively develop fabrics for production by our strategic
partner in China - and other products that for both strategic and economic
reasons are best produced in our Fall River-based manufacturing facilities. This
latter category includes our new outdoor fabric and contract furniture programs,
which are intended to build our revenues by leveraging our technological
expertise to expand the markets we serve - as well as fabrics for those domestic
and international residential customers in need of a strong U.S.-based fabric
mill to meet their requirements for high quality, innovative products with
relatively short delivery lead times.

Selling off the facilities and equipment we no longer need will also be
an important 2007 priority. And we are off to a good start. So far this year, we
have entered into two asset sale agreements. The first involves a pending sale
of our corporate headquarters building in Fall River for $4.7 million - and,
consistent with our overall consolidation program, it also involves a leaseback
of part of the building. The second agreement involves the ongoing sale of
additional excess machinery and equipment. This transaction

iii

included an initial payment to the Company of $1.3 million. The net proceeds
from all asset sales will be used to reduce the outstanding balance of our term
loan.

Paying attention to basic blocking and tackling will also be a corporate
imperative for us - making sure that our productivity levels and quality
performance are consistent with the objectives we have set for ourselves - and
that everything we do reflects our commitment to serving our shareholders,
customers, suppliers, employees and other stakeholders well.

We know that 2007 is a very important transition year for us, with much
of the work behind us, a clear, focused strategy in place for the future, and
much work still to be done. We look forward to tackling the challenges that lie
ahead. We appreciate your interest in Quaker and your continued support.

Sincerely,

/s/ Larry A. Liebenow /s/ Sangwoo Ahn

Larry A. Liebenow Sangwoo Ahn
PRESIDENT AND CHIEF EXECUTIVE OFFICER CHAIRMAN OF THE BOARD

TABLE OF CONTENTS

Page
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PART I
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Item 1 Business ................................................... 2
Item 1A Risk Factors ............................................... 10
Item 1B Unresolved Staff Comments .................................. 15
Item 2 Properties ................................................. 15
Item 3 Legal Proceedings .......................................... 17
Item 4 Submission of Matters to a Vote of Security Holders ........ 17

PART II
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Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities .......... 17
Item 6 Selected Financial Data .................................... 20
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................ 21
Item 7A Quantitative and Qualitative Disclosures about Market Risk.. 31
Item 8 Financial Statements and Supplementary Data 33
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .................................. 54
Item 9A Controls and Procedures ................................... 54
Item 9B Other Information ......................................... 54

PART III
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Item 10 Directors, Executive Officers and Corporate Governance .... 54
Item 11 Executive Compensation .................................... 55
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters ................ 55
Item 13 Certain Relationships and Related Transactions, and
Director Independence ..................................... 55
Item 14 Principal Accountant Fees and Services .................... 55

PART IV
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Item 15 Exhibits and Financial Statement Schedules ................ 55

Signatures .............................................................. 66

CORPORATE INFORMATION

Quaker Fabric Corporation is incorporated under the laws of the State of
Delaware. Our principal executive offices are located at 941 Grinnell Street,
Fall River, MA 02721 (telephone number 508-678-1951). Through a link on the
Investor Relations section of our Website, WWW.QUAKERFABRIC.COM, we make
available, free of charge, our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the SEC. These reports and other information are also available,
free of charge, at WWW.SEC.GOV. Alternatively, the public may read and copy any
materials we file with or furnish to the SEC at the SEC's Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of
the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

FOREWORD

THE INFORMATION SET FORTH IN THIS ANNUAL REPORT IS BASED PRIMARILY ON
HISTORICAL INFORMATION. THIS ANNUAL REPORT ALSO CONTAINS SOME FORWARD-LOOKING
STATEMENTS RELATING TO FUTURE PLANS AND OTHER MATTERS. TO THE EXTENT THAT THIS
ANNUAL REPORT INCLUDES FORWARD-LOOKING STATEMENTS, SUCH STATEMENTS INVOLVE
UNCERTAINTY AND RISK, AND ACTUAL RESULTS COULD DIFFER FROM THOSE REFLECTED IN
SUCH FORWARD-LOOKING STATEMENTS. A LIST OF CERTAIN FACTORS WHICH MANAGEMENT
BELIEVES COULD ADVERSELY AFFECT THE ACTUAL RESULTS IS SET FORTH IN ITEM 1A UNDER
THE CAPTION "RISK FACTORS," IMMEDIATELY FOLLOWING THE DESCRIPTION OF QUAKER'S
BUSINESS.

PART I

ITEM 1. BUSINESS

OVERVIEW

Quaker Fabric Corporation ("Quaker" or the "Company") is a leading
supplier of woven upholstery fabrics primarily for residential furniture.
Historically, all of the fabrics and yarns sold by the Company have been
designed and produced in the Company's own U.S.-based manufacturing facilities.
During 2005, Quaker began taking steps to supplement the woven Jacquard products
that have historically represented the core of the Company's product line with,
microdenier faux suede and woven products produced outside the U.S. and
purchased by Quaker for sale into the worldwide market. In January 2006, Quaker
entered into an agreement with a Chinese fabric mill pursuant to which certain
fabrics sold by the Company are designed at Quaker's headquarters in
Massachusetts but manufactured in China. In addition, Quaker has an outsourcing
arrangement in place with one other fabric manufacturer based in Asia and
anticipates entering into a limited number of additional similar arrangements in
the future.

The Company is also a leading developer and manufacturer of specialty
yarns, including a variety of chenille, taslan and spun products, which Quaker
both sells and uses in the production of its fabrics. The Company's vertically
integrated operations provide Quaker with important design and delivery
advantages.

The Company's revenues in 2006 were $151.7 million, compared to $224.7
million in 2005, and on a comparative basis, our sales have declined
quarter-to-quarter in each of the ten consecutive quarters ended December 30,
2006. Primarily as a result of our declining sales, there has been a significant
deterioration in our recent financial performance and we have reported operating
losses in each of the ten consecutive fiscal quarters ended December 30, 2006.
During 2005, Quaker implemented a restructuring plan intended to restore the
Company to profitability. The key elements of this restructuring plan include:
(i) stabilizing revenues from our U.S.-based residential fabric business by
concentrating our marketing efforts on those markets least sensitive to imported
products; (ii) reducing our operating costs enough to compensate for the drop we
have experienced in our revenues over the past few years; (iii) selling excess
assets, including machinery and equipment and real estate, and consolidating our
manufacturing operations into fewer facilities; (iv) developing strategically
important commercial relationships with a limited number of carefully chosen
offshore fabric mills so that we can recapture the share of the domestic
residential market that we have lost over the past few years to foreign imports;
and (v) generating additional profitable sales by penetrating the outdoor and
contract fabric markets.

Quaker has been producing upholstery fabric for sixty years and the
Company is well known for its broad range of Jacquard and plain woven upholstery
fabrics. Quaker's current product line consists of over 5,000 traditional,
contemporary, transitional and country fabric patterns intended to meet the
styling and design, color, texture, quality and pricing requirements of
promotional through middle to higher-end furniture manufacturers. Additionally,
the Company introduces over 1,000 new products to the market annually. The
Company sells its upholstery fabrics to approximately 1,000 furniture
manufacturers worldwide. Quaker also distributes its fabrics internationally. In
2006, net fabric sales outside the United States of $24.0 million represented
approximately 16.3% of net fabric sales.

Quaker uses three tradenames in the marketing of its
fabrics--Whitaker(R), Quaker(TM) and Terrazo(TM) Quaker's Whitaker(R)
Collection, a branded line of a select group of the Company's better-end
products, is intended to meet the design and construction requirements of middle
to higher-end furniture manufacturers and jobbers. The balance of the Company's
residential line fabrics carry the Quaker(TM) name. Fabrics included in Quaker's
line of outdoor products bear the Terrazo(TM) trademark. Management estimates
that approximately 60% of the Company's fabric sales are manufactured to
customer order.

The Company's yarn and fabric manufacturing and warehousing operations
are conducted in three separate manufacturing and warehousing facilities in Fall
River, Massachusetts. During 2005, the Company consolidated operations
previously conducted in four leased facilities into a single 540,000 square foot
leased facility, and during 2006, the Company continued its consolidation by
closing three additional plants and relocating the operations previously
conducted in them into this same 540,000 square foot leased plant. In addition
to distribution from the Company's facilities in Fall River, Quaker maintains
domestic distribution centers in High Point, North Carolina, Verona,
Mississippi, and City of Industry, California. To provide better service to its
international customers, the Company also has a distribution center in Mexico
and uses a third-party distribution company to provide warehousing services in
Brazil.

THE INDUSTRY

Total domestic upholstery fabric sales, exclusive of automotive
applications, are estimated to be approximately $1.6 billion annually, with
sales of imported fabrics, in both roll and "kit" (i.e., cut and sewn) form,
representing approximately 42% of total U.S. fabric sales during 2004, up from
29% in 2003 and 11% in 2002. Management believes that sales of imported fabric
as a percentage of total fabric sales have continued to increase since 2004, and
management estimates that sales of imported fabrics currently represent
approximately 60% of total U.S. fabric sales. Management estimates international
fabric sales to be at least twice those of the domestic market. At the
promotional end of the Jacquard market, price is the most significant
competitive factor. At the upper-end of the market, while pricing is still
important, fabric styling and design typically play a greater role.

Demand for upholstery fabric is a function of demand for upholstered
furniture. U.S. retail upholstered furniture sales grew from $20.3 billion in
1999 to an estimated $23.9 billion in 2004. Total upholstered furniture demand
is cyclical and is affected by population growth and demographics, new household
formations, consumer confidence, disposable income, geographic mobility, housing
starts, and home sales. Furniture purchases compete with home electronics such
as PCs and HDTVs for the consumer's discretionary income. Historically, the U.S.
furniture market has been characterized by relatively slow growth, with
compounded annual growth rates typically in the 2.5% to 3.5% range.

The upholstery fabric covering a sofa, chair, or other piece of
furniture is one of the most significant factors influencing a furniture buyer's
selection. Purchase decisions are based primarily on the consumer's evaluation
of aesthetics, comfort, durability, quality and price, with pricing the most
important factor at the promotional end of the market. As a result, the fabric
decisions a furniture manufacturer makes play a critical role in its ability to
capture retail floor space, thereby generating increased sales by attracting
consumer attention.

Management believes the long-term outlook for the Company's upholstery
fabric sales will be influenced by the following factors:

(i) Fabrics, leather and microdenier faux suede products entering
the United States from Asia in both roll and "kit" form have
resulted in increased competition in the upholstery fabric and
upholstered furniture markets and current estimates suggest that
these products have captured approximately 60% of the domestic
market. Economic factors affecting purchasing decisions made by
U.S. furniture manufacturers to source furniture coverings
domestically or in the international market, as well as further
improvements in the delivery and quality performance of Asian,
particularly Chinese, fabric mills are expected to cause this
trend to continue. In addition, recent increases in imported
furniture coverings and an increase in imports of fully
upholstered furniture ("FUF") into the U.S. have had a
deflationary effect on pricing throughout the distribution
chain.

(ii) A number of U.S. furniture manufacturers have begun to bring FUF
into the U.S. for sale into the domestic market. Most U.S.
furniture manufacturers doing this are purchasing FUF in China
and other countries in the Far East from local furniture
manufacturers operating there--and at least one U.S. furniture
manufacturer has set up its own FUF production facilities in
China. These furniture manufacturers are sourcing in the Far
East the raw materials, including fabric, they need for the FUF
they are making in China.

(iii) The furniture industry has been consolidating at both the retail
and manufacturing levels for several years. As a result, fabric
suppliers are required to deal with larger and more
sophisticated customers that require a broader range of product
choices, shorter delivery lead times, customer-specific
inventory management programs, and additional information
technology-based support services.

(iv) In recent years, the lines between the furniture industry's
manufacturers and retailers have begun to blur, with several of
the nation's larger furniture manufacturers operating retail
outlets of their own.

(v) Most Americans have adopted a more casual lifestyle, as
evidenced by product shifts in the apparel and home furnishings
industries. Management believes this has resulted in growing
demand for less formal furniture upholstered with softer, less
expensive, more comfortable fabric, with stain repellant and
stain resistance properties.

(vi) Consumer tastes in upholstered furniture coverings change as new
trends and styles emerge. Leather and faux suedes as furniture
coverings have benefited from strong demand in recent years,
resulting in a reduction in overall sales of woven upholstery
fabric.

(vii) Pushed by consumers demanding immediate product delivery, the
furniture industry has increased its focus at the upper end of
the market on just-in-time manufacturing methods and shorter
delivery lead times. At the promotional end of the market, the
focus is on higher volume commodity frames and coverings, with
furniture more likely to be sold "as shown."

(viii) Advances in the use and application of information technology
throughout the industry supply chain can be anticipated to allow
furniture industry manufacturers, suppliers and customers to
share information more quickly and more effectively, resulting
in reduced cycle times and greater transparency for end
consumers who will be able

to determine the status of their orders at each stage of the
manufacturing process. Significant advances in the use of
information technology in the sales and marketing function are
also anticipated.

(ix) Most consumers and some furniture manufacturers have placed
increased emphasis on product quality.

STRATEGY

Quaker's strategy is focused on:

RESTORING THE COMPANY TO PROFITABILITY. Management's number one priority
is restoring the Company to profitability. The key elements of Quaker's
restructuring plan include: (i) stabilizing revenues from our U.S.-based
residential fabric business by concentrating our marketing efforts on those
markets least sensitive to imported products; (ii) reducing our operating costs
enough to compensate for the drop we have experienced in our revenues since
2002; (iii) selling excess assets, including excess real estate and machinery
and equipment; (iv) developing strategically important commercial relationships
with a limited number of carefully chosen offshore fabric mills so that we can
recapture the share of the domestic residential market that we have lost over
the past few years to foreign imports; and (v) generating additional profitable
sales by penetrating the outdoor market and building the Company's position in
the contract fabric market.

MAINTAINING ITS LEADERSHIP POSITION IN THE DOMESTIC RESIDENTIAL FABRIC
MARKET. The Company has positioned itself as a full-service supplier of Jacquard
and plain woven fabrics to the promotional and middle to better-end of the
market by offering a wide variety of fabric patterns at prices ranging from
$2.50 to $36.00 per yard and by emphasizing superior customer service. Recently,
Quaker has taken steps to broaden its product offerings to include microdenier
faux suede and woven fabrics manufactured outside the U.S. pursuant to
outsourcing and/or commercial cooperation agreements entered into by the Company
with various offshore fabric manufacturers.

EXPANDING INTERNATIONAL SALES. The Company has made worldwide
distribution of its upholstery fabrics a key component of its strategy. Quaker
has built an international sales and distribution network, dedicated significant
corporate resources to the development of fabrics to meet the specific styling
and design needs of its international customers, and put programs in place to
simplify the purchase of product from Quaker, including the operation of a
distribution facility in Mexico, and the utilization of the services of a third
party distribution company in Brazil. The Company's international net fabric
sales were $24.0 million in 2006.

PENETRATING RELATED FABRIC MARKETS. Management believes the Company's
styling and design expertise, as well as its fabric finishing and post-finishing
abilities, provide opportunities for revenue growth in the contract and outdoor
markets.

MAINTAINING SPECIALTY YARN SALES. The Company's current line of
specialty yarns includes over 100 different varieties of spun, taslan and
chenille yarns, and Quaker's yarn design and development staff regularly creates
innovative new specialty yarns. Almost all of the specialty yarns manufactured
by the Company are used in the production of the Company's fabric. The balance
is sold to craft yarn distributors, upholstery weavers and home fashion
accessories firms. Net sales for this division increased by 6.7% to $21.8
million in 2005 from $20.4 million in 2004, but dropped by 79.2% to $4.5 million
in 2006 due to a dramatic reduction in sales to the Company's biggest yarn
customer.

PRODUCTS

The Company offers a broad assortment of contemporary, traditional,
transitional and country fabrics to manufacturers of both promotional-end and
middle to better-end furniture at prices ranging from $2.50 to $36.00 per yard.
While most of the Company's fabrics have historically been sold under the Quaker
label, the Company began marketing a select group of its middle to better-end
fabrics under its Whitaker(R) label in October 1996. During 2001, the Company
began marketing certain of its fabrics to its promotional-end customers under
its Davol(R) brand name; however, in 2005, the Company discontinued use of the
Davol brand and returned to marketing its promotional products under the Quaker
label. In 2006, the Company's promotional-end fabric line and its middle to
better-end fabric line had average gross sales prices of $4.08 per yard and
$7.09 per yard, respectively, compared to $4.04 and $7.09, respectively, in
2005. The weighted average gross sales price per yard of the Company's fabrics
was $6.21 in 2006, compared to $5.88 in 2005. Gross sales of the Company's
middle to better-end fabrics were $118.2 million, or 80.8% of total gross fabric
sales in 2006, with approximately 30.8% of those sales made under the
Whitaker(R) label. Most of the Company's products are merchandised in packages
or collections of coordinated fabrics intended to be marketed at retail on a
single furniture group, e.g., loveseat, sofa, chair.

Quaker's product line is focused on fabrics with woven designs referred
to in the industry as "Jacquards," because of the special Jacquard equipment, or
heads, required to produce them, and also includes a broad assortment of
striped, plaid, and plain fabrics. All of Quaker's active looms are equipped
with Jacquard heads. The use of these heads makes it possible to vary the
pattern, color, and texture of both the filling and warp yarns in a fabric.

In 2005, Quaker began taking steps to supplement the woven Jacquard
products that have historically represented the core of the Company's product
line with microdenier faux suede and woven products produced outside the U.S.
and purchased by Quaker for sale into the worldwide market. Quaker has entered
into outsourcing arrangements with two fabric manufacturers based in Asia for
this purpose, and the Company anticipates entering into a limited number of
additional similar arrangements in the future. Quaker and

its customers refer to the Company's outsourced products as Quaker's Global
Line(TM), and the Company's most important offshore sourcing arrangement
involves fabrics designed by Quaker's new product development team at the
Company's corporate headquarters in Fall River, Massachusetts and manufactured
in China using raw materials sourced in China and other Asian countries.

Quaker's broad product line, including the additional product types
added to Quaker's line as a result of the outsourcing arrangements to which the
Company is a party, is intended to allow the Company's customers to meet most of
their fabric needs through one full-service supplier.

NEW PRODUCT DEVELOPMENT AND DESIGN

Although management believes fashion trends in the upholstery industry
do not change significantly from year to year, consumer tastes in upholstery
fabric and other furniture coverings do change over time. Therefore, it is
important to identify emerging fashion needs and to develop new products
responsive to those needs. Management believes Quaker's design staff has an
established reputation for design excellence and product leadership.

The Company's design department has overall responsibility for the
development of new upholstery fabric patterns for sale by the Company. The
organization of the Company's design department reflects the various markets
served by the Company, with certain designers responsible for the development of
new fabrics for the residential market, others for the outdoor, contract and
international markets. Although the Company purchases artwork from independent
artists, the Company's staff of professional designers and designer technicians
creates the majority of the designs on which the Company's fabric patterns are
based and also determines the construction of those patterns. The design
department uses Computer Aided Design ("CAD") equipment to reduce the length of
the Company's new product development cycle.

The development of each new fabric line requires six months. The first
step in the new product development process is the preparation of a
merchandising plan for the line. The Company's merchandising plans are based on
extensive input from Quaker's sales representatives, senior managers, and major
customers. These plans provide both a broad outline of the number of new
products to be included within each major styling category (e.g., contemporary,
traditional, transitional, and country), as well as the number of new products
to be created for sale at each of the major price points within those styling
categories. Decisions are then made as to which new products are to be purchased
directly from offshore manufacturer with little design input from Quaker, which
are to be designed by Quaker for production in the Company's Fall River-based
manufacturing plants and which are to be designed for production by offshore
fabric mills through one of Quaker's non-U.S. outsourcing arrangements.

In addition, because of the design and delivery advantages of Quaker's
vertically integrated manufacturing operations, substantial emphasis is placed
on making maximum use of the Company's internally produced yarns during the
fabric development process. In conjunction with the development of each new
fabric merchandising plan, members of the Company's fabric design and yarn
development staffs meet to identify the design staff's yarn requirements for the
Company's next fabric line and many of Quaker's proprietary yarns trace their
origins to this design-driven process. Quaker's product development, engineering
and manufacturing staffs also play a key role in the new product development
process by reviewing proposed new product constructions to evaluate their impact
on the Company's raw material costs, equipment utilization rates and quality
performance. The Company's product development and engineering staffs also
design and develop new product attributes that add value to Quaker's products
from the consumer's perspective. Their efforts have lead to initiatives such as
the Company's entry into a non-exclusive licensing agreement with Hi-Tex, Inc.
for the use of its patented Crypton(R) finish for certain of the Company's
fabrics for the contract market. During 2005, Quaker's licensing agreement with
Hi-Tex was expanded to allow Quaker to produce all of the Company's Crypton
products in its Fall River operations. This allows for improved customer service
and reduced development time for new contract market products.

Although a few plain, striped and plaid fabrics remain in the Company's
product line for ten years or more, a successful product typically has a life of
two to three years. Quaker's design staff also regularly creates custom patterns
for customers seeking to differentiate their products for distribution purposes,
hit a certain price point at the retail level, or meet a particular styling need
in the market they serve. These patterns, which are not part of Quaker's "open
line," are known in the industry as "Specials" and have become increasingly
important to the Company's overall marketing efforts in recent years.

SALES AND MARKETING

UPHOLSTERY FABRICS

Net fabric sales during 2006 were $147.1 million, or approximately 97.0%
of the Company's net sales. The Company sells its upholstery fabrics to
approximately 1,000 furniture manufacturers worldwide. Fabric sales to the
Company's top 25 customers accounted for approximately 41.5% of 2006 net fabric
sales. None of the Company's customers accounted for more than 4.7% of net
fabric sales during 2006.

The Company uses a direct marketing force of 19 sales representatives,
three of whom are based in Mexico, to market its fabrics in the United States,
Canada and Mexico. All such sales representatives are paid on a commission basis
and represent the Company exclusively. Quaker recently appointed a new Director
of International Sales to head up its export business, and Quaker's fabrics are
distributed internationally through a network of eight exclusive sales
representatives and eight independent commissioned sales agents.

Quaker's United States customers market their products through national
furniture industry trade shows held annually in the Spring and Fall in High
Point, North Carolina, and in February and August in Las Vegas, Nevada as well
as through various regional shows. These shows provide most of Quaker's
customers with the opportunity to introduce their new furniture lines to their
major retail customers in a single setting. Quaker's design and marketing
process is closely linked to these trade shows, and the Company develops two
major lines of new fabrics each year timed to coincide with the furniture
industry's new product development cycle.

Quaker also markets its fabrics at a number of trade shows regularly
attended by its export customers, including shows in Belgium, Germany, Italy,
Brazil and Mexico. Net foreign sales of fabric accounted for approximately 16.3%
of Quaker's net fabric sales during 2006.

In addition to distribution from the Company's facilities in Fall River,
Massachusetts, Quaker maintains five distribution centers from which its
customers may take immediate delivery of selected products. These facilities are
located in City of Industry, California; Verona, Mississippi; High Point, North
Carolina; Sao Paulo, Brazil; and Mexico City, Mexico, with the Company's
Mississippi warehouse carrying a wide assortment of Quaker's Global Line
products and Quaker's High Point facility offering a cut-to-order program on the
middle to better-end fabrics inventoried there.

SPECIALTY YARNS

Net yarn sales during 2006 were $4.6 million, or approximately 3.0% of
the Company's net sales. The Company designs, manufactures and markets several
types of specialty yarns, including fancy spun, fancy twisted and chenille.
Because of their softness, the specialty yarns produced by the Company and the
fabrics made out of them are intended to be responsive to consumer demand for
soft, casual home furnishings and accessories. The Company's specialty yarns are
sold under the name of Nortex Yarns to craft yarn distributors and manufacturers
of home furnishings products, principally weavers of upholstery fabric, throws,
afghans and other products. The Company has approximately 50 yarn customers.

None of the Company's yarn customers accounted for more than 31% of net
yarn sales in 2006. Sales to one craft yarn customer represented more than 75%
of the Company's yarn sales in 2005. Sales into the craft yarn market reflected
significant growth during the first three quarters of 2005, but dropped
significantly during the fourth quarter due to excess inventory at the Company's
biggest yarn customer. This situation continued during 2006 and the Company's
craft yarn sales have remained depressed.

MANUFACTURING

The Company operates three manufacturing facilities in Fall River,
Massachusetts, and management estimates that approximately 60% of the Company's
fabric sales are manufactured to customer order. In addition, certain fabrics
sold by the Company are manufactured outside the U.S. pursuant to outsourcing
agreements entered into by the Company with fabric mills with operations in
Asia. Management, in partnership with key customers, uses forecasting techniques
to significantly reduce delivery lead times to its key customers. The Company's
objective is to operate its production facilities on a three-shift, five to five
and one half-day per week schedule. During periods of weaker demand, the Company
will decrease its production rates accordingly by reducing overtime and staffing
levels and/or idling plants and equipment. During 2006, Quaker implemented
several reductions in force, resulting in a significant decrease in the
Company's employment levels by the end of 2006, as compared to year-end 2005. In
addition, since year-end 2004 Quaker has idled its Somerset, Massachusetts yarn
manufacturing plant and its fabric weaving and finishing plant on Brayton Avenue
in Fall River and consolidated yarn manufacturing operations previously
conducted at its Quequechan Street, Quarry Street and Graham Road facilities in
Fall River and four of its leased Fall River-based warehousing/manufacturing
plants into its leased facility on Commerce Drive in Fall River.

The Company's vertically integrated manufacturing process begins with
the production of specialty yarns, primarily for use in the production of the
Company's fabrics, but also for sale to manufacturers of craft yarns, home
furnishings products and apparel. Although the Company purchases all of its
commodity yarns, most of the Company's weft, or filling, yarn needs are met
through internal production. The next stage of the fabric manufacturing process
involves the preparation of beams of warp yarn. The beams are then sent to the
Company's weave rooms, where looms are used to weave the warp and filling yarns
together. The final steps in the fabric production process include routing the
fabric through various fabric finishing and post-finishing processes to enhance
the durability and performance characteristics of the end product. Some of the
Company's fabrics benefit from additional chemical and mechanical finishing
processes designed to enhance their appearance, texture or "hand" and/or
performance characteristics. A final product quality inspection is conducted
prior to shipment to the Company's customers.

To improve asset utilization rates, overall conversion costs and
quality, Quaker has introduced "lean manufacturing" principles in various of its
manufacturing operations. These principles involve a flattening of the Company's
manufacturing management structure, plant layouts designed to ensure a smooth
continuous flow of product through the manufacturing process and an emphasis on
inventory reduction and continuous process improvements.

Since 1988, the United Kingdom has had a flammability standard in place
applicable to all upholstery fabrics sold in the U.K., including products
imported into the U.K. market from other countries. To ensure compliance with
this regulatory standard, the

Company devoted considerable resources to the successful development of fabrics
which would meet the performance specifications set forth in the standard. For
the past several years, the United States Consumer Product Safety Commission
(the "CPSC") has also been working on the development of an upholstered
furniture flammability standard, and the Company has played a lead role in the
shaping of these proposed regulations. Management believes the adoption by the
CPSC of new regulations in this area, if that were to occur, would not likely
have a material adverse effect on the Company's results of operations or
financial condition and that, prior to the effective date of such regulations,
if any, the Company would be able to make such changes in its fabric designs and
manufacturing processes as would be required to ensure the Company's compliance.

In January 2006, the federal Environmental Protection Agency (the "EPA")
launched a global stewardship program inviting companies to reduce PFOA
(Perfluorooctanoic acid) releases and its presence in products by 95% by no
later than 2010 and to work toward the elimination of these sources of exposure
no later than 2015 due to the possibility that at some point in the future the
EPA could determine PFOA to be a likely carcinogen. Certain of the fabric
finishes used by the Company to improve the stain resistance properties of
Quaker's products may release trace amounts of PFOA as a result of the breakdown
of fluorotelomers over time. Although studies done by DuPont, one of the
Company's fabric finish suppliers, indicate "the use of consumer articles based
on fluorotelomers would not result in any detectable exposure to PFOA," Quaker
is working with the Company's principal fabric finish supplier to assist with
the reformulation of the supplier's product in a manner consistent with the
EPA's stewardship program. It is not clear whether the use of a reformulated
product will result in any increased costs to the Company. In the event of any
cost increases, there can be no assurance that the Company would be able to pass
such cost increases on to its customers. If it is unable to, the Company may be
adversely affected.

All of the Company's active looms are equipped with electronic Jacquard
heads, maximizing the Company's ability to design its products to meet customer
needs, without equipment-related design constraints. To reduce the per pick cost
of producing certain fabrics not requiring the use of Jacquard heads, Quaker
also maintains 18 Dobby looms.

The Company's fabrics are generally shipped directly to its customers on
an FOB Fall River or FOB warehouse basis. The Company also supplies its
distribution centers with an appropriate selection of fabrics for customers
needing immediate delivery, with Quaker's Mississippi warehouse stocking a broad
selection of Global Line(TM) fabrics and the Company's High Point, North
Carolina distribution center offering a cut-to-order program on selected fabrics
for the middle to better-end furniture manufacturers located in that area.

QUALITY ASSURANCE

Management believes that product quality is a significant competitive
factor in both the domestic and international fabric markets. Quaker's quality
initiatives include:

o Inspection of incoming raw materials to ensure they meet the
Company's product specifications and to provide prompt feedback to
vendors when defects are discovered so that corrective actions may
be undertaken immediately.

o A final quality inspection of the Company's yarn and fabric products
before they are released for shipment.

o Continuous monitoring of the Company's performance against industry
standards and its own internal quality standards.

In addition to these measures, the built-in quality control features and
precision settings on much of the Company's production equipment also support
the Company's efforts to provide defect-free products to its customers.

The Company's quality-related return rate, as a percentage of total
yards shipped, was 0.58% in 2006 and 0.38% in 2005, and the Company sold 0.5
million yards of second-quality fabric into the seconds market during 2006
compared to 0.9 million yards during 2005.

TECHNOLOGY

The use of technology to improve productivity and decision making is a
key component of Quaker's overall strategy. Microprocessor-based control systems
in the production equipment used for yarn manufacturing, weaving, and fabric
finishing, along with the use of real-time production monitoring controls in
some areas of weaving, allow for the effective management of throughput and
quality in a complex production environment. An outsourced enterprise-wide
IP-based telecommunications network provides a high level of predictable
performance and cost for both data and voice communications. The use of wireless
RF and barcoding technology reduces errors and labor costs while increasing
speed throughout Quaker's new product development, production and distribution
processes.

Newly developed applications to further automate new product development
and design processes are reducing time to market and product introduction costs.
These tools allow for end-to-end management of information related to the
development and introduction of new products as well as sales, production
planning and scheduling, materials management, purchasing, inventory management,
and the management of production routings. Each of these contributes to the
improvement of customer service, the more efficient use of assets, and the
effective management of inventories.

Other examples of technologies used by Quaker include: computer-aided
design (CAD) used to design new patterns and to develop precise weaving
instructions for electronic download to the loom heads; a secure web portal for
use by customers in viewing order information; a data warehouse used to manage
data and to provide information for analysis and decision making; and an
outsourced HR/payroll system that is providing improved services and controls at
a reduced cost.

SOURCES AND AVAILABILITY OF RAW MATERIALS

Quaker's raw materials consist principally of polypropylene, polyester,
acrylic, cotton and rayon fibers and yarns for use in its yarn manufacturing and
fabric weaving operations, and latex to backcoat its finished fabrics. In
addition, Quaker purchases commission dyeing services from various dyehouses
which dye, to the Company's specifications, certain fabrics produced by the
Company and certain of the yarns the Company produces internally or purchases
from other manufacturers. While the Company purchases its raw material
requirements from both U.S. and non-U.S. based suppliers, in 2006, Quaker
sourced over 90% of its raw materials from suppliers in North America. It is
important to note, however that a number of the Company's North American
suppliers source a significant amount of their own raw materials from suppliers
around the world. The Company is dependent upon outside suppliers for its raw
material needs, including dyeing services, and is subject to price increases and
delays in receiving these materials and services. The Company's raw materials
are predominantly petrochemical products and their prices typically fluctuate
with changes in the underlying market for petrochemicals in general. In
addition, the financial performance and/or condition of a number of textile
industry suppliers has been hurt by significant reductions in the overall size
of the U.S. textile industry over the past few years, increasing the risk of
business failures and/or further consolidations among the Company's supplier
population and the related risk of disruption to Quaker's operations.

Although other sources may be available, the Company currently procures
approximately 85% of its raw material components from eight major industry
suppliers. One of these firms is the sole supplier of a polypropylene filament
yarn used in approximately 25% of the Company's products shipped in 2006, and
the Company currently does not have an alternative supplier in place for this
component. The Company also sources a low melt polymer essential to the
production of Quaker's Ankyra(TM) chenille yarns from a single supplier. While
alternate sources of this polymer are available, an unanticipated need to
transition to one of these alternate sources could result in a disruption in
Quaker's operations and related shipping delays.

Approximately 39% of the Company's filling yarns are acrylic and are
purchased from outside spinners. With the closure of Solutia Inc. in mid-2005,
Quaker began sourcing acrylic from two primary offshore producers. To maintain
customer service levels, the longer lead times associated with offshore sourcing
required the Company to hold additional component safety stock inventory at both
the spinners used by the Company and at Quaker. In addition, during the first
half of 2005 a Canadian supplier of acrylic spun yarns to Quaker went out of
business. To arrange for a continuous flow of these raw materials, Quaker was
required to source these spun yarn products from another Canadian yarn
manufacturer with which Quaker had worked in the past.

Although Quaker expects that it will be able to obtain adequate amounts
of raw materials to meet its future requirements, and as a matter of corporate
policy, attempts to identify alternate sources for all critical raw material
components, an increase in the price of or a shortage or interruption in the
supply of any critical component could have a material adverse effect on the
Company.

The Company's production operations are heavily reliant upon a
consistent supply of energy, including electricity to power the Company's
manufacturing equipment, natural gas to generate the heat used in Quaker's
finishing operations and oil to heat the Company's office areas. A significant
shortage or interruption in the availability of these energy sources would
likely have a material adverse effect on the Company's operations and financial
performance. Beginning in the latter part of 2000, the Company began to
experience rising energy costs. To help provide the Company with greater
stability and to reduce the impact of rising energy costs, during 2001, Quaker
entered into a contract to purchase its electrical power requirements at a fixed
price through December 2004. Upon expiration of this agreement, the Company
began purchasing 60% of its electricity requirements at the default rate and the
balance at an "hour to hour" rate. The Company experienced a significant
increase in its energy costs during 2006 and remains vulnerable to further
energy price increases with respect to both its pure energy costs and energy
cost-related increases in its raw material prices.

COMPETITION

The markets for the Company's products are highly competitive and the
U.S. textile industry, in general, has been hit hard by foreign
imports--particularly from China. Competitive factors in the upholstery fabric
business include product design, styling, price, customer service and quality.
While competitive pricing is important at every price point, it is a more
important competitive factor in the promotional-end of the market than it is in
the middle to better-end of the market, where competition is weighted more
heavily toward fabric styling and design considerations. Recently, cost and
other factors have afforded imported fabrics a significant competitive advantage
in the domestic market. Imported furniture coverings, including leather, fabric
in both roll and "kit" form, and faux suede products were estimated to represent
approximately 42% of sales into the U.S. fabric market during 2004, up from 29%
in 2003 and 11% in 2002, and management believes that sales of imported
furniture coverings currently account for approximately 60% of total U.S. fabric
sales. Although the design, delivery and quality performance of domestic fabric
mills can provide U.S. fabric manufacturers with an advantage in some market
segments, strong demand for imported products can be expected to continue in the
absence of a change in U.S. trade policy or other international developments.

Several of the companies with which the Company competes may have
greater financial resources than the Company. The Company's products compete
with other upholstery fabrics and furniture coverings, including prints, flocks,
tufts, velvets, suede and leather, with leather, faux suede and plain furniture
coverings generating strong demand over the past few years, primarily at the
expense of woven fabrics, such as the Jacquards and other woven fabrics Quaker
manufactures in its Fall River facilities.

During 2005, the Company's yarn sales business continued to be adversely
affected by diminished demand for products manufactured by the Company's
customers in the home furnishings and apparel markets, however, the Company's
sales to the craft yarn market grew significantly during the first three
quarters of the year, with sales to one craft yarn customer representing more
than 75% of the Company's 2005 yarn sales. Sales to that craft yarn customer
dropped off significantly during the fourth quarter of 2005 due to excess
inventory at retail. This situation continued throughout 2006, and the Company's
craft yarn sales have remained depressed.

BACKLOG

As of December 30, 2006, the Company had firm orders pending for
approximately $8.4 million of fabric and yarn compared to $11.3 million as of
December 31, 2005. The Company's backlog position at any given time may not be
indicative of the Company's long-term performance.

TRADEMARKS, PATENTS, COPYRIGHTS

The Company seeks copyright protection for all new fabric designs it
creates, and management believes that the copyrights owned by the Company serve
as a deterrent to those industry participants which might otherwise seek to
replicate the Company's unique fabric designs. In June 1995, the Company
introduced a new collection of fabrics featuring Quaker's proprietary Ankyra(TM)
chenille yarns. In 1997, the United States Patent and Trademark Office issued a
patent to the Company protecting the proprietary manufacturing process developed
by Quaker to produce these yarns. The Company's Davol(R), Quaker Ultra(R) and
Whitaker(R) marks, as well as a logo form of the "W(R)" mark, are registered
with the U.S. Patent and Trademark Office. Quaker's brands also include
Replay(TM), used in connection with the Company's recycled polyester program;
Terrazzo(TM), the brand under which the Company's outdoor fabrics are marketed;
and Quaker Global(TM), which is used to identify the fabrics the Company has
sourced offshore. In addition, the Company has filed patent applications with
the U.S. Patent and Trademark Office to protect its intellectual property rights
in several new technologies and processes created by the Company's product
development staff, including certain laminated products, Quaker's Regal(TM)
chenilles, and a continuous washing and post finishing process. The Company is
also a party to a non-exclusive licensing agreement with Hi-Tex, Inc. for the
use of its patented Crypton(R) finish for certain of the Company's fabrics for
the contract market.

INSURANCE

The Company maintains general liability and property insurance. The
costs of insurance coverage vary generally and the availability of certain
coverages can change. Following the events of September 11, 2001, the Company
experienced significant increases in the premium rates on certain of its
insurance coverages and certain changes were made in the insurance carriers used
by the Company and in the terms and conditions of some of the Company's
insurance policies. Although premium rates for most coverages purchased by the
Company have dropped since the significant increases experienced during the
first round of post-September 11 renewals, most rates have not decreased to
their pre-September 11 levels. While the Company believes that its present
insurance coverage is adequate for its current operations, there can be no
assurance that the coverage is sufficient for all future claims or will continue
to be available in adequate amounts or at reasonable rates.

EMPLOYEES

As of December 30, 2006, Quaker had 1,008 active employees, including
772 production employees, 83 technical and clerical employees, and 153 exempt
employees and commissioned sales representatives. In addition, as of that date,
the Company also had 355 individuals on leave, including individuals on layoff
status and individuals entitled to benefits under the federal Family and Medical
Leave Act and/or one or more of the various medical and disability fringe
benefit programs maintained by the Company;

compared to 374 individuals on leave as of year-end 2005. The Company's
employees are not represented by a labor union, and management believes that
employee relations are good. The Company's operations are heavily dependent on
the availability of labor in the Fall River, Massachusetts area.

ITEM 1A. RISK FACTORS

THE COMPANY HAS EXPERIENCED RECURRING LOSSES FROM OPERATIONS AND FAILED
TO ACHIEVE CERTAIN DEBT COVENANTS IN ITS SENIOR SECURED REVOLVING CREDIT AND
TERM LOAN AGREEMENT DURING FISCAL 2006 AND FISCAL 2005. AS A RESULT, THE
UNQUALIFIED OPINION ISSUED BY QUAKER'S INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON THE COMPANY'S FISCAL 2005 FINANCIAL STATEMENTS INCLUDED AN EXPLANATORY
PARAGRAPH RAISING SUBSTANTIAL DOUBT ABOUT THE ABILITY OF THE COMPANY TO CONTINUE
AS A GOING CONCERN. (SEE ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.)
THE UNQUALIFIED OPINION ISSUED BY QUAKER'S INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON THE COMPANY'S FISCAL 2006 FINANCIAL STATEMENTS DOES NOT
INCLUDE ANY EXPRESSION OF SUBSTANTIAL DOUBT ABOUT THE ABILITY OF THE COMPANY TO
CONTINUE AS A GOING CONCERN. NONETHELESS, AN INVESTMENT IN SHARES OF THE
COMPANY'S COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION, THE
COMPANY'S OPERATING RESULTS ARE SUBJECT TO QUARTERLY AND ANNUAL FLUCTUATIONS AS
A RESULT OF A NUMBER OF FACTORS. SUCH FACTORS INCLUDE:

WE MAY BREACH ONE OR MORE OF THE COVENANTS IN OUR 2006 LOAN AGREEMENTS.
If the Company is unable to meet its obligations under its 2006 Loan Agreements,
as hereinafter defined, in the future, there can be no assurance that the
lenders will agree to any amendments needed, and in the absence of such
amendments, the Company would be in default and our lenders would have the right
to accelerate payment of the outstanding balance of our loans, which as of March
29, 2007, was approximately $33.1 million. If our lenders were to exercise this
right, it is highly unlikely that we would be able to repay the debt from
existing resources. Under these circumstances, we would expect to seek
alternative financing arrangements that would enable us to repay the debt. There
can be no assurance as to when or whether we would be able to complete such an
arrangement on terms acceptable to us or at all.

WE NEED TO CAREFULLY MANAGE OUR CASH. Our ability to meet our current
obligations depends on our access to trade credit, our operating cash flow and
our ability to borrow under the terms of our 2006 Revolving Credit Agreement, as
hereinafter defined, with our ability to borrow under the 2006 Revolving Credit
Agreement a function of our Eligible Accounts Receivable, Eligible Inventory,
Availability and Availability Reserve, as those terms are defined in the 2006
Revolving Credit Agreement. Increases in the Availability Reserve reduce
Availability and thus reduce our ability to borrow and our access to cash. In
like manner, decreases in the Availability Reserve increase Availability and
thus increase our ability to borrow and our access to cash. We need to manage
our inventory levels, accounts receivable, accounts payable and capital
expenditures to provide adequate resources to meet our anticipated operating
needs, maximize our cash flow and reduce our need to borrow under the 2006
Revolving Credit Agreement. Our cash position may be adversely affected by
factors we cannot completely control, including but not limited to, a reduction
in incoming order rates, production rates, sales, and accounts receivable, as
well as delays in receipt of payment of accounts receivable and limitations of
trade credit. Unused Availability under the 2006 Revolving Credit Agreement
fluctuates daily. On March 29, 2007, unused Availability was $2.0 million, net
of the $4.4 million Availability Reserve.

OUR CASH RESOURCES AND OUR ABILITY TO BORROW UNDER OUR 2006 REVOLVING
CREDIT AGREEMENT MAY NOT BE ADEQUATE TO FUND OUR OPERATIONS. We have in the past
generated significant financial losses. If we generate significant financial
losses in the future, our cash resources and our ability to borrow under the
2006 Revolving Credit Agreement may not be adequate to fund our operations.
Based on current assessments, we will need adequate access to cash and other
capital in order to execute our restructuring plan and to support our product
and market development efforts and other operational needs. This investment is
critical in order to maintain and grow our business. We may seek to raise
additional capital in any number of ways, including through the issuance of debt
or equity, or through other financing. If we are able to borrow funds, we likely
will be obligated to make periodic interest or other debt service payments, and
the terms of this debt may impose burdensome restrictions on our ability to
operate our business. If we seek financing through the sale of equity
securities, our current stockholders may suffer dilution in their percentage
ownership of common stock. Additionally, due to our history of significant
losses, we are not certain as to our ability to raise additional capital in the
future or under what terms capital would be available. If we are unable to raise
capital on terms and conditions that are favorable to us, our business could be
negatively affected, which could cause our stock price to decline. Specifically,
if we do have adequate access to cash and other capital, we will have to take
various actions that may include, but not be limited to, a reduction in our
expenditures for new product and new market development initiatives and further
reductions in our overhead expenses. These actions, should they become
necessary, will probably result in significant further reductions in the size of
our operations.

WE MAY NOT BE ABLE TO PAY OFF OR REFINANCE DEBT OBLIGATIONS THAT FALL
DUE IN FISCAL 2007 THROUGH 2010. The Company has substantial debt obligations
that fall due in 2010 and which the Company would be required to pay off or
refinance. There can be no assurance that the Company will have sufficient cash
to satisfy these obligations. As of March 29, 2007, total debt outstanding was
$33.1 million, including $21.7 million under the 2006 Term Loan Agreements as
hereinafter defined, and $11.4 million under the 2006 Revolving Credit
Agreement. In addition, the Company's 2006 Term Loan Agreements are secured by a
first priority security interest in all of the Company's real estate and
equipment and the permit the lender to conduct annual re-appraisals of the
Company's real estate and semi-annual re-appraisals of the Company's machinery
and equipment. In the event of an "Appraisal Shortfall," as that term is defined
in the 2006 Term Loan Agreements, the Company would be required to make a cash
payment to the lender in an amount equal to the difference between the appraised
value of the asset or assets as of the most recent appraisal date and the
updated appraised value established through the re-appraisal process. This
"make-whole" payment would need to be made within a relatively short period of
time following notice to the Company of an Appraisal Shortfall. As a result, the
possibility exists that the Company's Availability under the 2006 Revolving
Credit Agreement would be inadequate to fund the make-whole payment required,
resulting in

a default under the 2006 Term Loans - and because of the cross default
provisions in the 2006 Loan Agreements, a related default under the 2006
Revolving Credit Agreement.

OUR RESTRUCTURING EFFORTS ARE CREATING SHORT-TERM COSTS THAT MAY NOT BE
OFFSET BY INCREASED EFFICIENCIES. In connection with management's execution of
Quaker's restructuring plan, we have implemented a number of manufacturing
realignment and cost savings programs and we anticipate the need to implement
similar programs in the future. Such programs have and can include the
consolidation and integration of facilities, functions, systems and procedures
and have and may result in a decrease in near-term earnings until the expected
cost reductions are achieved. In addition, certain products have been shifted
from domestic manufacturing to offshore sourcing and additional products may be
shifted to offshore sourcing in the future. Such actions may not be accomplished
as quickly as anticipated and the expected cost reductions may not be achieved
in full or at all.

We are incurring substantial costs in connection with our restructuring
efforts, including severance obligations, moving costs, advisor fees and lease
obligations for unused property. Though we anticipate that the restructuring
will ultimately result in reduced general and administrative expenses and more
efficient corporate operations, we can give no assurance that we will be
successful in redefining our cost and operational structures in the near term.
If we are not successful, we may not recoup our investment, which may negatively
impact our results of operations.

OUR SALES HAVE BEEN DECLINING, AND WE HAVE REPORTED OPERATING LOSSES IN
EACH OF THE TEN CONSECUTIVE FISCAL QUARTERS ENDED DECEMBER 30, 2006. WE MAY NOT
BE ABLE TO RESTORE THE COMPANY TO PROFITABILITY. On a comparative basis, our
sales have declined quarter-to-quarter in each of the ten consecutive quarters
ended December 30, 2006. Primarily as a result of our declining sales, we also
have reported operating losses in each of the ten consecutive fiscal quarters
ended December 30, 2006. Quaker has a restructuring plan in place that is
intended to restore the Company to profitability. The key elements of this
restructuring plan include: (i) stabilizing revenues from our U.S.-based
residential fabric business by concentrating our marketing efforts on those
markets least sensitive to imported products; (ii) reducing our operating costs
enough to compensate for the drop we have experienced in our revenues since
Fiscal 2002; (iii) selling excess assets; (iv) developing strategically
important commercial relationships with a limited number of carefully chosen
offshore fabric mills so that we can recapture the share of the domestic
residential market that we have lost over the past few years to foreign imports;
and (v) generating additional profitable sales by penetrating the outdoor and
contract fabric markets. Successfully executing our restructuring plan will
require considerable operational, management, financial, sales and marketing,
supply chain, information systems and design expertise involving the need to
continually recruit, train and retain qualified personnel. There can be no
assurance that the Company will have the resources, including the human
resources, needed to manage execution of its restructuring plan effectively, or
maintain its current sales levels. Accordingly, there can be no assurance that
we will be able to successfully execute our restructuring plan and restore the
Company to profitability.

WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE THE OUTSOURCING ARRANGEMENTS WE
HAVE PUT IN PLACE WITH NON-U.S. FABRIC MANUFACTURERS. A critical element of our
restructuring plan calls for the Company to increase its offshore (import)
capabilities to provide flexibility in product programs and pricing to meet
competitive pressures. Offshore (import) sourcing is subject to, among other
things, political instability in countries where contractors and suppliers are
located and possible delays due to managing at a distance and shipping delays
and interruptions. Either could make it more difficult for the Company to
service its customers. Other risks include the imposition of regulations and
quotas relating to imports; duties, taxes and other charges on imports; and
significant fluctuation in the value of the U.S. dollar against foreign
currencies, all of which could increase costs and decrease earnings. Management
of these outsourcing arrangements will place significant increased demand on the
Company's operational, managerial and administrative resources, including the
resources allocated by the Company to customs matters and other compliance
issues related to our participation in the global marketplace as both a buyer
and a seller. These increased demands could cause the Company to operate its
core domestic residential fabric business and Fall River-based manufacturing
operations less effectively, which in turn could cause a deterioration in our
profitability.

OUR INCREASED RELIANCE ON OFFSHORE FABRIC SOURCING ARRANGEMENTS COULD
ADVERSELY AFFECT OUR ABILITY TO SERVICE CUSTOMERS WHICH COULD RESULT IN A
DECREASE IN OUR SALES. Successful execution of our restructuring plan will
necessarily entail an increase in our involvement in the global upholstery
fabric market, including but not limited to Quaker's importation into the U.S.
market of a significant amount of finished fabrics in both roll and kit form
from various foreign sources, particularly China and South Korea. The roll goods
and furniture kits we source outside the U.S. will then be sold to both our U.S.
domestic furniture manufacturing customers and to our international customers
around the world. Disruptions to our supply chain could result in the late
arrival or unavailability of finished goods for resale, resulting in customer
dissatisfaction and having a material adverse effect on Quaker's reputation, our
sales and marketing initiatives and our future revenues.

ASSET WRITE-OFFS REQUIRED IN CONNECTION WITH THE EXECUTION OF OUR
RESTRUCTURING PLAN HAVE RESULTED IN A DECREASE IN EARNINGS AND ADDITIONAL
WRITE-OFFS ARE POSSIBLE. Accounting rules require that the Company's tangible
assets, such as real estate and machinery and equipment, be tested for
impairment immediately upon the occurrence of certain events. The Company has
substantial tangible assets, including significant investments in
special-purpose machinery and equipment useful only in the production of certain
types of yarns or fabrics. Changes in the Company's product mix or in the
various internally-produced components used in the production of the Company's
novelty yarns or fabrics could result in the idling of some or all of this
equipment, requiring the Company to test for impairment of these assets.
Depending upon the outcome of these tests, the Company could be required to
write-down all or a portion of these assets, resulting in a corresponding
reduction in Quaker's earnings and net worth. During 2006, this

testing process resulted in the need for Quaker to write-off approximately $21.5
million of buildings, machinery and equipment determined to be impaired in
accordance with these accounting rules.

FURTHER LOSS OF MARKET SHARE DUE TO COMPETITION WOULD RESULT IN FURTHER
DECREASES IN SALES AND EARNINGS. The residential upholstery fabric manufacturing
business is highly competitive, fragmented and has recently been hit hard by
foreign imports. As a result, we face significant competition from numerous
competitors, many of which are larger and better capitalized. The Company
competes with many other manufacturers, including manufacturers located in low
labor cost countries, such as China and India, where their lower cost structures
provide them with a significant competitive advantage, particularly when it
comes to the production of commodity products for the promotional end of the
U.S. domestic residential market. The highly competitive nature of the industry
means the Company is constantly subject to the risk of losing market share to
those privately held competitors who have lower sales and profitability targets.
As a result, the Company may not be able to maintain or to raise the prices of
its products in response to inflationary pressures, such as increasing labor,
materials and energy costs. Also due to the large number of competitors and
their wide range of product offerings, the Company may not be able to
differentiate its products (through styling, finish and other construction
techniques) from those of its competitors.

OUR REVENUES COULD CONTINUE TO BE ADVERSELY AFFECTED BY LOW-COST
IMPORTED MERCHANDISE. Competition in our industry is intense, from both domestic
fabric mills and fabric mills located outside the U.S. manufacturing products
for sale into the U.S. market. In addition, there has been a recent and
significant increase in imports of both furniture coverings, in both roll and
"kit" form, and fully upholstered furniture, particularly leather and
microdenier faux suede products, into the U.S. market. Industry data indicates
that sales of imported fabrics in both roll and "kit" form represented
approximately 42% of total U.S. fabric sales during 2004, up from 29% in 2003
and 11% in 2002. Current estimates suggest that this percentage is now
approximately 60%. This has resulted in diminished demand for our products, had
a deflationary effect on pricing in our industry, reduced our ability to
increase our selling prices to pass cost increases on to our customers, and
required us in some cases to reduce our selling prices.

FAILURE TO ANTICIPATE OR RESPOND TO CHANGES IN CONSUMER TASTES AND
FASHION TRENDS IN A TIMELY MANNER COULD RESULT IN A DECREASE IN FUTURE SALES AND
EARNINGS. Competitive factors in the upholstery fabric business include product
design, styling, price, customer service and quality. The Company's products are
predominantly Jacquard and plain woven fabrics. The Company's fabric products
compete with other furniture coverings, including leather, suede, microdenier
"faux suede," prints, tufts, flocks and velvets, for consumer acceptance.
Residential furniture is a highly styled product subject to fashion trends and
geographic consumer tastes. Consumer tastes in upholstered furniture coverings
are cyclical and change over time, sometimes rapidly, with various coverings
gaining or losing share depending on changes in home furnishing trends and the
amount of retail floor space allocated to various upholstered furniture product
categories at any given time. For example, leather furniture and furniture
covered with microdenier faux suede products, primarily imported in roll and
"kit" form from low labor cost countries, particularly China, have enjoyed
strong demand over the past few years, primarily at the expense of woven
fabrics, such as the Jacquards and other woven fabrics Quaker manufactures, and
in some retail furniture stores, these products may occupy as much as 50% of the
floor space allocated to upholstered furniture products.

If the Company is unable to anticipate or respond to changes in consumer
tastes and fashion trends in a timely manner it may lose sales and be faced with
excess inventory (both raw materials and finished goods). Disposal of excess
inventory may result in a decrease in sales and earnings.

QUAKER IS VERY DEPENDENT ON A LIMITED NUMBER OF RAW MATERIAL SUPPLIERS.
The Company is dependent upon outside suppliers for all of its raw material
needs, including dyeing services, and is subject to price increases and delays
in receiving these materials and services. The raw materials are predominantly
petrochemical products and their prices fluctuate with changes in the underlying
petrochemical market in general. Future price levels of raw materials will
depend on world-wide supply and demand conditions, the general inflation rate
and overall economic conditions. During 2005, the Company experienced
significant increases in certain raw material prices, which it was not able to
pass fully through to its customers and which contributed to a significant
reduction in the Company's 2005 gross margin. Similar conditions in the future
could have a material adverse effect on the Company. In addition, a number of
our domestic suppliers have been hurt by reduced demand related to the rapid
increase in imported fabrics into the U.S. market. Although other sources of
supply are available, the Company currently procures approximately 40% of its
raw materials from Unifi, Inc. and American Fibers and Yarns ("American"), and
American is the sole supplier of a filament yarn used in the Company's chenille
manufacturing operations. A shortage or interruption in the supply of any
critical component could have a material adverse effect on the Company.

WE ARE IMPORTING SOME CRITICAL RAW MATERIALS FROM FOREIGN SUPPLIERS.
During 2006, approximately 8% of the acrylic fibers and yarns that go into the
upholstery fabrics and novelty yarns we make was sourced outside the U.S.
Changes in exchange rates could affect the price the Company pays for these raw
materials, resulting in the Company's need to either increase the selling prices
of its fabrics and yarns--which could, of course, result in lower volumes--or
accept lower gross margins on their sale. In addition, any interruption in the
supply of these components could result in serious disruptions in our production
operations, impair our ability to fill customer orders and, therefore, have a
material adverse affect on our sales, profitability and financial condition.

ANY INCREASE IN ENERGY COSTS IS LIKELY TO ERODE OUR MARGINS. The
Company's production operations are heavily reliant upon a consistent supply of
energy, including electricity to power the Company's manufacturing equipment,
natural gas to generate the heat

used in Quaker's finishing operations and oil to heat the Company's office
areas. A significant shortage or interruption in the availability of these
energy sources would likely have a material adverse effect on the Company's
operations and financial performance. Beginning in the latter part of 2000, the
Company began to experience rising energy costs. To help provide the Company
with greater stability and to reduce the impact of rising energy costs, during
2001, Quaker entered into a contract to purchase its electrical power
requirements at a fixed price through December 2004. Upon expiration of this
agreement, the Company began purchasing 60% of its electricity requirements at
the default rate and the balance at an "hour to hour" rate. The Company
experienced a significant increase in its energy costs during 2005 and remains
vulnerable to further energy price increases with respect to both its pure
energy costs and energy cost-related increases in its raw materials prices.

A SIGNIFICANT PORTION OF OUR ANNUAL REVENUES COMES FROM FOREIGN SALES.
In 2006, foreign sales totaled $24.8 million or 16.9% of the Company's gross
fabric sales. A reduction in the volume of international trade, fluctuations in
currency exchange rates, political instability or an economic downturn in any of
the export markets important to the Company, or any material restrictions on
international trade could have a material adverse effect on the Company. In
addition, the Company's 2006 gross fabric sales to customers in four foreign
countries were $19.2 million in the aggregate, representing 77.6% of the
Company's total gross foreign sales and 12.8% of the Company's gross fabric
sales. There can be no assurance that economic, political or other events in any
foreign market will not have a material adverse effect on the Company.

BUSINESS FAILURES OF LARGE CUSTOMERS COULD RESULT IN A DECREASE IN THE
COMPANY'S FUTURE SALES AND EARNINGS. Although the Company has no single customer
which alone represents 10% or more of its total annual sales, the possibility of
business failures of large customers could have a material adverse effect on our
sales, profitability and financial condition and could result in a decrease in
our future sales and earnings in that these sales are difficult to replace.

OUR BAD DEBT EXPERIENCE MAY DIFFER MATERIALLY FROM OUR ESTIMATES.
Substantially all of the Company's trade accounts receivable are from
manufacturers of residential furniture. Management monitors the payment status
and periodically performs credit evaluations of these customers. However,
changes in creditworthiness can occur rapidly and unanticipated losses from
trade accounts receivable could occur in excess of the outstanding allowance for
losses. Therefore, there can be no assurance that total losses from
uncollectible accounts will not exceed the allowance. Such losses could have a
material adverse effect on our profitability and financial condition.

AN ECONOMIC DOWNTURN COULD RESULT IN A DECREASE IN THE COMPANY'S SALES
AND EARNINGS. Overall demand levels in the upholstery fabric industry are a
function of overall demand for household furniture. For most individuals, a
decision to buy upholstered furniture represents both a discretionary purchase
and a relatively large expenditure. As a result, demand is affected by general
economic conditions, population demographics, new household formations, consumer
confidence and disposable income levels, sales of new and existing homes and
interest rates. In general, aggregate demand is higher during periods of
economic strength and lower during periods of economic weakness or uncertainty.
Adverse economic conditions could have a material adverse effect on the Company.

WE ARE VERY DEPENDENT ON OUR COMPUTER SYSTEMS. The effective functioning
of Quaker's management information systems, including its Enterprise Resource
Planning and Advanced Planning ("APS") systems, is critical to the Company's
ability to manage both its administrative and manufacturing operations. Any
significant performance problem with these systems would have a material adverse
effect on Quaker's ability to manage its accounting, order processing, materials
purchasing and inventory management, scheduling and shipping and invoicing
functions, resulting in significant downtime in Quaker's production areas,
inefficient production, delays in filling and invoicing orders, and shortfalls
in our operating results.

A SUCCESSFUL PRODUCT LIABILITY CLAIM BROUGHT AGAINST THE COMPANY IN
EXCESS OF AVAILABLE INSURANCE COVERAGE WOULD RESULT IN A DECREASE IN EARNINGS
AND ANY CLAIM OR PRODUCT RECALL THAT RESULTS IN SIGNIFICANT ADVERSE PUBLICITY
AGAINST THE COMPANY MAY RESULT IN A DECREASE IN SALES AND EARNINGS. The Company
faces the business risk of exposure to product liability claims in the event
that the use of any of its products results in personal injury or property
damage. In the event that any of its products prove to be defective, the Company
may be required to recall or redesign such products. The Company maintains
insurance against product liability claims, but there can be no assurance that
such coverage will continue to be available on terms acceptable to it, or at
all, or that such coverage will be adequate for liabilities actually incurred.

WE MUST COMPLY WITH A NUMBER OF GOVERNMENTAL REGULATIONS APPLICABLE TO
OUR BUSINESS OPERATIONS. In May 1998, the U.S. Consumer Product Safety
Commission (the "CPSC") began reviewing whether to propose a standard to address
the hazards associated with small open flame ignitions of upholstered furniture.
The Company is unable to predict when or if any such standard will be adopted or
the effect the adoption of any standard would have on the Company. Any
requirement to treat fabrics for upholstered furniture with flame retardant
chemicals would increase the Company's production costs. There can be no
assurance that the Company would be able to pass any of such increased costs on
to its customers. In addition, any such requirement could adversely affect the
aesthetics of the Company's products resulting in lower demand.

In January 2006, the EPA launched a global stewardship program inviting
companies to reduce PFOA (Perfluorooctanoic acid) releases and its presence in
products by 95% by no later than 2010 and to work toward the elimination of
these sources of exposure no later than 2015 due to the possibility that at some
point in the future the EPA could determine PFOA to be a likely carcinogen.
Certain of the fabric finishes used by the Company to improve the stain
resistance properties of Quaker's products may

release trace amounts of PFOA as a result of the breakdown of fluorotelomers
over time. Although studies done by DuPont, one of the Company's fabric finish
suppliers, indicate "the use of consumer articles based on fluorotelomers would
not result in any detectable exposure to PFOA," Quaker is currently working with
the Company's principal fabric finish supplier to assist this supplier with the
reformulation of its product in a manner consistent with the EPA's stewardship
program. It is not clear whether the use of a reformulated product will result
in any increased costs to the Company. In the event of any cost increases, there
can be no assurance that the Company would be able to pass such cost increases
on to its customers. If it is unable to, the Company may be adversely affected.

OUR OPERATIONS ARE SUBJECT TO NUMEROUS ENVIRONMENTAL LAWS AND
REGULATIONS. The Company's operations are subject to numerous federal, state,
and local laws and regulations pertaining to the discharge of materials into the
environment or otherwise relating to the protection of the environment. The
Company's facilities are located in industrial areas, and, therefore, there is
the possibility of incurring environmental liabilities as a result of historical
operations at the Company's sites. Environmental liability can extend to
previously owned or leased properties, properties owned by third parties, and
properties currently owned or leased by the Company. Environmental liabilities
can also be asserted by adjacent landowners or other third parties in toxic tort
litigation. In addition, under the Comprehensive Environmental Resources
Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), and
analogous state statutes, liability can be imposed for the disposal of waste at
sites targeted for cleanup by federal and state regulatory authorities.
Liability under CERCLA is strict as well as joint and several. Further, certain
of the Company's manufacturing areas are subject to change in the future and any
failure by the Company to comply with present or future laws or regulations
could subject it to future liabilities or interruption of production which could
have a material adverse effect on the Company. Changes in environmental
regulations could restrict the Company's ability to expand its facilities or
require the Company to incur substantial unexpected other expenses to comply
with such regulations.

The Company accrues for estimated costs associated with known
environmental matters when such costs are probable and can be reasonably
estimated. The actual costs to be incurred for environmental remediation may
vary from estimates, given the inherent uncertainties in evaluating and
estimating environmental liabilities, including the possible effects of changes
in laws and regulations, the stage of the remediation process and the magnitude
of contamination found as the remediation progresses. Environmental due
diligence reviews conducted by the Company's lenders in connection with Quaker's
November 2006 refinancing transaction identified certain regulatory compliance
obligations which the Company failed to meet in a timely fashion. These reviews
also indicated the need for additional environmental site assessment work at
certain of the Company's facilities, raising the possibility that the Company
will be required to incur additional future remediation expenses should further
environmental conditions requiring remediation be identified during this
process. The Company has accrued reserves for environmental matters based on
information presently available, and management believes these reserves to be
adequate. Accordingly, management believes the ultimate disposition of known
environmental matters will not have a material adverse effect on the liquidity,
capital resources, business or consolidated financial position of the Company,
however, there can be no assurance that established reserves will prove to be
adequate or that the costs associated with environmental matters will not
increase in the future.

FAILURE TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS AND STOCK PRICE. Section 404 of the Sarbanes-Oxley Act requires us to
evaluate annually the effectiveness of our internal controls over financial
reporting as of the end of each fiscal year and to include a management report
assessing the effectiveness of our internal controls over financial reporting in
our annual report on Form 10-K. As a non-accelerated filer, Section 404 would
also require our independent registered public accounting firm to attest to, and
report on, management's assessment of our internal controls over financial
reporting with respect to our Fiscal 2008 operations. If we fail to maintain the
adequacy of our internal controls, as such standards are modified, supplemented
or amended from time to time, we cannot assure you that we will be able to
conclude in the future that we have effective internal controls over financial
reporting in accordance with Section 404. If we fail to maintain a system of
effective internal controls, it could lead to material misstatements in our
financial statements and we could fail to meet our reporting obligations, which
would likely cause investors to lose confidence in our reported financial
information. This could have an adverse effect on our business, hurt our
operating results and lead to a decline in our stock price. Additionally,
ineffective internal control over financial reporting could expose us to
increased risk of fraud or misuse of corporate assets and subject us to
potential delisting from the Nasdaq Stock Market, regulatory investigations and
civil or criminal sanctions.

DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon the efforts and abilities of the Company's key
employees. The loss of services of one or more of these key employees could have
a material adverse effect on the Company.

CERTAIN ANTI-TAKEOVER PROVISIONS AND PREFERRED STOCK COULD RESULT IN A
DECREASE IN A POTENTIAL ACQUIRER'S VALUATION OF THE COMPANY'S COMMON STOCK.
Certain provisions of Delaware law and the Company's Certificate of
Incorporation could make it more difficult for a third party to acquire control
of the Company, even if such change in control would be beneficial to
stockholders. Also, Quaker's Certificate of Incorporation allows the Company to
issue preferred stock without stockholder approval. Such issuances could also
make it more difficult for a third party to acquire the Company. In addition,
under the terms of the 2006 Loan Agreements, a Change in Control would
constitute an Event of Default, as those terms are defined in the 2006 Loan
Agreements. And finally, the Company is a party to change in control agreements
with each of Quaker's officers. In the event of a Termination of Employment in
connection with a Change in Control, as those terms are defined in the
agreements, the Company would be obligated to make certain

payments, expressed as a percentage of cash compensation, to the terminated
officer or officers. These provisions may have the effect of delaying, deferring
or dissuading a potential acquirer from acquiring outstanding shares of Common
Stock at a price that represents a premium to the then current trading price.

THE PRICE OF A SHARE OF THE COMPANY'S COMMON STOCK COULD FALL BELOW THE
LEVEL REQUIRED BY THE COMPANY'S LISTING AGREEMENT WITH THE NASDAQ GLOBAL MARKET.
The Company's common stock is traded on the NASDAQ Global Market. During 2006,
the sales price per share ranged from a low of $0.92 to a high of $3.00, and the
Company's common stock is "thinly-traded." The possibility exists that there
could be a further decrease in the share price, particularly if there is further
deterioration in the Company's financial performance. If the price of a share of
the Company's common stock were to fall below $1.00 for a period of thirty (30)
days, the Company would be in violation of its listing agreement with Nasdaq and
the Company's stock would be "delisted," resulting in a further reduction in the
liquidity of an investment in the Company's common stock.

FORWARD-LOOKING STATEMENTS:

Statements contained in this report that are prefaced with the words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"seek," "plan," "intend," "designed," "believe," or variations of such words and
similar expressions, are intended to identify forward-looking statements
regarding events, conditions and financial trends that may affect the Company's
future plans of operations, business strategy, results of operations and
financial position. These statements are based on the Company's current
expectations and estimates as to prospective events and circumstances about
which the Company can give no firm assurance. Further, any forward-looking
statement speaks only as of the date on which such statement is made, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement is made.
As it is not possible to predict every new factor that may emerge,
forward-looking statements should not be relied upon as a prediction of the
Company's actual future financial condition or results. The forward-looking
statements in this report, like any forward-looking statements, involve risks
and uncertainties that could cause actual results to differ materially from
those projected or anticipated. Such risks and uncertainties include, in
addition to those discussed above, product demand and market acceptance of the
Company's products; regulatory uncertainties; the effect of economic conditions;
the impact of competitive products and pricing, including, but not limited to,
imported furniture and furniture coverings sold into the U.S. domestic market;
foreign currency exchange rates; changes in customers' ordering patterns; the
effect of uncertainties in markets outside the U.S. in which the Company
operates; changes from anticipated levels of sales, whether due to future
global, national or regional economic and competitive conditions, customer
acceptance of existing and new products, or otherwise; economically effective
foreign sourcing of products; the price at which a property is sold, cash and
non-cash charges incurred in connection therewith, and the timing of any such
sale; pending or future litigation; pricing pressures due to excess capacity;
raw material cost increases; transportation cost increases; energy cost
increases; the inability of a major customer to meet its obligations; loss of
significant customers in connection with a merger, acquisition, disposition,
bankruptcy or otherwise; actions of current or new competitors; tax rate
changes; interest rate changes; future business decisions and other
uncertainties, all of which are difficult to predict and many of which are
beyond the control of the Company.

WE DO NOT UNDERTAKE ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING
STATEMENT TO REFLECT CIRCUMSTANCES OR EVENTS THAT OCCUR AFTER THE DATE ON WHICH
THE FORWARD-LOOKING STATEMENT IS MADE.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

PROPERTIES

Quaker is headquartered in Fall River, Massachusetts where it currently
owns five facilities and leases two. Operations have ceased at two of the owned
facilities and at one of the leased plants. A sale of the Company's corporate
headquarters building on Davol Street in Fall River is pending, with the Company
planning to lease back 127,000 square feet of this facility for office and R&D
purposes. The sixty-six acres of undeveloped land the Company owns in Fall River
and three of the Company's other plants are also for sale. The table below sets
forth certain information relating to the Company's current facilities:

BUILDING
LOCATION STATUS PURPOSE AREA (SF) OWNERSHIP
- ------------------------------ ------ ------------------ -------- ---------

Grinnell Street, Fall River .. Active Manufacturing 748,000 Owned
Commerce Drive, Fall River ... Active Warehouse/Mfg. 540,000 Leased(1)
Davol Street, Fall River ..... Active Offices/R&D 245,000 Owned(2)
Ferry Street, Fall River ..... Active Manufacturing 193,000 Owned(3)
Brayton Avenue, Fall River ... Idled Manufacturing 186,000 Owned(4)
Quarry Street, Fall River .... Idled Manufacturing 76,000 Owned(4)
Graham Road, Fall River ...... Idled Manufacturing 52,000 Leased(5)
Verona, Mississippi .......... Active Distribution Center 20,000 Owned
City of Industry, California.. Active Distribution Center 17,000 Leased(6)
Mexico City, Mexico .......... Active Distribution Center 9,000 Leased(7)
High Point, North Carolina ... Active Distribution Center 9,000 Leased(8)

- ----------
(1) Lease expires December 31, 2015

(2) A sale of this facility is pending. As part of this transaction, the
Company has agreed to lease approximately 127,000 square feet in the
building in order to maintain its corporate headquarters at the same
location

(3) This plant is for sale

(4) Manufacturing activities have ceased at this site, and the facility is
for sale

(5) Lease expires July 31, 2007. This facility has been idled, and this
lease will not be renewed

(6) Lease expires September 30, 2009

(7) Lease expires February 28, 2009

(8) Lease expires July 31, 2008

The Company also maintains inventory at a third party warehouse provider
in Sao Paulo, Brazil. Quaker has sales offices in Fall River, Massachusetts;
Guadalajara and Mexico City, Mexico; Hickory and High Point, North Carolina;
Chicago, Illinois; Tupelo, Mississippi; City of Industry, California; and Sao
Paulo, Brazil. All of the Company's sales offices, except the one in Fall River,
Massachusetts, are leased.

On March 3, 2006, the Company entered into a purchase and sale agreement
with respect to the Company's 244,000 square foot manufacturing facility located
at 763 Quequechan Street in Fall River, Massachusetts calling for the sale of
this facility to a Massachusetts limited liability company for $1.4 million, and
on March 14, 2006, Quaker entered into a purchase and sale agreement with
respect to the Company's 53,000 square foot manufacturing facility located at
3129 County Street in Somerset, Massachusetts calling for the sale of this
facility to a resident of Cumberland, Rhode Island for $1.75 million. These two
transactions closed during the third quarter of 2006.

On February 20, 2007, the Company entered into a purchase and sale agreement
with respect to the Company's 245,000 square foot corporate headquarters
building located at 1082 Davol Street in Fall River calling for the sale of this
facility for $4.7 million and a leaseback of approximately 127,000 square feet
for office purposes. This sale is pending, and the transaction is expected to
close in April 2007.

The Company also owns approximately sixty acres of undeveloped land in
Fall River, Massachusetts which was purchased in 1998 to allow for expansion of
its operations. The Company's December 2004 decision to enter into a long-term
lease on an additional 540,000 square feet of manufacturing and warehousing
space in Fall River led the Company to reevaluate its interest in developing
this land as a manufacturing location. The net book value of this land is
approximately $3.5 million, and the Company is actively marketing it for sale or
development.

ENVIRONMENTAL MATTERS

The Company's operations are subject to numerous federal, state, and
local laws and regulations pertaining to the discharge of materials into the
environment or otherwise relating to the protection of the environment. The
Company's facilities are located in industrial areas and, therefore, there is
the possibility of incurring environmental liabilities as a result of historic
operations at the Company's sites. Environmental liability can extend to
previously owned or leased properties, properties owned by third parties, and
properties currently owned or leased by the Company. Environmental liabilities
can also be asserted by adjacent landowners or other third parties in toxic tort
litigation. In addition, under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ("CERCLA"), and analogous
state statutes, liability can be imposed for the disposal of waste at sites
targeted for cleanup by federal and state regulatory authorities. Liability
under CERCLA is strict as well as joint and several. Environmental laws and
regulations are subject to change in the future, and any failure by the Company
to comply with present or future laws or regulations could subject it to future
liabilities or interruption of production which could have a material adverse
effect on the Company. In addition, changes in environmental regulations could
restrict the Company's ability to expand its facilities or require the Company
to incur substantial unexpected other expenses to comply with such regulations.

In particular, the Company is aware of soil and groundwater
contamination relating to the use of certain underground fuel oil storage tanks
at its Fall River facilities. During 2001, the Company filed Response Action
Outcome Statements ("RAOs") and Activities and Use Limitations ("AULs") with the
Commonwealth of Massachusetts with respect to soil and groundwater contamination
at two of its facilities. The AULs are intended to limit human access to the
tainted soil and groundwater, close out the sites and end future regulatory
reporting. During the fourth quarter of 2003, the Company terminated the AUL
with respect to one of these facilities at the direction of the Massachusetts
Department of Environmental Protection in order to complete additional response
actions necessary to support the conclusion that a condition of No Significant
Risk has been achieved at the site. In addition, during the fourth quarter of
1993 the Company removed and encapsulated asbestos at two of its facilities and
the Company has an on-going asbestos management program in place to
appropriately maintain the asbestos that remains present at its facilities.

Quaker has also determined that several localized areas of a sixty-acre
parcel of land in Fall River owned by the Company contain surficial soil
contamination from polyaromatic hydrocarbons ("PAHs") and lead, and are thus
subject to the Massachusetts Superfund law. Over eighty percent of the
contaminated soil exists under high-tension power lines. The site is currently
undeveloped and was purchased by the Company during 1998-1999 to provide a
location for the possible future development of a manufacturing and warehouse
facility. The Company engaged the services of a Licensed Site Professional
("LSP") and filed the appropriate notices and reports with the Massachusetts
Department of Environmental Protection. Following the determination of the
vertical and lateral extent of the contamination and the nature of the soil
contamination by the LSP, it was established that the site could be properly
remediated by covering the contaminated soil under the high-tension power wires
with a one-foot depth of clean soil. This was completed during the second half
of 2000. Subsequent soil sampling and laboratory analyses have confirmed that
the areas of contamination under the high-tension power wires have been properly
remediated. Additional regulatory compliance and environmental assessment and
remediation work at the site is anticipated, the final cost of which is
currently uncertain.

The Company acquired two additional manufacturing facilities during the
second half of 2001. Prior to the Company's purchase, comprehensive
environmental site assessments, including soil and groundwater analyses, were
completed at both sites by an LSP. As a result of these assessments, an AUL has
been filed with the Commonwealth of Massachusetts with respect to one of the
sites. Further, although urban fill containing waste material, including coal
and ash, was discovered at the other site, the Company has determined that the
"urban fill" exemption from the assessment and remediation requirements of the
Massachusetts environmental regulations requires no further action by the
Company with respect to this property.

During 2003, the Company entered into agreements with the Massachusetts
Department of Environmental Protection (the "MADEP") to install air pollution
control equipment on three of the stacks at one of its manufacturing facilities
located in Fall River. The control equipment is intended to ensure that
emissions from the stacks do not exceed the 0% opacity limit set forth in the
Company's operating permit for air emissions. Management anticipates that the
costs associated with the acquisition and installation of the control equipment
will total approximately $900,000. The equipment itself was scheduled to be
fully installed over a three year period beginning in 2003. By March 2006, the
required pollution control equipment had been installed on two of the three
stacks. The Company has reached an agreement with the MADEP extending the date
by which the equipment required on the third stack must be installed to October
2007.

presently available, and management believes these reserves to be adequate.
Accordingly, management believes the ultimate disposition of known environmental
matters will not have a material adverse effect on the liquidity, capital
resources, business or consolidated financial position of the Company, however,
there can be no assurance that established reserves will prove to be adequate or
that the costs associated with environmental matters will not increase in the
future.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings other than routine
legal proceedings incidental to its business, which, in the opinion of
management, are immaterial in amount or are expected to be covered by the
Company's insurance carriers.

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

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

The Company's common stock is traded over the counter and is quoted on
the Nasdaq Global Market under the symbol "QFAB."

As of March 29, 2007, there were approximately 89 record holders of the
Company's common stock.

No dividends were paid on the Company's common stock prior to fiscal
year 2003. During the first quarter of 2003, the Board of Directors adopted a
new dividend policy. This policy provides for future dividends to be declared at
the discretion of the Board of Directors, based on the Board's quarterly
evaluation of the Company's results of operations, cash requirements, financial
condition and other factors deemed relevant by the Board. The Company's 2006
Loan Agreements contain restrictive covenants which restrict the Company's
ability to pay dividends. The Company suspended dividend payments following the
third quarter of 2004 in order to comply with a similar restrictive covenant in
the financing agreements to which the Company was then a party, and no dividends
have been declared or paid since that time. See Note 7 of Notes to Consolidated
Financial Statements.

MARKET INFORMATION

The following summarizes the high and low sales prices for a share of
the Company's common stock as reported by Nasdaq and cash dividends paid per
share for each of the quarters in the years ended December 30, 2006 and December
31, 2005.

PRICE PER SHARE DIVIDENDS
------------------ PER
2006 HIGH LOW SHARE
---- -------- -------- ---------
FIRST QUARTER ..................... $ 3.00 $ 1.30 --
SECOND QUARTER .................... $ 1.83 $ 1.34 --
THIRD QUARTER ..................... $ 1.71 $ 1.06 --
FOURTH QUARTER .................... $ 1.34 $ 0.92 --

Price Per Share Dividends
------------------ Per
2005 High Low Share
---- -------- -------- ---------
First Quarter ..................... $ 5.99 $ 3.13 --
Second Quarter .................... $ 4.63 $ 3.00 --
Third Quarter ..................... $ 4.69 $ 2.54 --
Fourth Quarter .................... $ 2.92 $ 2.11 --

PERFORMANCE GRAPH

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG QUAKER FABRIC CORPORATION, NASDAQ
MARKET INDEX AND PEER GROUP INDEX

The graph below compares the cumulative total stockholder return for the
Company's Common Stock for the period beginning December 28, 2001 and ended
December 30, 2006 with the comparable returns of two indexes. The first index is
the NASDAQ Market Index (NMS Industrials) and the second is a group consisting
of the twenty-five textile manufacturing companies that currently compose the
Hemscott Group Inc., Textile Manufacturing Industry Group. Additional
information concerning this group, including a listing of the companies
included, is available at www.hemscottdata.com.

[The table below represents a line chart in the printed report.]

12/28/2001 1/3/2003 1/2/2004 12/31/2004 12/31/2005 12/30/2006
---------- -------- -------- ---------- ---------- ----------

QUAKER FABRIC CORP. 100 80.58 109.94 67.51 25.83 14.17
HEMSCOTT GROUP INDEX 100 97.14 122.78 152.54 130.41 123.12
NASDAQ MARKET INDEX 100 69.75 104.88 113.7 116.19 128.12

ASSUMES $100 INVESTED ON DEC. 28, 2001
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DEC. 30, 2006

COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS

FISCAL YEAR ENDING
------------------

12/28/01 1/3/03 1/2/04 12/31/04 12/30/05 12/29/06
-------- ------ ------ -------- -------- --------

Quaker Fabric 100.00 80.58 109.94 67.51 25.83 14.17

Textile Manufacturing 100.00 97.14 122.78 152.54 130.41 123.12

NASDAQ Market Index 100.00 69.75 104.88 113.70 116.19 128.12

For purposes of this comparison, the cumulative total stockholder return of each
issuer within the Hemscott Group Inc. Manufacturing Group has been weighted
according to the respective issuer's stock market capitalization at the
beginning of the period (December 28, 2001). This comparison assumes $100
invested on December 28, 2001 in the Company's Common Stock and $100 invested in
each of the indexes. This comparison also assumes that all dividends have been
reinvested.

EQUITY COMPENSATION PLAN INFORMATION

(IN THOUSANDS, EXCEPT DOLLAR AMOUNTS)
DECEMBER 30, 2006

NUMBER OF
SECURITIES
NUMBER OF REMAINING AVAILABLE
SECURITIES TO BE WEIGHTED-AVERAGE FOR FUTURE ISSUANCE
ISSUED UPON EXERCISE PRICE OF UNDER EQUITY
EXERCISE OF OUTSTANDING COMPENSATION PLANS
OUTSTANDING OPTIONS, (EXCLUDING
OPTIONS, WARRANTS WARRANTS AND SECURITIES REFLECTED
AND RIGHTS RIGHTS IN COLUMN A)
----------------- ----------------- --------------------
PLAN CATEGORY (A) (B) (C)
------------- ----------------- ----------------- --------------------

Equity compensation plans approved by security holders ......... 1,921 $ 7.66 1,740
Equity compensation plans not approved by security holders ..... 627 8.03 432
----- ------ ------
Total ........................................................ 2,548 $ 7.75 2,172
===== ====== ======

EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS

The Company's 1996 Stock Option Plan for certain key employees currently
covers 522,500 shares of common stock. Options granted under the 1996 Stock
Option Plan vest over a five-year period beginning on the date of each grant.
Options are issued at their fair market value at the date of grant, and the
average exercise price for all options granted is $7.98 per share. Prior to
their participation in the Company's 1997 Stock Option Plan in 2001, the
Company's non-employee directors were awarded options pursuant to individual
contracts. These options were issued at their fair market value at the date of
grant, and the average exercise price for all such options granted is $8.25 per
share. All options granted to the Company's non-employee directors under these
contracts are fully vested and currently cover a total of 105,000 shares of
common stock.

On December 16, 2005, the Board of Directors approved the acceleration
of vesting of all outstanding unvested stock options previously awarded to its
employees (including its executive officers) under the Company's equity
compensation plans. The acceleration of vesting became effective on December 16,
2005 for stock options outstanding as of such date. On such date, the closing
market price was $2.60. Options to purchase an aggregate of approximately
565,000 shares of common stock (of which options to purchase an aggregate of
393,000 shares of common stock are held by executive officers of the Company)
were accelerated on December 16, 2005. The exercise prices of the options range
from $7.04 to $9.12. Under the recently issued Financial Accounting Standards
Board Statement No. 123R, "Share-Based Payment" ("SFAS 123R"), the Company was
required to apply the expense recognition provisions under SFAS 123R beginning
January 2, 2006. The decision to accelerate the vesting of these stock options,
all of which are at exercise prices higher than current market price, was made
because (i) there is no perceived value in these options to the employees
involved, and (ii) there are no employee retention ramifications.

PURCHASES OF EQUITY SECURITIES BY THE COMPANY

The Company did not purchase any of its equity securities during 2006.

ITEM 6. SELECTED FINANCIAL DATA

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS)

The following table sets forth certain consolidated financial and
operating data of the Company for the periods indicated. This selected financial
and operating data should be read in conjunction with the Consolidated Financial
Statements, the Notes thereto and the other financial information included
herein.

FISCAL YEAR ENDED
-----------------------------------------------------------------------
DECEMBER 30, DECEMBER 31, JANUARY 1, JANUARY 3, JANUARY 4,
2006 2005 2005 2004 2003(1)
----------- ----------- ----------- ----------- -----------

STATEMENT OF OPERATIONS DATA:
Net sales .......................................... $ 151,664 $ 224,684 $ 289,145 $ 325,337 $ 365,445
Cost of products sold .............................. 136,809 195,764 236,270 255,202 285,493
----------- ----------- ----------- ----------- -----------
Gross profit ....................................... 14,855 28,920 52,875 70,135 79,952
Selling, general and administrative expenses ....... 37,053 46,076 55,315 55,334 56,885
Goodwill impairment ................................ -- 5,432 -- -- --
Restructuring and asset impairment charges ......... 26,458 11,203 -- -- --

Non-recurring (income)(3) .......................... -- -- -- (1,426) --
----------- ----------- ----------- ----------- -----------
Operating income (loss) ............................ (48,656) (33,791) (2,440) 16,227 23,067
Other expenses (income):
Interest expense ................................. 3,727 3,019 3,327 3,887 4,633
Early extinguishment of debt ..................... 628 2,232 -- -- --
Amortization and write-off of deferred
financing costs ................................ 1,336 396 53 53 103
Other income ..................................... (262) (200) (45) (2) (12)
----------- ----------- ----------- ----------- -----------
Income (loss) before provision for income taxes .... (54,085) (39,238) (5,775) 12,289 18,343
Provision (benefit) for income taxes(4) ............ (16,453) (12,982) (3,733) 4,350 6,787
----------- ----------- ----------- ----------- -----------
Net income (loss) .................................. $ (37,632) $ (26,256) $ (2,042) $ 7,939 $ 11,556
----------- ----------- ----------- ----------- -----------
Earnings (loss) per common share(2)--basic ......... $ (2.23) $ (1.56) $ (0.12) $ 0.48 $ 0.72
----------- ----------- ----------- ----------- -----------
Earnings (loss) per common share(2)--diluted ....... $ (2.23) $ (1.56) $ (0.12) $ 0.47 $ 0.69
----------- ----------- ----------- ----------- -----------
Dividends per common share ......................... $ -- $ -- $ 0.09 $ 0.10 $ --
----------- ----------- ----------- ----------- -----------
Weighted average shares outstanding (2)--basic ..... 16,869 16,826 16,819 16,671 16,022
----------- ----------- ----------- ----------- -----------
Weighted average shares outstanding (2)--diluted ... 16,869 16,826 16,819 16,958 16,847
----------- ----------- ----------- ----------- -----------

SELECTED OPERATING DATA:
Depreciation and amortization ...................... $ 14,903 $ 17,255 $ 18,757 $ 19,470 $ 17,826
Capital expenditures ............................... 1,222 5,402 15,015 7,921 32,094
Unit volume (in yards) ............................. 23,560 34,593 47,195 56,132 63,847
Weighted average gross sales price per yard ........ $ 6.21 $ 5.88 $ 5.74 $ 5.66 $ 5.57

BALANCE SHEET DATA:
Working capital .................................... $ 23,297 $ 18,661 $ 33,396 $ 74,168 $ 74,808
Total assets ....................................... 160,844 219,862 266,505 276,278 288,686
Current portion of debt and capital leases ......... 11,432 38,023 40,000 5,000 5,000
Long-term debt and capitalized leases, net of
current portion .................................. 22,917 629 -- 40,000 61,200
Stockholders' equity ............................... $ 102,929 $ 141,164 $ 166,492 $ 169,505 $ 161,805

- ----------
(1) The fiscal year ended January 4, 2003 was a 53-week period.

(2) Earnings (loss) per share is computed using the weighted average number
of common shares and common share equivalents outstanding during the
year.

(3) In the fiscal year ended January 3, 2004, income resulted from a
settlement of a tariff dispute with the Mexican tax authorities.

(4) Favorable settlement of the Company's claim for certain state research
and development tax credits added approximately $1,200 or $0.07 per
share, to the tax benefit included in the Company's results of
operations for fiscal 2005. Favorable settlement of the Company's claim
for certain federal research and development tax credits added
approximately $2,000 or $0.12 per share, to the tax benefit included in
the Company's results of operations for fiscal 2004. See Note 8 to the
Consolidated Financial Statements.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following analysis of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this report.

The report issued by Quaker's independent registered public accounting
firm on the Company's Fiscal 2005 financial statements included an explanatory
paragraph raising substantial doubt about the ability of the Company to continue
as a going concern. (See Item 8. Financial Statements and Supplementary Data.)
The report issued by Quaker's independent registered public accounting firm on
the Company's Fiscal 2006 financial statements does not include any expression
of substantial doubt about the ability of the Company to continue as a going
concern. (See Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments and Liquidity and
Capital Resources.)

GENERAL

OVERVIEW. Quaker is a leading supplier of woven upholstery fabrics. To
complement the Company's U.S. production capability and to generate incremental
sales, during the second half of 2005, Quaker began building a global fabric
sourcing capability. This global fabric sourcing capability primarily involves
the development of commercial relationships with a limited number of carefully
chosen offshore fabric mills and is intended to allow the Company to recapture
the share of the domestic residential market it has lost to foreign imports
since Quaker's sales peaked at $365.4 million during Fiscal 2002. The most
important of these commercial relationships is with a large, fully integrated
fabric mill in Hangzhou, China. Quaker also manufactures specialty yarns, most
of which are used in the production of the Company's fabric products. The
balance is sold to manufacturers of craft yarns, home furnishings and other
products.

Overall demand levels in the upholstery fabric sector are a function of
overall demand for household furniture, which is, in turn, affected by general
economic conditions, population demographics, new household formations, consumer
confidence and disposable income levels, sales of new and existing homes and
interest rates.

Competition in the industry is intense, from both domestic fabric mills
and fabric mills located outside the U.S. manufacturing products for sale into
the U.S. market. In addition, there has been a recent and significant increase
in imports of both furniture coverings and fully upholstered furniture into the
U.S. market, with industry data indicating that sales of imported fabrics in
both roll and "kit," i.e., cut and sewn, form represented approximately 42% of
total U.S. fabric sales during 2004, up from 29% in 2003 and 11% in 2002.
Management believes that this trend has continued and estimates that imported
fabrics currently represent approximately 60% of total U.S. fabric sales.

The Company's fabric products compete with other furniture coverings,
including leather, suede, microdenier "faux suede," prints, tufts, flocks and
velvets, for consumer acceptance. Consumer tastes in upholstered furniture
coverings are somewhat cyclical and do change over time, sometimes rapidly, with
various coverings gaining or losing share depending on changes in home
furnishing trends and the amount of retail floor space allocated to various
upholstered furniture product categories at any given time. For example, leather
furniture and furniture covered with microdenier faux suede products, primarily
imported in roll and "kit" (i.e., cut and sewn) form from low labor cost
countries, particularly China, have enjoyed strong demand over the past few
years, primarily at the expense of woven fabrics, such as the Jacquards and
other woven fabrics Quaker manufactures. In some retail furniture stores, these
products may occupy as much as 50% of the floor space allocated to upholstered
furniture products.

Fiscal 2004 started out reasonably strong, but the Company's financial
performance deteriorated as the year progressed, particularly during the second
half. Because of the capital intensive nature of the upholstery fabric
manufacturing process, the Company's fixed costs are relatively high--causing
any shortfall at the top line to quickly erode Quaker's margins and bottom line
profitability.

Net sales of $289.1 million for 2004 were down 11.1% versus 2003--with
net sales into the domestic residential market of $232.8 million for the year,
down 15.3%--and international fabric sales of $35.9 million for the year, down
10.2%. Yarn sales, however, showed consistent strength throughout the year, with
total 2004 sales into that market of $20.4 million, up 92% over 2003 and
reflecting a strategic repositioning of that aspect of Quaker's business.

From a profitability standpoint, the Company's performance during the
first quarter of 2004 was solid, with net income of $2.4 million--but the
Company recorded a small loss in the second quarter, a ($2.1) million loss in
the third quarter and a ($1.9) million loss in the fourth quarter--leading to a
loss of ($2.0) million for the year as a whole, with favorable settlement of a
Company claim for certain federal research and development tax credits adding
approximately $2.0 million, or $0.12 per share, to the Company's results for the
fourth quarter and for the year.

The $41.9 million drop in Quaker's net sales into the domestic
residential furniture market in 2004 compared to 2003 was the single most
important factor affecting the Company's financial performance during 2004. This
decline reflected a continuation of intense competition in the domestic market,
including competition and pricing pressure from leather, faux suede and other
furniture coverings coming into the U.S. from Asia, with the popularity of faux
suede at the promotional end of the market and leather at the middle and
upper-end reducing the size of the market for the woven Jacquard and plain
fabrics Quaker makes.

Fiscal 2004's lower revenues resulted in a significant deterioration in
Quaker's margin performance, pushed SG&A expense as a percentage of sales up to
19.1%--and generally hurt the Company's financial performance resulting in
losses at the bottom line in every quarter except the first. The problems
created by 2004's revenue shortfall were exacerbated by a number of other
factors, including higher energy and raw material prices and the more than $0.7
million of professional fees Quaker incurred in connection with its
Sarbanes-Oxley Act compliance efforts.

The deterioration in the Company's financial results during 2004 led to
violations of several of the financial covenants in Quaker's principal loan
documents. The Company sought and received waivers from its two major financing
sources to deal with these covenant violations, and in May of 2005, Quaker put
in place a new senior secured credit facility with three banks.

The Company took aggressive action during the second half of 2004 to
reduce its operating costs. These actions included staffing reductions intended
to reduce overhead and bring production rates in line with demand, and the
temporary idling of certain yarn manufacturing equipment as well as the
execution of a long-term lease on 540,000 square feet of replacement
manufacturing and warehousing space in Fall River.

New fabric orders during the fourth quarter of 2004 were down
approximately 17% versus the comparable period of 2003, and 2004 ended with a
total production backlog valued at approximately $14.6 million, down 45.1% in
comparison to $26.5 million at the end of 2003.

In late 2004, Quaker arranged to have an in-depth market study performed
to serve as the basis of a refinement of the Company's strategy going forward so
that the core competencies the Company has in the design, technology, supply
chain and new product development areas could be used to best advantage to
further the Company's revenue and profitability objectives. As the Company moved
into 2005, Quaker was planning to: (i) move aggressively to build sales in both
the domestic and international residential fabric markets; (ii) continue its
efforts to grow sales into the contract and specialty yarn markets; (iii) work
on a new line of products for the outdoor furniture market to generate
additional sales; and (iv) begin bringing fabrics into the U.S. market that the
Company did not have the equipment to make, as a complement to Quaker's existing
product offerings.

During 2005, the continued strength of leather, faux suede and woven
fabric products imported into the U.S. market and the deflationary effects of
heavy competition from both domestic and foreign fabric suppliers led to a 22.3%
fall-off in Quaker's total revenues--with domestic and international fabric
sales for the year of $173.6 million and $29.3 million, down 25.4% and 18.4%,
respectively. Net yarn sales, at $21.8 million, increased by $1.4 million, or
6.7%, over 2004 and for the first eight months of the year were running well
ahead of 2004, but orders from the craft yarn market slowed significantly in
September and remained weak through the balance of the year. At total 2005 net
sales of $224.7 million, the Company's significantly lower revenues resulted in
a net loss for the year of ($26.3 million), with diluted and basic losses per
share of ($1.56); compared to a net loss of ($2.0 million), and diluted and
basic losses per share of ($0.12) on total net sales for 2004 of $289.1 million.
New orders during 2005 were down 21.6%, and Quaker closed out the year with an
order backlog valued at approximately $11.3 million, compared to $14.6 million
at year-end 2004.

Quaker's 2005 financial results reflected a number of one-time charges
related to the Company's ongoing restructuring efforts including approximately
$14.8 million of after-tax asset impairment and restructuring expenses.
Excluding these asset and restructuring charges, as well as a $1.2 million tax
credit related to the favorable settlement of a state income tax refund claim
recorded in the second quarter, net loss for 2005 was ($12.6 million), or
($0.75) per diluted and basic share.

The Company's primary goal during 2005 was to fundamentally reshape the
Company to restore it to profitability and ensure its long-term success. To do
that, management put a restructuring plan in place that was intended to:

o Stabilize revenues from the Company's U.S.-based residential fabric
business by concentrating its marketing efforts on those markets
least sensitive to imported products;

o Reduce the Company's operating costs enough to compensate for the
revenue drop experienced since 2002, when Quaker's net sales peaked
at $365.4 million;

o Develop commercial relationships with a limited number of carefully
chosen offshore fabric mills to recapture the share of the domestic
residential market lost to foreign imports and respond to ongoing
market changes more quickly; and

o Generate additional profitable sales by penetrating the outdoor and
contract fabric markets and expanding Quaker's specialty yarns
business.

To reduce costs, during 2005, management took more than $40.0 million
out of the Company's cost structure on an annualized basis--through significant
staffing reductions and reductions of approximately $3.0 million and $14.3
million in Quaker's annualized SG&A and fixed manufacturing costs, respectively.
These cuts brought aggregate planned reductions in the Company's cost structure
since the second quarter of 2004 to approximately $52.0 million on an annualized
basis. In addition, operations at three of Quaker's Fall River-based facilities
were moved into one of the Company's other Fall River plants, and just before
the end of the year, remaining operations at a fourth facility were transferred
into that same plant. A new senior secured credit facility was put in place in
May 2005, and cash flows during the year resulted in a reduction in funded debt
of approximately $2.1 million. And finally,

considerable new market and new product development work was done during
2005--including work on a new line of products for the outdoor market that
Quaker rolled out in January of 2006--and work to identify opportunities for the
Company to develop strategically important relationships with fabric mills in
China, Korea and other areas, anchored by a commercial cooperation agreement
with a leading Chinese fabric mill that the Company signed during the first
quarter of 2006.

But 2005 also saw some very significant increases in the Company's
energy and raw material costs. In January 2005, an important raw material
supplier announced its decision to exit the acrylic business. The Company built
a safety stock of acrylic inventory at Quaker sufficient to cover its
manufacturing requirements until raw materials from new suppliers could enter
the Company's supply chain, but the loss of this domestic supplier increased
Quaker's raw material costs, put additional pressure on the Company's margins
and also involved some significant opportunity costs. In March of 2005, Quaker
put through a price increase to deal with those problems, and in October, the
Company implemented a surcharge to compensate for increases in the prices of
some of the petroleum-based raw materials used by Quaker and in the Company's
overall energy costs. But, Quaker's revenues were falling faster than its costs
and the Company reported both operating and net losses in each quarter of 2005.

RECENT DEVELOPMENTS

The market for upholstery fabric in the United States continued to
experience unprecedented change during 2006. Imported fabrics, in both roll and
kit form, now represent more than half of the market and could be as high as 75%
- - and a number of domestic furniture manufacturers and retailers are bringing
fully-upholstered furniture into the U.S. market from China. For Quaker, these
dramatic changes led to a 29% drop in 2006 domestic fabric sales and an 18% drop
in 2006 export fabric sales. Net yarn sales for the year were down 79.2%. This
large sales decline outpaced the speed at which the Company was able to reduce
costs. At the end of the day, net sales for the year were $151.7 million, with a
net loss of ($37.6 million), and diluted and basic losses per share of ($2.23);
compared to net sales of $224.7 million, a net loss of ($26.3 million), and
diluted and basic losses per share of ($1.56) for fiscal 2005.

One-time charges related to the Company's ongoing restructuring plan
also had a significant effect on Quaker's 2006 results - with pre-tax
restructuring and asset impairment charges accounting for $26.5 million, or more
than half, of the $48.5 million operating loss the Company reported for 2006.
These charges were primarily non-cash and included the write-down of assets,
including manufacturing plants and machinery and equipment, that have been put
up for sale as part of the Company's consolidation strategy. Excluding these
charges, Quaker's 2006 net loss would have been ($17.4 million), or ($1.03) per
share.

Despite last year's results, management believes that the steps taken
during 2006 to reshape and restructure the Company represent significant
progress toward returning Quaker to profitability - and throughout 2006,
management continued to implement the restructuring plan first put in place in
2005. The key elements of this plan include:

o Aligning operating costs with revenue expectations;

o Stabilizing revenues from Quaker's U.S.-based residential fabric
business by concentrating the Company's marketing efforts on those
market segments least sensitive to imported products - such as the
jobber, upper-end and specialty retailer categories - where prompt
delivery is critical;

o Generating additional sales by penetrating the outdoor fabric market and
building on its existing position in the contract fabric market;

o Striking the right balance between domestic production and offshore
sourcing by developing commercial relationships with a limited number of
carefully chosen non-U.S. fabric mills - with these complementary
offshore sourcing programs intended to allow Quaker to recapture at
least a portion of the domestic residential business lost to imported
products; and

o Consolidating manufacturing operations into fewer facilities and selling
off excess real estate and machinery and equipment.

Using this plan as a guide, during 2006, Quaker sold two manufacturing
plants and about $4.0 million of machinery and equipment. The Company also cut
SG&A costs by approximately $10.0 million - and manufacturing costs by
approximately $20.0 million - both on an annualized basis. Inventory was reduced
by about $9.7 million and senior debt by a little over $4.0 million. And new
financing agreements were put in place in November 2006 which management
believes to be consistent with Quaker's strategic objectives and current
operating and working capital needs. In addition, the Company's independent
registered public accounting firm's unqualified opinion on the Company's Fiscal
2006 financial statements does not contain a reference expressing substantial
doubt about the Company's ability to continue as a going concern. (See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.)

To counter the decline in the Company's sales, Quaker has refocused its
marketing efforts on segments less vulnerable to Chinese imports - including the
development and introduction of new products for the outdoor, jobber, contract,
upper-end residential and specialty retailer markets. This effort will remain a
major focus for the Company going forward. To further Quaker's dual strategy of
striking the right balance between domestic production and global sourcing, the
Company also developed and implemented a China program last year that is
intended to give Quaker a competitive advantage in the global sourcing arena -
and management believes that the alliance the Company put in place with its
China-based partner in January 2006 is developing well.

That said, the Company's primary focus during 2007 will be on rebuilding
the top line and keeping costs in line with sales. Quaker continues to bring
significant competitive strengths to the industry - design talent, product
development expertise, the close working relationships the Company has built
over many years with its customers, sourcing capabilities, technological savvy,
and the ability to find and make the most of new market opportunities.
Management intends to use those competitive strengths to aggressively develop
fabrics for production by Quaker's strategic partner in China - and other
products that for both strategic and economic reasons are best produced in the
Company's Fall River-based manufacturing facilities. This latter category
includes Quaker's relatively new outdoor fabric and contract furniture programs,
which are intended to build revenues by leveraging the Company's technological
expertise to expand into new markets - as well as fabrics for those domestic and
international residential customers in need of a strong U.S.-based fabric mill
to meet their requirements for high quality, innovative products with relatively
short delivery lead times.

Selling off excess facilities and equipment will also be an important
2007 priority. During the first quarter of 2007, Quaker entered into two asset
sale agreements. The first involves a pending sale of the Company's corporate
headquarters building in Fall River for $4.7 million - and, consistent with
Quaker's overall consolidation program, a leaseback of part of the building. The
second agreement involves the ongoing sale of additional excess machinery and
equipment. This transaction included an initial payment to the Company of $1.3
million. The net proceeds from all asset sales will be used to reduce the
outstanding balance of our term loan.

Paying attention to basic blocking and tacking will also be a 2007
corporate imperative, including making sure that the Company's productivity
levels and quality performance are consistent with our 2007 objectives.

Management believes that 2007 will be a very important transition year
for Quaker. Domestic market conditions are likely to remain both challenging and
highly dynamic, with problems at the Company's suppliers and customers
symptomatic of the broader challenges arising out of the changes taking place in
the furniture industry as a whole. These challenges--including rapid changes in
the competitive landscape, further significant increases in fabric imports,
particularly from China, the emergence of new industry participants,
consolidation in the furniture retailing and manufacturing sectors and changes
in the kind of furniture consumers want to purchase and in how they want to
purchase it--will make building the kind of sales volume the Company needs a
difficult task. These challenges also place additional importance on the wisdom
of Quaker's restructuring plan, as outlined above, and on the effectiveness of
its execution.

To complete the restructuring of our business, Quaker will need to make
significant investment in the development, production, marketing and sale of new
products and the development of new commercial relationships, in particular the
new commercial relationships the Company is putting in place with offshore
fabric sources. This investment is critical in order to maintain and grow our
business. However, we cannot guarantee that the capital needed to achieve this
will be available or that we will be successful in our strategic initiatives. If
we are not successful, management is prepared to take various actions which may
include, but not be limited to, a reduction in our expenditures for internal and
external new product and new market development initiatives and further
reduction in overhead expenses. These actions, should they become necessary, may
result in a significant reduction in the size of our operations.

QUARTERLY OPERATING RESULTS. The following table sets forth certain
unaudited condensed consolidated statements of operations data for the eight
fiscal quarters ended December 30, 2006, as well as certain data expressed as a
percentage of the Company's total net sales for the periods indicated:

FISCAL 2006 Fiscal 2005
------------------------------------------- --------------------------------------------
FIRST SECOND THIRD FOURTH First Second Third Fourth
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands, except percentages and per share data)

Net sales ....................... $ 46,280 $ 42,880 $ 30,311 $ 32,193 $ 59,215 $ 68,885 $ 46,457 $ 50,127
Gross margin .................... 5,441 5,225 1,997 2,192 7,681 10,134 6,075 5,030
Gross margin percentage ......... 11.8% 12.2% 6.6% 6.8% 13.0% 14.7% 13.1% 10.0%
Goodwill impairment,
restructuring and asset
impairment charges ............ 296 13,572 4,920 7,670 -- 9,094 5,990 1,551
Operating loss .................. (5,187) (17,194) (12,084) (14,191) (4,468) (11,526) (10,448) (7,349)
Operating loss percentage ....... (11.2%) (40.1%) (39.9%) (44.1%) (7.5%) (16.7%) (22.5%) (14.7%)
Loss before provision for
income taxes .................. (6,362) (18,376) (12,834) (16,513) (5,304) (14,497) (11,215) (8,222)
-------- -------- -------- -------- -------- -------- -------- --------
Net loss ........................ $ (4,135) $(12,130) $ (8,438) $(12,929) $ (3,090) $(10,342) $ (7,155) $ (5,669)
======== ======== ======== ======== ======== ======== ======== ========
Loss per common share--basic .... $ (0.25) $ (0.72) $ (0.50) $ (0.77) $ (0.18) $ (0.61) $ (0.43) $ (0.34)
======== ======== ======== ======== ======== ======== ======== ========
Loss per common share--diluted .. $ (0.25) $ (0.72) $ (0.50) $ (0.77) $ (0.18) $ (0.61) $ (0.43) $ (0.34)

The data reflected in this table has been derived from unaudited
financial statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this Form 10-K. Fiscal Years 2006 and 2005 each contained 52 weeks.

The Company follows industry practice by closing its operating
facilities for a one-to-two week period during July of each year. In both 2006
and 2005, this shutdown period, and the resulting effect on sales, occurred in
the third fiscal quarter.

PRODUCT MIX. By offering a broad assortment of fabrics at each price
point and in each styling category, the Company has positioned itself as a full
service supplier of Jacquard and plain woven fabrics to the upholstered
furniture market. Quaker's product line is divided into two distinct branded
collections, with its Quaker(TM) line intended to meet the styling, design,
quality and pricing needs of the promotional and middle to better end of the
market and its Whitaker(R) collection designed to target the better to upper
end. In 2005, Quaker began taking steps to supplement the woven Jacquard
products that have historically represented the core of the Company's product
line with microdenier faux suede and woven products produced outside the U.S.
and purchased by Quaker for sale into the worldwide market, and in January 2006,
Quaker entered into an agreement with a Chinese fabric mill pursuant to which
certain fabrics sold by the Company are designed at Quaker's headquarters in
Massachusetts but manufactured in China. Quaker has one other outsourcing
arrangement in place, with a fabric manufacturer based in South Korea, and the
Company anticipates entering into a limited number of additional similar
arrangements in the future. All outsourced products are marketed under Quaker's
Global Line(TM) brand.

GEOGRAPHIC DISTRIBUTION OF FABRIC SALES. To develop markets for
upholstery fabric outside the United States, the Company has placed substantial
emphasis on building both direct exports from the United States as well as on
sales from its distribution centers in Mexico and Brazil. The following table
sets forth certain information about the changes which have occurred in the
geographic distribution of the Company's net fabric sales since 2004:

2006 2005 2004
-------------------- -------------------- --------------------
PERCENT OF Percent of Percent of
AMOUNT SALES Amount Sales Amount Sales
--------- --------- --------- --------- --------- ---------
(in thousands)

Net fabric sales (dollars):
Domestic sales ........... $ 123,121 83.7% $ 173,551 85.6% $ 232,773 86.6%
Foreign sales(1) ......... 24,005 16.3% 29,309 14.4% 35,928 13.4%
--------- --------- --------- --------- --------- ---------
Net fabric sales ....... $ 147,126 100.0% $ 202,860 100.0% $ 268,701 100.0%

(1) Foreign sales consists of both direct exports from the United States as well
as sales from the Company's distribution centers in Mexico and Brazil.

CRITICAL ACCOUNTING POLICIES

The following is a brief discussion of the more significant accounting
estimates used by the Company.

GENERAL

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to
accounts receivable reserves, inventory valuation and inventory reserves,
self-insurance reserves, property, plant and equipment and income taxes. Actual
amounts could differ significantly from these estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS AND ALLOWANCES

The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
creditworthiness, as determined by management's review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues identified.
The Company cannot guarantee that credit loss rates in the future will be
consistent with those experienced in the past. The Company's accounts receivable
are spread among more than 1,000 customers and no single customer represented
more than 5.8% of the accounts receivable balance at December 30, 2006 and
December 31, 2005.

differences may result in the amount and timing of the Company's net sales for
any period if management makes different judgments or uses different estimates.

INVENTORIES

Inventory is valued at the lower of cost or market using the last-in,
first-out (LIFO) method. Approximately 60% of finished goods are produced upon
receipt of a firm order. Management, in partnership with key customers, is
utilizing forecasting techniques to significantly reduce delivery lead times.
Management regularly reviews inventory quantities on hand and records a
provision for excess and obsolete inventory based primarily on historical
information and estimated forecasts of product demand and raw material
requirements for the next twelve months. A significant increase in demand for
the Company's products could result in a short-term increase in manufacturing
costs, including but not limited to overtime and other costs related to capacity
constraints in certain areas of the Company. A significant decrease in demand
could result in an increase in the amount of excess inventory quantities on
hand. During 2006, in response to reduced demand, the Company reduced inventory
levels in an orderly manner, avoiding any negative impact on Quaker's excess and
obsolete reserve requirements. Additionally, assumptions used in determining
management's estimates of future product demand may prove to be incorrect, in
which case the provision required for excess and obsolete inventory would have
to be adjusted in the future. If inventory is determined to be overvalued, the
Company would be required to recognize such costs as cost of goods sold at the
time of such determination. Therefore, although every effort is made to ensure
the accuracy of management's forecasts of future product demand, any significant
unanticipated changes in demand could have a significant impact on the value of
the Company's inventory and the Company's reported operating results.

SELF-INSURANCE RESERVES

The Company is self-insured for workers' compensation and medical
insurance. Quaker has purchased stop loss coverage for both types of risks in
order to minimize the effect of a catastrophic level of claims. At the end of
each accounting period, the reserves for incurred but not reported claims are
evaluated. Management evaluates claims experience on a regular basis in
consultation with the Company's insurance advisors and makes adjustments to
these reserves. Significant management judgments and estimates must be made and
used in connection with evaluating the adequacy of self-insurance reserves.
Material differences may result in the amount and timing of these costs for any
period if management makes different judgments or uses different estimates.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is depreciated over the estimated useful
lives. Useful lives are based on management's estimates of the period that the
assets will generate revenue. See Note 3 to the Consolidated Financial
Statements. These assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. Reductions in the useful lives of the Company's fixed assets would
have an adverse impact on the Company's financial results.

INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, "Accounting
for Income Taxes." This statement requires that the Company recognize a current
tax liability or asset for current taxes payable or refundable and a deferred
tax liability or asset for the estimated future tax effects of temporary
differences and carry forward to the extent they are realizable. A valuation
allowance is recorded to reduce the Company's deferred tax assets to the amount
that is more likely than not to be realized. The Company does not provide for
United States income taxes on earnings of subsidiaries outside of the United
States. The Company's intention is to reinvest these earnings permanently.
Management believes that United States net operating losses would largely
eliminate any United States taxes on these earnings.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing. This amendment
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). SFAS No. 151 requires that those
items be recognized as current-period charges regardless of whether they meet
the criteria specified in ARB 43 of "so abnormal." In addition, SFAS No. 151
requires that allocation of fixed production overheads to the costs of
conversion be based on normal capacity of the production facilities. SFAS No.
151 is effective for financial statements for fiscal years beginning after June
15, 2005. The adoption of SFAS No. 151 did not have a material effect on the
Company's Consolidated Financial Statements.

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes," (FIN 48). FIN 48 clarifies the accounting and
reporting for income taxes recognized in accordance with SFAS No. 109,
"Accounting for Income Taxes." FIN 48 prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken, or expected to be taken, in income tax returns.
The adoption of FIN 48 is not expected to have a material effect on the
Company's Consolidated Financial Statements.

In September 2006, the FASB issued SFAS 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS 157 establishes a common definition of fair value, provides a
framework for measuring fair value under accounting principles generally
accepted in the United States and expands disclosure requirements about fair
value measurements. SFAS 157 is effective for us as of January 1, 2008. The
Company is currently evaluating the impact, if any, the adoption of SFAS 157
will have on its financial position and results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB)
No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB No. 108 was issued in
order to eliminate the diversity of practice surrounding how public companies
quantify financial statement misstatements. This SAB establishes a "dual
approach" methodology that requires quantification of financial statement
misstatements based on the effects of the misstatements on each of the company's
financial statements (both the statement of operations and statement of
financial position). The SEC has stated that SAB No. 108 should be applied no
later than the annual financial statements for the first fiscal year ending
after November 15, 2006, with earlier application encouraged. SAB No. 108
permits a company to elect either retrospective or prospective application.
Prospective application requires recording a cumulative effect adjustment in the
period of adoption, as well as detailed disclosure of the nature and amount of
each individual error being corrected through the cumulative adjustment and how
and when it arose. The application of SAB No. 108 had no effect on the Company's
Consolidated Financial Statements.

RESULTS OF OPERATIONS

FISCAL 2006 COMPARED TO FISCAL 2005

NET SALES. Net sales for 2006 decreased $73.0 million, or 32.5%, to
$151.7 million from $224.7 million in 2005. Net fabric sales within the United
States decreased 29.1%, to $123.1 million in 2006 from $173.6 million in 2005,
as a result of continued competition from leather, microdenier faux suede and
other furniture coverings being imported into the U.S. in roll and "kit" form,
primarily from low labor cost countries in Asia, particularly China. Net foreign
sales of fabric decreased 18.1%, to $24.0 million in 2006 from $29.3 million in
2005. This decrease in foreign sales was due primarily to lower sales in Canada.
Canadian furniture manufacturers sell furniture into both the United States and
Canadian markets where strong competition from imported faux suede fabrics and
leather continued during 2006 and contributed to a more difficult competitive
environment. Sales to the Middle East were also down due to unrest in the area.
Net yarn sales decreased to $4.5 million in 2006 from $21.8 million in 2005,
with the decrease in 2006 principally due to excess craft yarn inventory held by
a single customer. Sales to this customer accounted for 0.0% of 2006 yarn sales
and 77.6% of 2005 yarn sales.

The gross volume of fabric sold decreased 31.9%, to 23.6 million yards
in 2006 from 34.6 million yards 2005. The weighted average gross sales price per
yard increased 5.6%, to $6.21 in 2006 from $5.88 in 2005 as a result of product
mix changes. The Company sold 19.9% fewer yards of middle to better-end fabrics
and 50.0% fewer yards of promotional-end fabrics in 2006 than in 2005. The
average gross sales price per yard of middle to better-end fabrics was $7.09 in
both 2006 and 2005. The average gross sales price per yard of promotional-end
fabrics increased by 1.0%, to $4.08 in 2006 from $4.04 in 2005.

GROSS MARGIN. The gross margin percentage for 2006 decreased to 9.8% as
compared to 12.9% for 2005. The 32.5% drop in net sales in 2006 compared to 2005
caused fixed manufacturing costs as a percentage of net sales to increase,
leading to a decline in the gross margin of approximately 270 basis points. In
addition, the Company wrote down certain inventory related to its craft yarn
products, resulting in a charge of approximately $0.8 million or 50 basis
points.

RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During 2006, the Company
reported restructuring and asset impairment charges of $26.5 million. This
consisted of $22.5 million of asset impairment charges, $1.9 million of
consulting and refinancing fees, $1.5 million of plant consolidation, lease, and
occupancy costs and $0.6 million of employee termination costs. During 2006, the
Company reduced its production capacity by idling certain manufacturing
equipment and closing several manufacturing facilities. As a result of these
changes and in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company evaluated these assets for
impairment and recorded asset impairments of $12.4 million, $3.6 million, and
$6.5 million in the second, third, and fourth quarters of 2006, respectively.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $37.1 million for 2006 as compared to
$46.1million for 2005, primarily due to lower sales commissions as a result of
lower sales and a decrease in payroll costs attributable to staffing reductions,
partially offset by an increase in bad debt expense. Selling, general and
administrative expenses as a percentage of net sales were 24.4% and 20.5% for
2006 and 2005, respectively. Selling, general and administrative expenses were
higher as a percentage of net sales due to lower sales. In addition, the Company
had a higher bad debt provision in 2006 due to the bankruptcy of Rowe Furniture
Inc., a major customer, and several other losses.

INTEREST EXPENSE. Interest expense increased to $3.7 million in 2006
from $3.0 million in 2005, primarily due to debt with higher interest rates.

EFFECTIVE TAX RATE. The Company's effective tax rate was a benefit of
30.4% in 2006 compared to a benefit of 33.1% in 2005. The tax benefit rate in
2006 is limited because the Company has benefited the maximum amount of its
losses allowable against its remaining deferred tax liabilities.

FISCAL 2005 COMPARED TO FISCAL 2004

NET SALES. Net sales for 2005 decreased $64.5 million, or 22.3%, to
$224.7 million from $289.1 million in 2004. Net fabric sales within the United
States decreased 25.4%, to $173.6 million in 2005 from $232.8 million in 2004,
as a result of increased competition from leather, microdenier faux suede and
other furniture coverings being imported into the U.S. in roll and "kit" form,
primarily from low labor cost countries in Asia. Net foreign sales of fabric
decreased 18.4%, to $29.3 million in 2005 from $35.9 million 2004. This decrease
in foreign sales of fabric was due primarily to lower sales in Mexico, Canada,
Europe and the Middle East. In Mexico, the Company competes primarily with
Mexican weavers which typically offer their products at prices lower than the
Company's. The Company has lost some additional market share to these lower cost
local mills. Sales in Europe declined primarily due to general economic
weakness. In Canada, where furniture manufacturers sell furniture into both the
United States and Canadian markets, competition from imported faux suede fabrics
and leather increased during 2005, contributing to a more difficult competitive
environment. The political climate in the Middle East, as well as increased
competition from Turkish and Chinese fabric manufacturers, negatively impacted
the Company's sales into that region during 2005. Net yarn sales increased to
$21.8 million in 2005 from $20.4 million in 2004, with the increase in 2005
principally due to craft yarn sales to a single customer. Sales to this customer
accounted for 77.6% of the Company's yarn sales in 2005 and 50.2% in 2004 yarn
sales.

The gross volume of fabric sold decreased 26.7%, to 34.6 million yards
in 2005 from 47.2 million yards 2004. The weighted average gross sales price per
yard increased 2.4%, to $5.88 in 2005 from $5.74 in 2004 as a result of product
mix changes. The Company sold 28.3% fewer yards of middle to better-end fabrics
and 24.2% fewer yards of promotional-end fabrics in 2005 than in 2004. The
average gross sales price per yard of middle to better-end fabrics increased by
4.3%, to $7.09 in 2005 from $6.80 in 2004. The average gross sales price per
yard of promotional-end fabrics decreased by 0.2%, to $4.04 in 2005 from $4.05
in 2004.

GROSS MARGIN. The gross margin percentage for 2005 decreased to 12.9% as
compared to 18.3% for 2004. The 22.3% drop in net sales in 2005 compared to 2004
caused fixed manufacturing costs as a percentage of net sales to increase,
leading to a decline in the gross margin of approximately 270 basis points.
Higher energy costs accounted for another 150 basis points of the decline at the
gross margin level. The balance of the gross margin decline was caused by a
general increase in Quaker's raw material costs driven by rising oil prices,
unusual costs of approximately $1.7 million incurred during the first half of
2005 related to a key supplier's decision to exit the acrylic fiber business and
the liquidation of a second important supplier. As part of the consolidation of
manufacturing and warehousing facilities, the Company incurred $1.2 million of
moving and duplicate occupancy costs during 2005. These costs are included in
cost of goods sold.

RESTRUCTURING AND ASSET IMPAIRMENT CHARGES. During 2005, the Company
reported restructuring and asset impairment charges of $11.2 million. This
consisted of $10.9 million of asset impairment charges and $0.3 million of
employee termination costs. During 2005, the Company reduced its production
capacity by idling certain manufacturing equipment and also decided to close a
manufacturing facility. As a result of these changes and in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the
Company evaluated these assets for impairment and asset impairments of $3.4
million, $5.3 million, and $1.5 million were reported in the second, third, and
fourth quarters of 2005, respectively. In addition, due to recent weakness in
upholstery fabric orders, the Company evaluated its prepaid marketing materials
for impairment and determined that a portion of this asset had been impaired and
recorded a charge of $0.7 million. See Footnote 3 to the Consolidated Financial
Statements.

GOODWILL IMPAIRMENT. The Company determined that goodwill should be
tested for impairment at July 2, 2005 in accordance with the provisions of SFAS
No. 142, "Goodwill and Other Intangible Assets," due to lower than anticipated
orders and a related reduction in the Company's backlog position. As a result of
this testing, the Company determined that goodwill had been impaired.
Accordingly, a goodwill impairment charge of $5.4 million, or $0.32 per share,
was recorded in the three month period ended July 2, 2005.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $46.1 million for 2005 as compared to $55.3
million for 2004, primarily due to lower sales commissions as a result of lower
sales and a decrease in payroll costs attributable to staffing reductions.
Selling, general and administrative expenses as a percentage of net sales were
20.5% and 19.1% for 2005 and 2004, respectively. Selling, general and
administrative expenses were higher as a percentage of net sales due to lower
sales.

INTEREST EXPENSE. Interest expense decreased to $3.0 million in 2005
from $3.3 million in 2004, primarily due to the repayment of senior debt with
higher interest rates.

EFFECTIVE TAX RATE. The Company's effective tax rate was a benefit of
33.0% in 2005 compared to a benefit of 65.0% in 2004. The tax benefit rate in
2004 was 65% principally due to the $2.0 million favorable settlement of certain
claims for federal research and development credits. The effective tax rate in
2005 was affected by two events. First, the Company reported a goodwill
impairment charge of $5.4 million. The goodwill had no tax basis, and therefore,
no tax benefit related to this expense was realized. Second, the Company
recorded the settlement of certain state tax assessments and claims during the
second quarter of 2005, which resulted in a tax benefit of $1.2 million.

During the second quarter of 2005, the Company settled tax assessments
from the Massachusetts Department of Revenue (MDOR) for the years 1993-1998. In
addition, the Company settled refund claims related to amended tax returns filed
with the MDOR claiming approximately $1.4 million of research and development
tax credits for the years 1993-2001 and additional credits of $0.7 million
claimed on the originally filed tax returns for 2002 and 2003. Settlement of
these claims allowed the Company to record a state tax benefit of $1.8 million
($1.2 million, net of applicable federal taxes).

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, debt and
equity offerings and borrowings under its financing agreements, including its
2006 Revolving Credit Agreement, as hereinafter defined. The Company's capital
requirements have arisen principally in connection with (i) the purchase of
equipment to expand production capacity, add new technologies to broaden and
differentiate the Company's products, and improve the Company's quality and
productivity performance, (ii) increases in the Company's working capital needs,
and (iii) investments in the Company's information technology systems. The
Company's current capital requirements are related to the execution of Quaker's
restructuring plan. (See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Recent Developments.)

A key 2007 objective is to stabilize revenues from Quaker's core
domestic residential business while simultaneously working to generate
incremental sales from the new product and new market initiatives the Company
has been pursuing. These initiatives include the development of fabrics designed
by Quaker for manufacture outside the U.S. through strategic relationships put
in place with various offshore fabric mills. These offshore sourcing programs
are intended to allow Quaker to supplement the woven fabrics in its product line
with other upholstery products, such as velvets and faux suedes, that the
Company does not have the equipment to make itself and to allow the Company to
recapture at least a portion of the domestic residential business it has lost to
imported products over the past several years.

Simultaneously, Quaker intends to generate revenues based on its U.S.
production by continuing to aggressively develop other products that for both
strategic and economic reasons are best produced in our Fall River-based
manufacturing facilities. These include Quaker's relatively new outdoor fabric
and contract furniture programs, which are intended to build revenues by
leveraging the Company's technological expertise to expand the markets it
serves, as well as fabrics for those domestic and international residential
customers in need of a strong U.S.-based fabric mill to meet their requirements
for high quality, innovative products with relatively short delivery lead times.
On the cost reduction front, Quaker will be continuing to consolidate its Fall
River manufacturing operations into fewer facilities, actively marketing its
excess real estate and other excess assets, improving its quality performance
and productivity levels and being increasingly innovative and flexible--while at
the same time keeping operating costs as low as possible and continuing to
generate positive operating cash flows through careful inventory control.

To complete the restructuring of our business, Quaker will need to make
significant investment in the development of new commercial relationships and in
the development, production, marketing and sale of new products. This investment
is critical in order to maintain and grow our business. However, we cannot
guarantee that the capital needed to achieve this will be available or that we
will be successful in our strategic initiatives. If we are not successful,
management is prepared to take various actions which may include, but not be
limited to, a reduction in our expenditures for internal and external new
product development and further reduction in overhead expenses. These actions,
should they become necessary, may result in a significant reduction in the size
of our operations.

The primary source of the Company's liquidity and capital resources in
recent years has been operating cash flow. The Company's net cash provided by
operating activities was $3.2 million, $5.9 million and $20.2 million during
2006, 2005 and 2004 respectively. Cash provided by operating activities
decreased during 2006 due principally to higher operating losses. Reductions in
working capital provided $17.6 million of cash in 2006 as compared to $14.5
million in 2005. Continued significant working capital reductions during 2007
are not anticipated.

Capital expenditures in 2006, 2005 and 2004 were $1.2 million, $5.4
million and $14.9 million, respectively. Capital expenditures during 2006 were
funded by operating cash flow and borrowings under the Company's Credit
Agreements. Management anticipates that capital expenditures for new projects
will not exceed $3.0 million in 2007, consisting principally of
facilities-related and information technology expenditures. Capital expenditures
are restricted under the 2006 Revolving Credit Agreement and may not exceed
$12.0 million in Fiscal 2007. During 2006, the Company generated $4.8 million
from the disposition of fixed assets. The proceeds from these asset sales were
used to reduce the term loan debt under the 2005 Credit Agreement, as
hereinafter defined.

Debt consists of the following:

DECEMBER 30, December 31,
2006 2005
------------ ------------
(IN THOUSANDS)
Senior Secured Revolving Credit Facility ... $ 9,480 $ 18,880
Term Loan payable in quarterly principal
installments through May 1, 2006 and
monthly installments thereafter, plus
interest, over a 5 year period beginning
November 1, 2005 ......................... -- 19,000
Term Loans payable by May 2010 ............. 24,240 --
------------ ------------
Total Debt ................................. $ 33,720 $ 37,880
Less: Current Portion of Senior Secured
Revolving Credit Facility ....... 9,480 18,880
Current Portion of Term Loans ..... 1,800 19,000
------------ ------------
Total Long-Term Debt ....................... $ 22,440 $ --
============ ============

On November 9, 2006, Quaker Fabric Corporation of Fall River ("Quaker"),
a wholly-owned subsidiary of Quaker Fabric Corporation (the "Company"), entered
into a $25.0 million amended and restated senior secured revolving credit
agreement with Bank of America, N.A. (the "Bank") and two other lenders (the
"2006 Revolving Credit Agreement"). Quaker's obligations to the revolving credit
lenders are secured by all of the Company's assets, with a junior interest in
Quaker's real estate and machinery and equipment. Simultaneously, Quaker entered
into two (2) senior secured term loans in the aggregate amount of $24.6 million,
with GB Merchant Partners, LLC as Agent for the term loan lenders (the "2006
Term Loan Agreement"). The two term loans consist of a $12.5 million real estate
loan and a $12.1 million equipment loan (the "Real Estate Term Loan" and the
"Equipment Term Loan", respectively, and together, the "Term Loans"). The Term
Loans are secured by all of the Company's assets, with a first priority security
interest in the Company's machinery and equipment and real estate.

The proceeds of the Term Loans were used to: (i) repay, in full, all
outstanding obligations under the term loan previously provided by the Bank
pursuant to the terms of Quaker's May 18, 2005 senior secured credit facility
with the Bank (the "2005 Credit Agreement"), (ii) reduce Quaker's obligations to
the Bank under the revolving credit portion of the 2005 Credit Agreement by
approximately $8.9 million, (iii) fund a $1.0 million environmental escrow
account required by the Term Loan Lenders to cover certain environmental site
assessment and remediation expenses potentially arising out of environmental
conditions at the various parcels of real estate serving as collateral for
Quaker's obligations to the Term Loan Lenders, and (iv) pay for approximately
$2.6 million of transaction and related costs required by the Bank and the Term
Loan Lenders to be paid at the Closing, including fees to the various lenders of
approximately $1.5 million and professional and consulting fees of approximately
$1.1 million.

Both the 2006 Revolving Credit Agreement and the 2006 Term Loan
Agreement have maturity dates of May 17, 2010, and the 2006 Revolving Credit
Agreement and the 2006 Term Loan Agreement are together referred to in this
report as the "2006 Loan Agreements."

Advances to Quaker under the 2006 Revolving Credit Facility are limited
to a formula based on Quaker's accounts receivable and inventory minus an
"Availability Reserve" (and such other reserves as the Bank may establish from
time to time in its reasonable credit judgment.) Advances bear interest at the
prime rate plus 1.25% or LIBOR (London Interbank Offered Rate) plus 2.75%. As of
December 30, 2006, the weighted average interest rate of the advances
outstanding was 8.5%.

Pursuant to the terms of the 2006 Term Loan Agreement, mandatory
prepayments of the Real Estate and Equipment Term Loans are required as Quaker
sells the assets securing those loans pursuant to the terms of the restructuring
plan Quaker has in place (the "Restructuring Plan"). Following the sale in 2008
of the last parcel of real estate contemplated by the Restructuring Plan,
amortization of the Real Estate Term Loan would be at the rate of $1.1 million
per year, payable at the rate of $100,000 per month in each month other than
July. In addition, in the event sales of certain parcels of real estate are not
consummated on or before the dates assumed for such sales in the Restructuring
Plan, Quaker would be responsible for making Late Sale Amortization Payments (as
defined in the 2006 Term Loan Agreement) at the rate of $150,000 per month until
such payments equal 92.5% of the net proceeds the Term Loan Lenders would have
received on the sale of such real estate. Mandatory prepayments of the Equipment
Term Loan and the Real Estate Term Loan are also required in the event of
Equipment Appraisal and/or Real Property Appraisal Shortfalls, respectively (as
defined in the 2006 Term Loan Agreement). The Term Loans bear interest at the
LIBOR rate plus 7.75%, payable monthly. As of December 30, 2006, the interest
rate on the Term Loans was 13.07%.

In addition, both the 2006 Revolving Credit Agreement and the 2006 Term
Loan Agreement contain a "springing" Fixed Charge Coverage Ratio covenant with
which Quaker would need to comply in the event Quaker's "Excess Availability"
under the 2006 Revolving Credit Agreement were to fall below certain levels. The
2006 Loan Agreements also include customary reporting obligations and certain
affirmative and negative covenants including, but not limited to, restrictions
on dividend payments, capital expenditures, indebtedness, liens and acquisitions
and investments.

On December 1, 2006, the Company and the other parties to the 2006 Term
Loan Agreement entered into Amendment No. 1, effective as of December 1, 2006,
to the 2006 Term Loan Agreement (the "Amendment") to: (i) place certain
restrictions on the terms and conditions on which the Company may agree to sell
excess machinery and equipment going forward, including restrictions on the
Company's ability to agree to the payment of the purchase price for such
equipment over time and the minimum price at which such equipment may be sold,
and (ii) acknowledge and consent to the Company's sale of certain machinery and
equipment no longer needed to support the Company's operations for $2.1 million,
payable in six (6) equal monthly installments of $315,000 each, beginning
January 15, 2007, and a deposit of $210,000 paid upon execution of the contract.
Pursuant to the terms of the 2006 Revolving Credit Agreement, Bank of America,
N.A. consented to the Amendment.

The terms of the Company's 2006 Loan Agreements are more favorable to
the Company than the terms of the 2005 Credit Agreement which they replaced, and
management believes the 2006 Loan Agreements to be consistent with Quaker's
strategic objectives and current operating and working capital needs. More
specifically, the 2005 Credit Agreement, as hereinafter defined, contained a
number of financial covenants including, but not limited to, a minimum
consolidated EBITDA covenant. To avoid a default under the terms of the 2005
Credit Agreement, this covenant required the Company to achieve certain minimum
consolidated EBITDA levels at the end of each fiscal quarter which, taken
together with the Company's EBITDA results for each of the preceding three
fiscal quarters, were equal to or greater than the minimum consolidated EBITDA
requirements set forth in the 2005 Credit Agreement. Very short lead times and
new offshore competition during Fiscal 2005 made it difficult for management to
predict near term revenues and to adjust the Company's cost structure rapidly
enough to keep pace with declining sales. As a result, the Company reported
operating losses in each quarter of 2005. These recurring operating losses,
coupled with the Company's inability to accurately forecast future EBITDA
levels, resulted in several breaches of this EBITDA covenant during Fiscal 2005
and 2006, requiring several amendments to the 2005 Credit Agreement to avoid an
acceleration of the Company's obligations under the 2005 Credit Agreement, which
the Company would have been unable to satisfy. The 2006 Loan Agreements
eliminated this EBITDA test and contain only a single financial covenant. The
single financial covenant in the 2006 Loan Agreements requires the Company to
maintain minimum Excess Availability of $500,000 at all times. Because the
Company's ability to comply with an Excess Availability covenant is, by
definition, a function of the Company's cash requirements, and based on the
Company's 2007 Business Plan and sensitivity testing of that Plan assuming
various reductions in the Company's revenues, management believes that the
Company will be able to remain in compliance with this covenant during Fiscal
2007 by carefully managing the Company's cash position. Based on this, in
combination with: (i) a stabilization of the Company's order rates and revenues
during the second half of Fiscal 2006 and the first two months of Fiscal 2007,
(ii) the progress management has made in implementing the Company's
restructuring plan and reducing costs, and (iii) the development of contingency
plans which could be executed in the event of an unanticipated shortfall in
sales, management has concluded that the Company will have sufficient cash
available to operate the business during Fiscal 2007. In addition, the Company's
independent registered public accounting firm's unqualified opinion on the
Company's Fiscal 2006 financial statements does not contain a reference
expressing substantial doubt about the Company's ability to continue as a going
concern.

The Company's ability to meet its current obligations is dependent on:
(i) its access to trade credit, (ii) its operating cash flow and (iii) its
Availability under the 2006 Revolving Credit Agreement, which is a function of
Eligible Accounts Receivable, Eligible Inventory, and the Availability Reserve
as those terms are defined in the 2006 Revolving Credit Agreement. Availability
is typically lowest during the third quarter of each fiscal year principally due
to: (i) the seasonality of the Company's business and (ii) the negative effects
of the Company's annual two-week July shutdown period on sales and cash.
Increases in the Availability Reserve reduce Availability and thus the Company's
ability to borrow. In like manner, decreases in the Availability Reserve
increase Availability and thus the Company's ability to borrow. The Company
manages its inventory levels, accounts payable and capital expenditures to
provide adequate resources to meet its operating needs, maximize its cash flow
and reduce the need to borrow under the 2006 Revolving Credit Agreement.
However, its cash position may be adversely affected by factors it cannot
completely control, including but not limited to, a reduction in incoming order
rates, production rates, sales, and accounts receivable, as well as delays in
receipt of payment of accounts receivable and limitations of trade credit. The
Company is seeking to dispose of certain production equipment and manufacturing
and warehousing facilities no longer needed as a result of the consolidation of
some of its facilities. In addition, management adjusts the Company's cost
structure on a continuing basis to reflect changes in demand.

As of December 30, 2006, there were $33.7 million of loans outstanding,
including $9.5 million of loans outstanding under the 2006 Revolving Credit
Agreement and $24.2 million of loans outstanding under the 2006 Term Loan. On
December 30, 2006, unused Availability was $3.8 million, net of the $4.3 million
Availability Reserve, and the Company had approximately $4.5 million of letters
of credit outstanding.

As of March 29, 2007, there were $33.1 million of loans outstanding,
including $11.4 million of loans outstanding under the 2006 Revolving Credit
Agreement and $21.7 million of loans outstanding under the 2006 Term Loan. On
March 29, 2006, unused Availability was $2.0 million, net of the $4.4 million
Availability Reserve, and the Company had approximately $4.0 million of letters
of credit outstanding.

The following table sets forth contractual obligations and commitments
due as of December 30, 2006.

PAYMENTS DUE BY PERIOD (IN THOUSANDS)
---------------------------------------------------------
LESS THAN 2-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
---------------------------------------- --------- --------- --------- --------- ---------

Debt ................................... $ 33,720 $ 11,280 $ 3,600 $ 18,840 $ --
Capital Leases ......................... 629 152 317 160 --
Operating Leases ....................... 15,826 2,899 4,160 3,502 5,265
Letters of Credit ...................... 4,503 4,503 -- -- --
Purchase Obligations ................... 6,149 6,149 -- -- --
Other long-term liabilities ............ 2,317 -- 550 -- 1,767
--------- --------- --------- --------- ---------
Total Contractual Cash Obligations ... $ 63,144 $ 24,983 $ 8,627 $ 22,502 $ 7,032
========= ========= ========= ========= =========

No dividends were paid on the Company's common stock prior to 2003.
During the first quarter of 2003, the Board of Directors adopted a new dividend
policy. This policy provides for dividends to be declared at the discretion of
the Board of Directors, based on the Board's quarterly evaluation of the
Company's results of operations, cash requirements, financial condition and
other factors deemed relevant by the Board. In 2004 and 2003, the Company paid
cash dividends of $1.5 million or $0.09 per common share and $1.7 million or
$0.10 per common share, respectively. As noted above, the terms of the 2006 Loan
Agreements restrict the payment of dividends. The Company had previously agreed
with its prior lenders not to declare or pay any dividends or distributions, and
in accordance with those agreements, the Company suspended dividend payments
during the third quarter of 2004 and no dividends have been declared or paid
since that time. Restricted net assets of the Company as of December 30, 2006
equal 100% of the net assets of the Company. All operations of the Company are
conducted by Quaker. This restriction has no impact on the Company's operations,
except for the prohibition on the payment of dividends.

INFLATION

The Company does not believe that inflation has had a significant impact
on the Company's results of operations for the periods presented. Historically,
the Company believes it has been able to minimize the effects of inflation by
improving its manufacturing and purchasing efficiency, by increasing employee
productivity, and by reflecting the effects of inflation in the selling prices
of the new products it introduces each year. However, increases during 2005 in
oil prices resulted in significant increases in the Company's energy and raw
material costs, primarily as a result of the substantial number of raw materials
used by the Company that are petroleum derivatives, e.g., polypropylene,
acrylic. Despite an across the board price increase effected by the Company
during the first half of 2005, and a $0.15 per yard temporary surcharge effected
in October, 2005, intense competition in the industry has impaired the Company's
ability to pass cost increases of any kind along to its customers.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposures relative to market risk are due to foreign
exchange risk and interest rate risk.

FOREIGN CURRENCY RISK

Approximately 5.5% of the Company's revenues are generated outside the
U.S. from sales which are not denominated in U.S. dollars. Foreign currency risk
arises because the Company engages in business in Mexico and Brazil in local
currency. Accordingly, in the absence of hedging activities, whenever the U.S.
dollar strengthens relative to the other major currencies, there is an adverse
affect on the Company's results of operations, and alternatively, whenever the
U.S. dollar weakens relative to the other major currencies, there is a positive
affect on the Company's results of operations.

It had been the Company's policy to minimize, for a period of time, the
unforeseen impact on its results of operations of fluctuations in foreign
exchange rates by using derivative financial instruments to hedge the fair value
of foreign currency denominated intercompany payables. The Company's primary
foreign currency exposures in relation to the U.S. dollar are the Mexican peso
and the Brazilian real.

At December 30, 2006, the Company had no derivative financial
instruments to hedge the anticipated cash flows from the repayment of foreign
currency denominated intercompany payables outstanding.

INTEREST RATE RISK

The Company is exposed to market risk from changes in interest rates on
debt. The Company's exposure to interest rate risk consists of floating rate
debt based on either Prime or London Interbank Offered Rate ("LIBOR") rates,
plus an "Applicable Margin" under the Company's 2006 Loan Agreements. As of
December 30, 2006, there was $9.5 million of borrowings outstanding under 2006
Revolving Credit Agreement and $24.2 million of borrowings outstanding under the
2006 Term Loan Agreement at floating rates, including some LIBOR loans.
Increases in short-term interest rates will increase the Company's interest
expense. Based upon the balances outstanding as of December 30, 2006, an
increase of 100 basis points in interest rates would increase annual interest
expense by approximately $337,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

DECEMBER 30, December 31,
2006 2005
------------ ------------
ASSETS
Current assets:
Cash ........................................... $ 724 $ 725
Accounts receivable, net of reserves for
bad debts and sales allowances of $2,019
and $1,463 at December 30, 2006 and
December 31, 2005, respectively .............. 21,512 31,822
Inventories, net ............................... 28,122 37,827
Prepaid and deferred income taxes .............. -- 106
Production supplies ............................ 1,651 1,904
Prepaid insurance .............................. 1,582 1,212
Other current assets ........................... 2,387 4,848
------------ ------------
Total current assets ......................... 55,978 78,444
Property, plant and equipment, net ............... 77,413 131,177
Assets held for sale ............................. 21,811 6,483
Other assets .................................... 5,642 3,758
------------ ------------
Total assets ................................. $ 160,844 $ 219,862
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt (Note 7) ............... $ 11,280 $ 37,880
Current portion of capital lease obligations ... 152 143
Accounts payable ............................... 12,405 13,423
Accrued expenses and other current liabilities.. 8,844 8,337
------------ ------------
Total current liabilities .................... 32,681 59,783
Long term debt, less current portion ............. 22,440
Capital lease obligations, less current portion .. 477 629
Deferred income taxes ............................ -- 16,501
Other long-term liabilities ...................... 2,317 1,785
Commitments and contingencies (Note 9) ........... -- --
Redeemable preferred stock:
Series A convertible $0.01 par value
per share, liquidation preference
$1,000 per share, 50,000 shares
authorized, none issued ...................... -- --
Stockholders' equity:
Common stock, $0.01 par value per share,
40,000,000 shares authorized; 16,876,918
and 16,826,218 shares issued and outstanding
at December 30, 2006 and December 31, 2005,
respectively ................................. 169 168
Additional paid-in capital ..................... 89,168 89,076
Retained earnings .............................. 15,784 53,416
Other accumulated comprehensive loss ........... (2,192) (1,496)
------------ ------------
Total stockholders' equity ................... 102,929 141,164
------------ ------------
Total liabilities and stockholders' equity ... $ 160,844 $ 219,862
============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ------------

Net sales ................................................. $ 151,664 $ 224,684 $ 289,145
Cost of products sold ..................................... 136,809 195,764 236,270
------------ ------------ ------------
Gross profit .............................................. 14,855 28,920 52,875
Selling, general and administrative expenses .............. 37,053 46,076 55,315
Goodwill impairment ....................................... -- 5,432 --
Restructuring and asset impairment charges ................ 26,458 11,203 --
------------ ------------ ------------
Operating loss ............................................ (48,656) (33,791) (2,440)
Other expenses:
Interest expense ........................................ 3,727 3,019 3,327
Early extinguishment of debt ............................ 628 2,232 --
Amortization and write-off of deferred financing costs .. 1,336 396 53
Other income ............................................ (262) (200) (45)
------------ ------------ ------------
Loss before provision from income taxes ................... (54,085) (39,238) (5,775)
Benefit for income taxes .................................. (16,453) (12,982) (3,733)
------------ ------------ ------------
Net loss .................................................. (37,632) (26,256) $ (2,042)
------------ ------------ ------------
Loss per common share--basic .............................. $ (2.23) $ (1.56) $ (0.12)
------------ ------------ ------------
Loss per common share--diluted ............................ $ (2.23) $ (1.56) $ (0.12)
------------ ------------ ------------
Weighted average shares outstanding--basic ................ 16,869 16,826 16,819
------------ ------------ ------------
Weighted average shares outstanding--diluted .............. 16,869 16,826 16,819
------------ ------------ ------------

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

----------------------

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS)

FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 30, DECEMBER 31, January 1,
2006 2005 2005
------------ ------------ ------------

Net loss .................................................. $ (37,632) $ (26,256) $ (2,042)
------------ ------------ ------------
Other comprehensive income (loss)
Foreign currency translation adjustments, net of tax
benefit of $0, $51, and $7 ............................ (696) 425 145
Unrealized gain (loss) on hedging instruments,
without tax benefit ................................... -- 15 (15)
------------ ------------ ------------
Other comprehensive income (loss) ..................... (696) 440 130
------------ ------------ ------------
Comprehensive loss ........................................ $ (38,328) $ (25,816) $ (1,912)
============ ============ ============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON COMMON PAID-IN UNEARNED RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES STOCK CAPITAL COMPENSATION EARNINGS GAIN (LOSS) EQUITY
--------- --------- --------- --------- --------- --------- ---------

Balance, January 3, 2004 .................. 16,796 $ 168 $ 88,870 $ (695) $ 83,228 $ (2,066) $ 169,505
Net loss ................................ -- -- -- -- (2,042) -- (2,042)
Proceeds from stock options
exercised, net of tax benefits ........ 30 -- 206 -- -- -- 206
Amortization of unearned
compensation, net ..................... -- -- -- 207 -- -- 207
Foreign translation adjustment, net ..... -- -- -- -- -- 145 145
Unrealized (loss) on hedging
instruments, net ...................... -- -- -- -- -- (15) (15)
Cash dividends ($0.09 per share) ........ -- -- -- -- (1,514) -- (1,514)
--------- --------- --------- --------- --------- --------- ---------
Balance, January 1, 2005 .................. 16,826 $ 168 $ 89,076 $ (488) $ 79,672 $ (1,936) $ 166,492
Net loss ................................ -- -- -- -- (26,256) -- (26,256)
Amortization of unearned
compensation, net ..................... -- -- -- 488 -- -- 488
Foreign translation adjustment, net ..... -- -- -- -- -- 425 425
Unrealized gain on hedging
instruments, net ...................... -- -- -- -- -- 15 15
--------- --------- --------- --------- --------- --------- ---------
Balance, December 31, 2005 ................ 16,826 $ 168 $ 89,076 $ -- $ 53,416 $ (1,496) $ 141,164
--------- --------- --------- --------- --------- --------- ---------
NET LOSS ................................ -- -- -- -- (37,632) -- (37,632)
PROCEEDS FROM STOCK OPTIONS
EXERCISED, NET OF TAX BENEFITS ........ 51 1 92 -- -- -- 93
FOREIGN TRANSLATION ADJUSTMENT, NET ..... -- -- -- -- -- (696) (696)
--------- --------- --------- --------- --------- --------- ---------
BALANCE, DECEMBER 30, 2006 .............. 16,877 $ 169 $ 89,168 -- $ 15,784 $ (2,192) $ 102,929
========= ========= ========= ========= ========= ========= =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

FISCAL YEAR ENDED
------------------------------------------
DECEMBER 30, DECEMBER 31, January 1,
2006 2005 2005
------------ ------------ ------------

Cash flows from operating activities:
Net loss ........................................................................... $ (37,632) $ (26,256) $ (2,042)
Adjustments to reconcile net income to net cash provided by operating activities: .. 14,903 17,255 18,757
Depreciation and amortization
(Gain) loss on sale of fixed assets .............................................. (190) (15) 124
Amortization of unearned compensation ............................................ -- 488 207
Deferred income tax provision (benefit) .......................................... (16,645) (11,844) (2,826)
Provision for bad debts .......................................................... 1,652 606 1,141
Goodwill impairment .............................................................. -- 5,432 --
Asset impairments ................................................................ 22,385 10,948 --
Early extinguishment of debt ..................................................... 628 2,232 --
Tax benefit related to exercise of common stock options ............................ -- -- 41
Prepayment penalty on extinguishment of debt ....................................... -- (1,990) --
Changes in operating assets and liabilities: ....................................... 8,714 8,469 2,569
Accounts receivable
Inventories ...................................................................... 9,772 6,182 534
Prepaid expenses and other assets ................................................ 675 160 2,063
Accounts payable, accrued expenses, and other current liabilities ................ (1,555) (5,332) (1,145)
Other long-term liabilities ...................................................... 532 (490) 801
------------ ------------ ------------
Net cash provided by operating activities ...................................... $ 3,239 $ 5,845 $ 20,224
------------ ------------ ------------
Cash flows from investing activities:
Net purchases of property, plant and equipment ..................................... (1,222) (5,402) (15,015)
Proceeds from asset dispositions ................................................... 4,830 -- --
------------ ------------ ------------
3,608 (5,402) (15,015)
Cash flows from financing activities:
Borrowings under revolving credit facility ......................................... 105,404 52,280 --
Repayment of revolving credit facility ............................................. (114,804) (33,400) --
Repayment of long-term debt ........................................................ -- (40,000) (5,000)
Repayment of term loans ............................................................ (19,360) (1,000) --
Change in overdraft ................................................................ 451 413 (323)
Repayment of capital lease obligations ............................................. (143) (92) --
Proceeds from issuance of term loan ................................................ 24,600 20,000 --
Debt issuance costs ................................................................ (3,113) (2,153) --
Cash dividends ..................................................................... -- -- (1,514)
Proceeds from exercise of common stock options and issuance of
shares under the employee stock purchase plan .................................... 93 -- 165
------------ ------------ ------------
Net cash used in financing activities .......................................... (6,872) (3,952) (6,672)
Effect of exchange rates on cash ..................................................... 24 100 6
------------ ------------ ------------
Net increase (decrease) in cash ...................................................... (1) (3,409) (1,457)
Cash and cash equivalents, beginning of period ....................................... 725 4,134 5,591
------------ ------------ ------------
Cash and cash equivalents, end of period ............................................. $ 724 $ 725 $ 4,134
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for (received):
Interest ....................................................................... $ 3,653 $ 3,101 $ 3,438
Income taxes, net .............................................................. $ (93) $ (987) $ 108
Supplemental disclosure of non-cash investing and financing activities:
Capital lease obligations incurred for new equipment ............................... $ -- $ 864 $ --

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

1. OPERATIONS

Quaker Fabric Corporation and subsidiaries (the "Company" or "Quaker")
designs, manufactures and markets woven upholstery fabrics primarily for
residential furniture markets and specialty yarns for use in the production of
its own fabrics and for sale to distributors of craft yarns and manufacturers of
home furnishings and other products.

On a comparative basis, the Company's sales declined quarter-to-quarter
in each of the six consecutive fiscal quarters ending December 31, 2005. Quaker
also reported operating losses in each of those fiscal quarters, causing the
Company to breach certain financial covenants in its 2005 Credit Agreement.
During 2005, management put a restructuring plan in place intended to restore
the Company to profitability. The key elements of this restructuring plan
include: (i) stabilizing revenues from Quaker's U.S.-based residential fabric
business by concentrating the Company's marketing efforts on those markets least
sensitive to imported products; (ii) reducing operating costs enough to
compensate for the drop the Company has experienced in its revenues over the
past few years; (iii) selling excess assets; (iv) developing strategically
important commercial relationships with a limited number of carefully chosen
offshore fabric mills to recapture the share of the domestic residential market
lost to foreign imports over the past few years; and (v) generating additional
profitable sales by penetrating the outdoor and contract fabric markets. To
reduce the Company's working capital requirements and further conserve cash, the
Company may also further reduce its cost structure by taking actions such as
further personnel reductions and/or the suspension of certain new product/new
market development projects. Successful execution of the Company's restructuring
plan will require considerable operational, management, financial, sales and
marketing, supply chain, information systems and design expertise involving the
need to continually recruit, train and retain qualified personnel.

At the time the Company was required to file its Annual Report on Form
10-K for the year ended December 31, 2005, all of the Company's obligations,
liabilities and indebtedness to the lenders under the 2005 Credit Agreement
could have been declared due and payable in full at any time. While the Company
was then exploring various alternatives to improve its financing situation,
including a replacement of the 2005 Credit Agreement, there was no assurance
that the Company would be successful in its efforts to obtain appropriate
financing, and consequently, the report issued by the Company's independent
registered public accounting firm on the Company's Fiscal 2005 financial
statements included an explanatory paragraph raising substantial doubt about the
ability of the Company to continue as a going concern.

during Fiscal 2007. In addition, the Company's independent registered public
accounting firm's unqualified opinion on the Company's Fiscal 2006 financial
statements does not contain a reference expressing substantial doubt about the
Company's ability to continue as a going concern.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of Quaker Fabric Corporation and its wholly
owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.

(b) FISCAL YEAR. The Company's fiscal year ends on the Saturday nearest
to January 1 of each year. The fiscal years ended December 30, 2006, December
31, 2005, and January 1, 2005 all contained 52 weeks.

(c) REVENUE RECOGNITION. Revenue is recognized from product sales when
earned as required by generally accepted accounting principles and in accordance
with SEC Staff Accounting Bulletin 104, "Revenue Recognition in Financial
Statements." Revenues are recognized when product shipment has occurred. At that
time, the price is fixed and determinable and collectability is reasonably
assured, title and risk of loss have transferred and all provisions agreed to in
the arrangement necessary for customer acceptance have been fulfilled.

(d) CASH. The Company maintains a minimal amount of cash in its
operating accounts using available funds to reduce debt. The Company frequently
has checks issued and outstanding in excess of the cash balances in its bank
accounts. Funds are borrowed daily under the 2006 Revolving Credit Agreement to
cover checks which clear daily through the Company's operating account. Checks
issued and outstanding in excess of the cash balance constitute an overdraft.
Overdrafts are included in Accounts Payable on the Balance Sheet, and were
$1,243 and $792 as of December 30, 2006 and December 31, 2005 respectively.

(e) ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS AND ALLOWANCES.
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current
creditworthiness, as determined by management's review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues identified.
The Company cannot guarantee that credit loss rates in the future will be
consistent with those experienced in the past. The Company's accounts receivable
are spread among approximately 1,000 customers and no single customer
represented more than 5.8% of the accounts receivable balance at December 30,
2006 and December 31, 2005, respectively. The provision for bad debts was
$1,652, $606 and $1,141 for the years ended December 30, 2006, December 31, 2005
and January 1, 2005, respectively.

Management analyzes historical sales and quality returns, current
economic trends, and the Company's quality performance when evaluating the
adequacy of the reserve for sales returns and allowances. Management judgments
and estimates must be made and used in connection with establishing the reserve
for sales returns and allowances in any accounting period. The provision for
sales returns and allowances is recorded as a reduction of sales. Material
differences may result in the amount and timing of net sales for any period if
management makes different judgments or uses different estimates.

(f) INVENTORIES. Inventories are stated at the lower of cost or market
and include materials, labor and overhead. A standard cost system is used and
approximates cost on a FIFO basis. Cost for financial reporting purposes is
determined by the last-in, first-out (LIFO) method. Inbound freight, purchasing
and receiving costs, inspection costs, internal transfer costs and raw material
warehousing costs are all capitalized into inventory and included in cost of
goods sold as related inventory is sold. Finished goods warehousing costs and
the cost of operating the Company's finished product distribution centers are
included in Selling, General and Administrative expenses. Inventories consist of
the following at December 30, 2006 and December 31, 2005:

DECEMBER 30, December 31,
2006 2005
------------ ------------

Raw materials ................ $ 16,532 $ 22,504
Work-in-process .............. 3,397 6,120
Finished goods ............... 10,703 12,169
------------ ------------
Inventory at FIFO .......... 30,632 40,793
LIFO adjustment .............. (2,510) (2,966)
------------ ------------
Inventory at LIFO ............ $ 28,122 $ 37,827
============ ============

During the years ended December 30, 2006 and December 31, 2005,
inventory quantities were reduced. These reductions resulted in a liquidation of
LIFO inventory quantities. The effect of the inventory reduction in 2006 and
2005 decreased cost of goods sold by approximately $942 and $277, and increased
net income by approximately $655 and $180, or $0.04 and $0.01, per share,
respectively. The effect of the inventory reduction in 2004 was immaterial.

Approximately 60% of finished goods are produced upon receipt of a firm
order. Management, in partnership with key customers, utilizes forecasting
techniques to significantly reduce delivery lead times. Management regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on historical information and estimated
forecasts of product demand and raw material requirements for the next twelve
months.

(g) PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are
stated at cost. The Company provides for depreciation and amortization on
property and equipment on a straight-line basis over their estimated useful
lives as follows:

Buildings and improvements .... 32-39 years
Machinery and equipment ....... 2-20 years
Furniture and fixtures ........ 5-10 years
Motor vehicles ................ 4-5 years
Leasehold improvements ........ Life of Lease
Capital leases ................ Life of Lease

The useful life for leasehold improvements is initially established as
the lesser of: (i) the useful life of the asset or (ii) the initial term of the
lease excluding renewal option periods, unless it is reasonably assured that
renewal options will be exercised based on the existence of a bargain renewal
option or economic penalties. If the exercise of renewal options is reasonably
assured due to the existence of bargain renewal options or economic penalties,
such as the existence of significant leasehold improvements, the useful life of
the leasehold improvements includes both the initial term and any renewal
periods. Gains or losses on the disposition of fixed assets are included in
"Other Income."

Maintenance and repairs are charged to operations as incurred. When
equipment and improvements are sold or otherwise disposed of, the asset's cost
and accumulated depreciation are removed from the accounts, and the resulting
gain or loss, if any, is included in the results of operations. Fully
depreciated assets are removed from the accounts when they are no longer in use.

(h) IMPAIRMENT OF LONG-LIVED ASSETS. The Company periodically considers
whether there has been a permanent impairment in the value of its long-lived
assets, primarily property and equipment in accordance with Financial Accounting
Standards Board ("FASB") Statement No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company evaluates various
factors, including current and projected future operating results and the
undiscounted cash flows for any underperforming long-lived assets. To the extent
that the estimated future undiscounted cash flows are less than the carrying
amount of the asset, the asset is written down to its estimated fair market
value and an impairment loss is recognized. The value of impaired long-lived
assets is reviewed and adjusted periodically to reflect changes in these
factors.

(i) GOODWILL. Goodwill represents the excess of the purchase price over
the fair value of identifiable net assets acquired. In accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets," the Company ceased amortization
of goodwill effective December 30, 2001. SFAS No. 142 also requires companies to
test goodwill for impairment at least annually, or when changes in events and
circumstances warrant an evaluation. Due to lower than anticipated orders and a
related reduction in the Company's backlog position, the Company determined that
goodwill should be tested for impairment at July 2, 2005 in accordance with the
provisions of SFAS No. 142. The Company tested for impairment using a discounted
cash flow approach. As a result of this testing, the Company determined that
goodwill had been impaired and should be written down to $0. Accordingly, a
goodwill impairment charge of $5,432, or $0.32 per share, was recorded in the
second quarter of Fiscal 2005.

(j) INCOME TAXES. The Company accounts for income taxes under SFAS No.
109, "Accounting for Income Taxes." This statement requires that the Company
recognize a current tax liability or asset for current taxes payable or
refundable and a deferred tax liability or asset for the estimated future tax
effects of temporary differences and carryforwards to the extent they are
realizable. A valuation allowance is recorded to reduce the Company's deferred
tax assets to the amount that is more likely than not to be realized. The
Company does not provide for United States income taxes on earnings of
subsidiaries outside of the United States. The Company's intention is to
reinvest these earnings permanently. Management believes that United States net
operating losses would largely eliminate any United States taxes on these
earnings.

(k) EARNINGS (LOSS) PER COMMON SHARE. Basic earnings (loss) per common
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding during the period. For diluted earnings (loss) per
share, the denominator also includes dilutive outstanding stock options
determined using the treasury stock method. Due to losses for the years ended
December 30, 2006, December 31, 2005 and January 1, 2005, no incremental shares
are included in the dilutive weighted average shares outstanding because the
effect would be antidilutive. The dilutive potential common shares for the years
ended December 30, 2006, December 31, 2005 and January 1, 2005 would have been
2, 28, and 294 respectively. The following table reconciles weighted average
common shares outstanding to weighted average common shares outstanding and
dilutive potential common shares.

DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ------------

Weighted average common shares outstanding .... 16,869 16,826 16,819
Dilutive potential common shares .............. -- -- --
------------ ------------ ------------
Weighted average common shares outstanding
and dilutive potential common shares ........ 16,869 16,826 16,819
============ ============ ============
Antidilutive options .......................... 2,626 2,913 2,191
============ ============ ============

(l) FOREIGN CURRENCY. The assets and liabilities of the Company's
Mexican and Brazilian operations are translated at period-end exchange rates,
and statement of operations accounts are translated at weighted average exchange
rates. The resulting translation adjustments are included in the consolidated
balance sheet as a separate component of equity, "Accumulated Other
Comprehensive Income (Loss)," and foreign currency transaction gains and losses
are included with selling, general and administrative expenses in the
consolidated statements of operations. Foreign currency losses included in
selling, general, and administrative expenses were $95, $527, and $130 for the
years ended December 30, 2006, December 31, 2005 and January 1, 2005,
respectively.

The Company accounts for its derivative instruments in accordance with
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
and SFAS No. 138 "Accounting for Certain Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133," (collectively, SFAS No.
133, as amended) effective in Fiscal 2001. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the statement of operations, to
the extent effective, and requires that the Company formally document, designate
and assess the effectiveness of transactions that receive hedge accounting. SFAS
No. 133 in part, allows special hedge accounting for fair value and cash flow
hedges. The statement provides that the gain or loss on a derivative instrument
designated and qualifying as a fair value hedging instrument, as well as the
offsetting changes in the fair value of the hedged item attributable to the
hedged risk, be recognized currently in earnings in the same accounting period.
SFAS No. 133 provides that the effective portion of the gain or loss on a
derivative instrument designated and qualifying as a cash flow hedging
instrument be reported as a component of "Other Comprehensive Income (Loss)" and
be reclassified into earnings in the same period or periods during which the
hedged forecasted transaction affects earnings. The ineffective portion of a
derivative's change in fair value is recognized currently through earnings
regardless of whether the instrument is designated as a hedge.

The Company periodically enters into forward exchange contracts to hedge
the fair value of foreign currency denominated intercompany accounts payable.
The purpose of the Company's foreign currency hedging activities is to minimize,
for a period of time, the impact on the Company's results of operations of
unforeseen fluctuations in foreign exchange rates. The Company has designated
these contracts as fair value hedges intended to lock in the expected cash flows
from the repayment of foreign currency denominated intercompany payables at the
available forward rate at the inception of the contract. Changes in the fair
value of the hedge instruments are recognized in earnings. At December 31, 2005,
the fair value of these contracts resulted in a loss of $121. At December 30,
2006, the Company had no forward exchange contracts to exchange Brazilian reals
and Mexican pesos for U.S. dollars.

These derivative financial instruments are for risk management purposes
only and are not used for trading or speculative purposes.

(m) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions. Material estimates that are
particularly susceptible to significant changes in the near term relate to the
determination of inventory reserves and accounts receivable reserves, the useful
life or potential impairment of long lived assets, self-insurance reserves, and
the potential impairment of goodwill.

(n) SELF-INSURANCE RESERVES. The Company is self-insured for workers'
compensation and medical insurance. The Company has purchased stop loss coverage
for both types of risks in order to minimize the effect of a catastrophic level
of claims. At the end of each accounting period, the reserves for incurred but
not reported claims must be evaluated. In addition, management evaluates claims
experience on a regular basis in consultation with the Company's insurance
advisors and makes adjustments to these reserves as required. Significant
management judgments and estimates must be made and used in connection with
evaluating the adequacy of self-insurance reserves. Material differences may
result in the amount and timing of these costs for any period if management
makes different judgments or uses different estimates.

(o) FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial
instruments mainly consist of cash, accounts receivable, accounts payable,
foreign currency financial instruments and debt. The carrying amounts of these
financial instruments as of December 30, 2006 approximate their fair values due
to the short-term nature and terms of these instruments, and also the rates
available to the Company for debt and foreign currency financial instruments
with similar terms and remaining maturities.

(p) SHIPPING AND HANDLING COSTS. The Company accounts for shipping and
handling costs in accordance with Emerging Issues Task Force (EITF) Issue 00-10,
"Accounting for Shipping and Handling Fees and Costs," (EITF 00-10). In
accordance with this guidance, the Company records shipping and handling costs
billed to customers as a component of revenue. Shipping and handling costs,
which are included in cost of goods sold, are not significant.

(q) RESEARCH AND DEVELOPMENT COSTS. Expenditures for research and
development are expensed as incurred. Research and development costs consist of
internal material, labor and overhead expenses. The Company expensed
approximately $3,300, $4,900 and $6,400 in research and development costs during
the years ended December 30, 2006, December 31, 2005 and January 1, 2005,
respectively, primarily related to the development of new products.

(r) ADVERTISING COSTS. Advertising expenditures consist primarily of
print media and trade shows. These advertising costs are expensed during the
period incurred and totaled $284, $470, and $635 for the years ended December
30, 2006, December 31, 2005 and January 1, 2005, respectively.

(s) STOCK OPTION PLANS. Prior to January 1, 2006 the Company accounted
for its stock option plans under APB 25 as well as provided disclosure of
stock-based compensation as outlined in Financial Accounting Standards Board
Statement No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123") as
amended by Financial Accounting Standards Board Statement No.148, "Accounting
for Stock-Based Compensation Transition and Disclosure," ("SFAS 148"). SFAS 123
required disclosure of pro forma net income, EPS and other information as if the
fair value method of accounting for stock options and other equity instruments
described in SFAS 123 had been adopted. The Company adopted Financial Accounting
Standards Board Statement No. 123R "Share Based Payment," ("SFAS 123R")
effective January 1, 2006 using the modified prospective method. No unvested
stock options were outstanding as of December 31, 2005. No stock options were
granted and no modifications to outstanding options were made during the year
ended December 30, 2006.

Had compensation cost for awards granted under the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
consistent with the method set forth in SFAS No. 123, the effect on the
Company's net loss and loss per common share would have been as follows:

Fiscal Year Ended
---------------------------
December 31, January 1,
2005 2005
------------ ------------
Net loss, as reported ...................... $ (26,256) $ (2,042)
Add: Stock-based employee compensation
expense included in net income (loss),
net of related tax effects ............... 311 133
Less: Stock-based employee compensation
expense determined under Black-Scholes
option pricing model, net of related
tax effects .............................. 2,390 1,176
------------ ------------
Pro forma net income (loss): ............... $ (28,335) $ (3,085)
============ ============
Earnings (loss) per common share--basic
As reported ............................ $ (1.56) $ (0.12)
Pro forma .............................. $ (1.68) $ (0.18)
Earnings (loss) per common share--diluted
As reported ............................ $ (1.56) $ (0.12)
Pro forma .............................. $ (1.68) $ (0.18)

Pro forma compensation expense for options is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted. No options were granted during the year ended
December 30, 2006.

On December 16, 2005, the Board of Directors approved the acceleration
of vesting of all outstanding unvested stock options previously awarded to its
employees (including its executive officers) under the Company's equity
compensation plans. The acceleration of vesting became effective on December 16,
2005 for stock options outstanding as of such date. On such date, the closing
market price was $2.60. Options to purchase an aggregate of approximately
565,000 shares of common stock (of which options to purchase an aggregate of
393,000 shares of common stock are held by executive officers of the Company)
were accelerated on December 16, 2005. The exercise prices of the options range
from $7.04 to $9.12. Under the recently issued Financial Accounting Standards
Board Statement No. 123R, "Share-Based Payment" ("SFAS 123R"), the Company was
required to apply the expense recognition provisions of SFAS 123R beginning
January 2, 2006. The decision to accelerate the vesting of these stock options,
all of

which were at exercise prices higher than current market price, was made
because: (i) there was no perceived value in these options to the employees
involved, and (ii) there were no employee retention ramifications.

Included in the options subject to the accelerated vesting described
above were options granted below fair market value in May 2002. The compensation
expense related to these options was being amortized over their five year
vesting period. In accordance with APB 25, the unamortized compensation expense
related to these options of $300 was expensed in the fourth quarter of 2005.

(t) RECENT ACCOUNTING PRONOUNCEMENTS. In November 2004, the FASB issued
SFAS No. 151, "Inventory Costs," which amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing. This amendment clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage). SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criteria specified in
ARB 43 of "so abnormal." In addition, SFAS No. 151 requires that allocation of
fixed production overheads to the costs of conversion be based on normal
capacity of the production facilities. SFAS No. 151 is effective for financial
statements for fiscal years beginning after June 15, 2005. The adoption of SFAS
No. 151 did not have a material effect on the Company's Consolidated Financial
Statements.

(u) RECLASSIFICATIONS. Certain prior year amounts have been
reclassified to conform with the current year's presentation. These
reclassifications had no impact on the Company's financial position or results
of operations.

3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES.

A summary of the Company's restructuring and asset impairments charges
by period is below:

Twelve Months Ended December 31, 2005
-------------------------------------
Balance Cost Cash Non-Cash Balance
Jan. 2, 2005 Incurred Payments Adjustments Dec. 31, 2005
------------ -------- -------- ----------- -------------

Employee severance costs $ -- $ 255 $ (230) $ -- $ 25
Asset impairments -- 10,948 -- (10,948) --
------- -------- -------- -------- ----
$ -- $ 11,203 $ (230) $(10,948) $ 25
======= ======== ======== ======== ====

Twelve Months Ended December 30, 2006
-------------------------------------
Balance Cost Cash Non-Cash Balance
Jan. 1, 2006 Incurred Payments Adjustments Dec. 30, 2006
------------ -------- -------- ----------- -------------

Employee severance costs $ 25 $ 639 $ (629) $ -- $ 35
Asset impairments -- 22,474 -- (22,474) --
Restructuring professional fees -- 1,873 (1,845) -- 28
-- 620 (620) -- --
Plant consolidation costs
Lease, occupancy and other exit costs -- 852 (159) -- 693
------- -------- -------- -------- ----

$ 25 $ 26,458 $ (3,253) $(22,474) $756
======= ======== ======== ======== ====

2005 RESTRUCTURING

During 2005, the Company implemented a restructuring plan to address a
declining order rate and sales volume, and the following steps were taken as
part of that plan:

o Reduced production capacity by idling excess manufacturing
equipment.

o Reduced the workforce from 2,314 employees as of January 1, 2005
to 1,655 employees as of December 31, 2005.

o Closed the Company's manufacturing facility located at 763
Quequechan Street in Fall River, Massachusetts and offered the
building for sale.

o Idled all of the manufacturing equipment at its Somerset,
Massachusetts facility and offered the building for sale.

o Offered for sale 60 acres of undeveloped land purchased in 1998.

As a result of these steps, the Quequechan Street and Somerset
facilities and idled equipment were evaluated for impairment in accordance with
SFAS No. 144. Based on projected gross cash flows expected from this equipment
and these facilities, the Company determined that these assets were impaired and
recorded a charge of $10,241, representing the difference between management's
estimate of their fair value and their book value. Also, the Company incurred
$255 of employee termination costs related to 27 employees. In addition, as part
of the consolidation of manufacturing and warehousing facilities, the Company
incurred $1,203 of moving and duplicate occupancy costs during the year ended
December 31, 2005. These costs are included in cost of goods sold.

2006 RESTRUCTURING

During 2006, the Company continued to implement its restructuring plan,
including taking actions intended to reduce costs and bring them in line with
lower revenue estimates and the 2006 Business Plan. The following steps were
taken:

o A plan was adopted to reduce the number of facilities occupied
by the Company from six to two. Consistent with that plan,
during 2006, the Company offered for sale three owned
manufacturing facilities and its corporate headquarters and
research and development facility.

o Additional equipment was idled to reduce production capacity to
levels consistent with anticipated order volumes.

o Reduced the workforce from 1,655 employees as of December 31,
2005 to 1,008 employees as of December 30, 2006.

o Completed the sale of the Company's Quequechan Street and
Somerset facilities, which realized cash proceeds of
approximately $2,800.

As a result of these actions, the Company evaluated its facilities and
equipment for impairment, in accordance with SFAS No. 144. Based upon the
projected gross cash flows expected from the assets idled during 2006, the
Company determined that these assets were impaired and recorded an impairment
charge of $21,967. Also, the Company recorded additional impairment charges of
$507 related to the 60 acres of land held for sale. This land previously had a
book value of $4,007, which approximated the fair market value based upon
independent appraisals. The land was written down in the third quarter of 2006
to a revised estimated sales value of $3,500, based on written offers received
but not accepted during the fourth quarter. This property remains for sale.

The Company also closed its Graham Road, Fall River, Massachusetts yarn
manufacturing facility in the fourth quarter of 2006. The Company recorded a
charge of $193 during the fourth quarter of 2006 for the remaining contractual
lease payments due with respect to this facility through the June 2007 lease
termination date. Also included in 2006 restructuring expenses were occupancy
costs of $159 for the period in which the facility was idled. The Company also
recorded $500 of other occupancy related restructuring charges.

In addition, as part of the consolidation of manufacturing and
warehousing facilities, the Company incurred $620 of moving and duplicate
occupancy costs during the year ended December 30, 2006. Also, the Company
incurred $639 of employee termination costs related to 40 employees. In
accordance with Amendment No. 5 to the 2005 Credit Agreement, the Company was
required by its lenders to engage Alvarez & Marsal, a New York-based financial
and management consulting firm, to assist the Company with the implementation of
its restructuring, refinancing and consolidation plans. Expenses incurred during
2006 for these services were $1,531. In addition, the Company also incurred $342
of other professional fees related to the November 2006 refinancing of the
Company's debt.

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

DECEMBER 30, December 31,
2006 2005
------------ ------------

Land ................................. $ 70 $ 106
Buildings and improvements ........... 9,406 30,670
Leasehold improvements ............... 2,929 2,929
Machinery and equipment .............. 158,726 217,068
Capital leases ....................... 864 864
Furniture and fixtures ............... 721 2,253
Motor vehicles ....................... 156 190
Construction in progress ............. 171 330
------------ ------------
173,043 254,410
Less: Accumulated depreciation ....... 95,630 123,233
------------ ------------
Net property, plant and equipment .... $ 77,413 $ 131,177
============ ============

Depreciation expense related to property, plant and equipment for the
years ending December 30, 2006, December 31, 2005 and January 1, 2005 was
$13,567, $16,860 and $18,704, respectively.

5. ASSETS HELD FOR SALE

During the second half of 2005, the Company idled certain manufacturing
equipment and decided to offer two owned facilities for sale. The land,
buildings and improvements were written down to management's estimate of fair
market value and placed with a real estate broker. Subsequently, the Company
entered into agreements during the first quarter of 2006 to sell its Quequechan
Street facility in Fall River and its County Street facility in Somerset,
Massachusetts for $1,400 and $1,700, respectively. The Quequechan Street
facility sold in June 2006 for $1,400 less expenses of $118, and the County
Street facility sold in July 2006 for $1,625. The Company sold the County Street
facility for a gain of $367. In addition, the Company has 60 acres of unimproved
land purchased in 1998, which has been placed with a real estate broker for
sale. This land is stated at estimated fair market value based upon management's
estimate of the expected proceeds to be received upon sale of the property.
During the third quarter of 2006, the Company decided to offer three additional
manufacturing facilities and its administrative office and R&D facility for
sale. A real estate broker is actively marketing these four properties which
have an aggregate book value of $13,636.

During the fourth quarter of 2006, the Company entered into an
agreement to sell certain equipment for $2,100. The Company received a deposit
of $210, and will receive monthly installment deposits of $315 though June 2007.
The Company has also identified certain other manufacturing equipment with a
book value of $2,300, which is being offered for sale.

DECEMBER 30, December 31,
2006 2005
------------ ------------

Land, Buildings and Improvements ..................................... $ 13,636 $ 2,398
Equipment ............................................................ 4,415 77
60 Acres of Unimproved Land in Fall River, Massachusetts ............. 3,760 4,008
------------ ------------
$ 21,811 $ 6,483
============ ============

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses consists of the following:

DECEMBER 30, December 31,
2006 2005
------------ ------------

Payroll and fringe benefits .......................................... $ 809 $ 1,241
Workers' compensation ................................................ 2,888 2,727
Vacation ............................................................. 1,535 2,145
Medical insurance .................................................... 485 327
Interest ............................................................. 410 336
Deferred income taxes ................................................ 1,216 308
Other ................................................................ 1,501 1,253
------------ ------------
Total accrued expenses and other current liabilities ............... $ 8,844 $ 8,337
============ ============

7. DEBT

Debt consists of the following:

DECEMBER 30, December 31,
2006 2005
------------ ------------

Senior Secured Revolving Credit Facility ............................. $ 9,480 $ 18,880
Term Loan payable in quarterly principal installments through
May 1, 2006 and monthly installments thereafter, plus interest,
over a 5-year period beginning November 1, 2005 -- 19,000
Term Loans payable by May 2010 ....................................... 24,240 --
------------ ------------
Total Debt ........................................................... $ 33,720 $ 37,880
Less: Current Portion of Senior Secured Revolving Credit Facility... 9,480 18,880
Current Portion of Term Loans .............................. 1,800 19,000
------------ ------------
Total Long-Term Debt ................................................. $ 22,440 $ --
============ ============

On November 9, 2006, Quaker Fabric Corporation of Fall River ("Quaker"),
a wholly-owned subsidiary of Quaker Fabric Corporation (the "Company"), entered
into a $25,000 amended and restated senior secured revolving credit agreement
with Bank of America, N.A. (the "Bank") and two other lenders (the "2006
Revolving Credit Agreement"). Quaker's obligations to the revolving credit
lenders are secured by all of the Company's assets, with a junior interest in
Quaker's real estate and machinery and equipment. Simultaneously, Quaker entered
into two (2) senior secured term loans in the aggregate amount of $24,600, with
GB Merchant Partners, LLC as Agent for the term loan lenders (the "2006 Term
Loan Agreement"). The two term loans consist of a $12,500 real estate loan and a
$12,100 equipment loan (the "Real Estate Term Loan" and the "Equipment Term
Loan", respectively, and together, the "Term Loans"). The Term Loans are secured
by all of the Company's assets, with a first priority security interest in the
Company's machinery and equipment and real estate.

The proceeds of the Term Loans were used to: (i) repay, in full, all
outstanding obligations under the term loan previously provided by the Bank
pursuant to the terms of Quaker's May 18, 2005 senior secured credit facility
with the Bank (the "2005 Credit Agreement"), (ii) reduce Quaker's obligations to
the Bank under the revolving credit portion of the 2005 Credit Agreement by
approximately $8,900, (iii) fund a $1,000 environmental escrow account required
by the Term Loan Lenders to cover certain environmental site assessment and
remediation expenses potentially arising out of environmental conditions at the
various parcels of real estate serving as collateral for Quaker's obligations to
the Term Loan Lenders, and (iv) pay for approximately $2,600 of transaction and
related costs required by the Bank and the Term Loan Lenders to be paid at the
Closing, including fees to the various lenders of approximately $1,500 and
professional and consulting fees of approximately $1,100.

Pursuant to the terms of the 2006 Term Loan Agreement, mandatory
prepayments of the Real Estate and Equipment Term Loans are required as Quaker
sells the assets securing those loans pursuant to the terms of the restructuring
plan Quaker has in place (the "Restructuring Plan"). Following the sale in 2008
of the last parcel of real estate contemplated by the Restructuring Plan,
amortization of the Real Estate Term Loan would be at the rate of $1,100 per
year, payable at the rate of $100 per month in each month other than July. In
addition, in the event sales of certain parcels of real estate are not
consummated on or before the dates assumed for such sales in the Restructuring
Plan, Quaker would be responsible for making Late Sale Amortization Payments (as
defined in the 2006 Term Loan Agreement) at the rate of $150 per month until
such payments equal 92.5% of the net proceeds the Term Loan Lenders would have
received on the sale of such real estate. Mandatory prepayments of the Equipment
Term Loan and the Real Estate Term Loan are also required in the event of
Equipment Appraisal and/or Real Property Appraisal Shortfalls, respectively (as
defined in the 2006 Term Loan Agreement). The Term Loans bear Interest at the
LIBOR rate plus 7.75% and is payable monthly. As of December 30, 2006, the
interest rate on the Term Loans was 13.07%.

On December 1, 2006, the Company and the other parties to the 2006 Term
Loan Agreement entered into Amendment No. 1, effective as of December 1, 2006,
to the 2006 Term Loan Agreement (the "Amendment") to: (i) place certain
restrictions on the terms and conditions on which the Company may agree to sell
excess machinery and equipment going forward, including restrictions on the
Company's ability to agree to the payment of the purchase price for such
equipment over time and the minimum price at which such equipment may be sold,
and (ii) acknowledge and consent to the Company's sale of certain machinery and
equipment no longer needed to support the Company's operations for $2,100,
payable in six (6) equal monthly installments of $315 each, beginning January
15, 2007, and a deposit of $210, paid upon execution of the contract. Pursuant
to the terms of the 2006 Revolving Credit Agreement, Bank of America, N.A.
consented to the Amendment.

As of December 30, 2006, there were $33,720 of loans outstanding,
including $9,480 of loans outstanding under the 2006 Revolving Credit Agreement
and $24,240 of loans outstanding under the 2006 Term Loan. On December 30, 2006,
unused Availability was $3,756, net of the $4,250 Availability Reserve, and the
Company had approximately $4,500 of letters of credit outstanding.

8. INCOME TAXES

Income (loss) before provision for income taxes consists of:

FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ------------

Domestic .................................................... $ (54,185) $ (38,76) $ (5,999)
Foreign ..................................................... 100 (471) 224
------------ ------------ ------------
$ (54,085) $(39,238) $ (5,775)
============ ============ ============

The following is a summary of the provision (benefit) for income taxes:

FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ------------

Federal
Current ................................................... $ -- $ -- $ (1,290)
Deferred .................................................. (16,329) (11,438) (3,538)
------------ ------------ ------------
(16,329) (11,438) (4,828)
------------ ------------ ------------
State
Current ................................................... 115 (1,195) 382
Deferred .................................................. (415) (217) 640
------------ ------------ ------------
(300) (1,412) 1,022
------------ ------------ ------------
Foreign
Current ................................................... 77 57 1
Deferred .................................................. 99 (189) 72
------------ ------------ ------------
176 (132) 73
------------ ------------ ------------
$ (16,453) $ (12,982) $ (3,733)
============ ============ ============

A reconciliation between the provision for income taxes computed at U.S.
federal statutory rates and the amount reflected in the accompanying
consolidated statements of operations is as follows:

FISCAL YEAR ENDED
--------------------------------------------
DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ------------

Provision (benefit) for income taxes at statutory rate ...... $ (18,930) $(13,733) $ (2,021)
State income taxes (benefit), net of federal tax effect ..... (429) (142) 307
Foreign income taxes (benefit), net of federal tax effect ... 19 (86) 49
Valuation allowances ........................................ 3,100 844 796
Goodwill impairment ......................................... -- 1,901 --
State investment tax credits, net of federal provision ...... -- (136) (438)
State research and development tax credits .................. -- (1,321) --
Extraterritorial income or foreign sales corporation benefit -- (178) (162)
Federal research and development tax credits ................ -- (252) (1,988)
Other ....................................................... (213) 121 (276)
------------ ------------ ------------
$ (16,453) $(12,98) $ (3,733)
============ ============ ============

The following table summarizes the change in the Valuation Allowance:

DECEMBER 30, DECEMBER 31, January 1,
DESCRIPTIONS 2006 2005 2005
------------ ------------ ------------ ------------

Valuation allowance at beginning of year .................... $ 5,298 $ 4,470 $ 3,722
Charged to expense .......................................... 3,100 844 796
Charge to other accumulated comprehensive loss .............. 884 -- --
Other ....................................................... 32 (16) (48)
------------ ------------ ------------
Valuation allowance at end of year .......................... $ 9,314 $ 5,298 $ 4,470
============ ============ ============

The Company has approximately $4,600 of federal tax credit
carryforwards, of which approximately $2,300 expire from 2014 to 2025. The
remaining federal tax credit carryforwards have no expiration date. The Company
also has approximately $49,000 of net operating loss carryforwards which expire
in 2024 through 2026. The timing and use of the net operating loss carryforwards
and tax credit carryforwards may be limited under applicable federal tax
legislation. In addition, the Company has approximately $7,400 of state
investment tax credit carryforwards, of which approximately $5,100 expire from
2009 to 2015. The remaining state investment tax credits have no expiration
date. The Company also has approximately $500 of state research and development
tax credits which expire in 2019 and 2020. The timing and use of these credits
is limited under applicable state income tax legislation.

The Company filed amended tax returns during the third quarter of 2003
with the Internal Revenue Service claiming $1,378 of research and development
tax credits for the years 1993-2001. In addition, credits of $959 were claimed
on originally filed tax returns for 2002 and 2003. During the fourth quarter of
2004, the Company reached an agreement with the Internal Revenue Service on
certain assessments and amended returns filed by the Company for the years
1997-1999. As a result of this agreement, in the fourth quarter of 2004, the
Company recorded a tax benefit of $1,729 related to research and development tax
credits for the years prior to 2004, and $259 related to 2004.

During the second quarter of 2005, the Company settled tax assessments
from the Massachusetts Department of Revenue (MDOR) for the years 1993-1998. In
addition, the Company settled refund claims from amended tax returns filed with
the MDOR claiming approximately $1,400 of research and development tax credits
for the years 1993-2001 and additional credits of $700 claimed on the originally
filed tax returns for 2002 and 2003. Settlement of these claims allowed the
Company to record a tax benefit during the second quarter of 2005 of $1,800, or
$1,167, net of applicable federal taxes.

The significant items comprising the deferred tax asset/liability are as
follows:

DECEMBER 30, 2006 DECEMBER 31, 2005
---------------------- ----------------------
CURRENT LONG-TERM Current Long-term
--------- --------- --------- ---------

Assets:
Tax credit carryforwards ............................ $ -- $ 8,938 $ -- $ 9,128
Receivable reserves ................................. 757 -- 549 --
Accrued fringe benefits and workers' compensation ... 547 1,034 775 858
Net operating loss .................................. -- 17,904 -- 8,062
Foreign net operating loss .......................... -- 96 -- 131
Other ............................................... 356 1,256 317 885
--------- --------- --------- ---------
Total assets ...................................... 1,660 29,228 1,641 19,064
Valuation allowance ............................... (1,660) (7,654) (411) (4,887)
--------- --------- --------- ---------
Total assets, net of valuation allowance .......... -- 21,574 1,230 14,177
--------- --------- --------- ---------
Liabilities:
Property basis differences .......................... -- (21,574) -- (30,678)
Inventory basis differences ......................... (1,216) -- (1,538) --
Other ............................................... -- -- -- --
--------- --------- --------- ---------
Total liabilities ................................. (1,216) (21,574) (1,538) (30,678)
--------- --------- --------- ---------
Net assets (liabilities) ........................ $ (1,216) $ -- $ (308) $ (16,501)
========= ========= ========= =========

9. COMMITMENTS AND CONTINGENCIES

(a) LITIGATION. In the ordinary course of business, the Company is party
to various types of litigation. The Company believes it has meritorious defenses
to all claims and in its opinion, all litigation currently pending or threatened
will not have a material effect on the Company's financial position, results of
operations or liquidity.

(b) ENVIRONMENTAL CLEANUP MATTERS. The Company accrues for estimated
costs associated with known environmental matters when such costs are probable
and can be reasonably estimated. The actual costs to be incurred for
environmental remediation may vary from estimates, given the inherent
uncertainties in evaluating and estimating environmental liabilities, including
the possible

effects of changes in laws and regulations, the stage of the remediation process
and the magnitude of contamination found as the remediation progresses.
Environmental due diligence reviews conducted by the Company's lenders in
connection with Quaker's November 2006 refinancing transaction identified
certain regulatory compliance obligations which the Company failed to meet in a
timely fashion. These reviews also indicated the need for additional
environmental site assessment work at certain of the Company's facilities,
raising the possibility that the Company will be required to incur additional
future remediation expenses should further environmental conditions requiring
remediation be identified during this process. The Company has accrued reserves
for environmental matters based on information presently available, and
management believes these reserves to be adequate. Accordingly, management
believes the ultimate disposition of known environmental matters will not have a
material adverse effect on the liquidity, capital resources, business or
consolidated financial position of the Company, however, there can be no
assurance that established reserves will prove to be adequate or that the costs
associated with environmental matters will not increase in the future.

(c) LEASES. The Company leases certain facilities and equipment under
operating and capital lease agreements expiring at various dates from the
current year to the year 2015. As of December 30, 2006, the aggregate minimum
future commitments under leases are as follows:

OPERATING CAPITAL
LEASES LEASES
---------- ----------
2007 ....................................... $ 2,899 $ 187
2008 ....................................... 2,171 187
2009 ....................................... 1,989 170
2010 ....................................... 1,747 148
2011 ....................................... 1,755 18
Thereafter ................................. 5,265 --
---------- ----------
Total minimum payments ................... $ 15,826 $ 710
========== ==========
Less: Amount representing interest ....... 81
----------
Present value of minimum lease payments .. $ 629
==========

Rent expense for operating leases for the years ended December 30, 2006,
December 31, 2005 and January 1, 2005 was $4,142, $5,456, and $4,466,
respectively.

(d) LETTERS OF CREDIT. In the normal course of its business activities,
the Company is required under certain contracts to provide letters of credit
which may be drawn down in the event the Company fails to perform under the
contracts. As of December 30, 2006 and December 31, 2005 the Company had issued
or agreed to issue letters of credit totaling $4,503 and $4,591, respectively.

(e) EMPLOYMENT CONTRACT AND CHANGE-IN-CONTROL AGREEMENTS. In March 2004,
the Company's Board of Directors amended and restated the President and Chief
Executive Officer's Employment Agreement (the "Employment Agreement"). The
Employment Agreement provides for Mr. Liebenow to continue to serve as President
and Chief Executive Officer of the Company on a full-time basis through March
12, 2008, subject to an automatic three-year extension, unless terminated by the
Company upon one year's prior notice and provides for certain payments to be
made to Mr. Liebenow following certain termination events occurring in
connection with a change in control. The Employment Agreement as amended
effective October 4, 2004, provides for a base salary of $645, subject to such
annual increases as may be determined by the Board of Directors, as well as
certain benefits and reimbursement of expenses.

If the Employment Agreement is terminated as the result of a termination
without cause, Mr. Liebenow would be entitled to receive $1,935, plus the
continuation of certain benefits. If the Employment Agreement is terminated as a
result of a voluntary resignation, Mr. Liebenow would be entitled to receive
$1,935, plus the continuation of certain benefits, provided he agrees not to
engage in competition with the Company for a three year period following his
termination date. If the Employment Agreement is terminated as the result of a
termination for cause, Mr. Liebenow would be entitled to receive the
continuation of certain benefits, plus payment of accrued, but unpaid, salary
and benefits as of his termination date.

During 1999, the Company also entered into change-in-control agreements
with the Company's other corporate officers. These agreements provide certain
benefits to the Company's other officers in the event their employment with the
Company is terminated as a result of a change-in-control as defined. The maximum
contingent liability related to the change-in-control agreements is
approximately $2,200, exclusive of any amount due Mr. Liebenow pursuant to the
terms of the Employment Agreement.

10. STOCK OPTIONS

The Company has several stock option plans (the "Plans") in effect that
provide for the granting of non-qualified stock options and other equity-based
incentives to directors, officers, and employees of the Company. Options under
the Plans are granted at fair market value and vesting is determined by the
Board of Directors.

STOCK OPTION ACTIVITY. A summary of the Company's stock option activity
is as follows:

FISCAL YEAR ENDED
------------------------------------------------------------------------
DECEMBER 30, DECEMBER 31, January 1,
2006 2005 2005
---------------------- ---------------------- ----------------------
WEIGHTED Weighted Weighted
AVG. Avg. Avg.
NUMBER OF EXERCISE Number of Exercise Number of Exercise
SHARES PRICE Shares Price Shares Price
--------- --------- --------- --------- --------- ---------

Options outstanding,
beginning of year ................ 3,007 $ 7.57 3,147 $ 7.58 3,218 $ 7.57
Granted ............................ -- -- -- -- 10 $ 9.12

Exercised .......................... (51) $ 1.37 -- -- (30) $ 5.31
Forfeited .......................... (408) $ 7.20 (140) $ 7.79 (51) $ 8.52
--------- --------- ---------
Options outstanding, end of year ... 2,548 $ 7.75 3,007 $ 7.57 3,147 $ 7.58
Options exercisable ................ 2,548 $ 7.75 3,007 $ 7.57 2,125 $ 7.50
Options available for grant ........ 2,182 -- 1,766 -- 1,633 --
Weighted average fair value per
share of options granted ......... -- -- -- -- -- $ 4.25

The following table summarizes information for options outstanding and
exercisable at December 30, 2006:

Weighted
Weighted Average Weighted
Average Remaining Average
Range of Options Exercise Life Options Exercise
Prices Outstanding Price (in years) Exercisable Price
-------------- ----------- -------- --------- ----------- --------

$ 3.54-- 5.30 .... 433 4.22 3.7 433 4.22
$ 5.31-- 7.07 .... 638 6.44 4.9 638 6.44
$ 7.08-- 8.84 .... 600 8.02 3.8 600 8.02
$ 8.85--10.60 .... 790 9.62 3.8 790 9.62
$12.37--14.14 .... 30 13.00 1.8 30 13.00
$15.90--17.67 .... 57 17.67 1.4 57 17.67
----------- -------- --------- ----------- --------
2,548 $ 7.75 4.0 2,548 $ 7.75
=========== ======== ========= =========== ========

At its regular meeting in December 2001, the Company's Board of
Directors granted options to purchase 160,000 shares of common stock at an
exercise price of $8.30 per share to certain individuals subject to shareholder
approval of an increase of 750 shares in the number of shares available for
grant under the Plans. At the May 16, 2002 Annual Meeting, shareholder approval
was received. Accordingly, the Company recorded an unearned compensation charge
equal to the difference between the exercise price and the fair value on the
date of shareholder approval of $1,032. During 2006, 2005 and 2004, the Company
recognized $0, $488 and $207 of amortization of unearned compensation,
respectively.

On December 12, 2003, pursuant to the terms of the Company's 1997 Stock
Option Plan, the Company's Board of Directors granted to Mr. Liebenow, the
Company's President and CEO, options covering 90,000 shares of common stock,
10,000 shares of which were subject to shareholder approval at the Company's
2004 Annual Meeting of Shareholders, which approval was received. This option
grant is exercisable for a period of ten years from the grant date, has an
exercise price of $9.12 per share, the fair market value of the Company's common
stock on December 12, 2003, and originally vested over a five year period.
Pursuant to a decision made on December 16, 2005 by the Company's Board of
Directors, this option grant is now fully vested.

At the May 21, 2004 Annual Shareholder meeting, the 2004 Stock Incentive
Compensation Plan was approved. A maximum of 1,500,000 shares may be issued
under this plan. Awards under this plan may be in the form of stock options,
stock appreciation rights, restricted stock or other stock-based compensation,
as determined by the Compensation and Stock Option Committee of the Board of
Directors.

closing market price was $2.60. Options to purchase an aggregate of
approximately 565,000 shares of common stock (of which options to purchase an
aggregate of 393,000 shares of common stock are held by executive officers of
the Company) were accelerated on December 16, 2005. The exercise prices of the
options range from $7.04 to $9.12. Under the recently issued Financial
Accounting Standards Board Statement No. 123R, "Share-Based Payment" ("SFAS
123R"), the Company was required to apply the expense recognition provisions
under SFAS 123R beginning January 2, 2006. The decision to accelerate the
vesting of these stock options, all of which are at exercise prices higher than
current market price, was made because (i) there is no perceived value in these
options to the employees involved, and (ii) there are no employee retention
ramifications.

ACCOUNTING FOR STOCK-BASED COMPENSATION. Prior to January 1, 2006 the
Company accounted for its stock option plans under APB 25 as well as provided
disclosure of stock-based compensation as outlined in Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation,"
("SFAS 123") as amended by Financial Accounting Standards Board Statement
No.148, "Accounting for Stock-Based Compensation Transition and Disclosure,"
("SFAS 148"). SFAS 123 required disclosure of pro forma net income, EPS and
other information as if the fair value method of accounting for stock options
and other equity instruments described in SFAS 123 had been adopted. The Company
adopted Financial Accounting Standards Board Statement No. 123R "Share Based
Payment" ("SFAS 123R") effective January 1, 2006 using the modified prospective
method. No unvested stock options were outstanding as of December 31, 2005. No
stock options were granted and no modifications to outstanding options were made
during the year ended December 30, 2006.

Had compensation cost for awards granted in Fiscal 2005 and Fiscal 2004
under the Company's stock-based compensation plans been determined based on the
fair value at the grant dates consistent with the method set forth in SFAS No.
123, the effect on the Company's net loss and loss per common share would have
been as follows:

FISCAL YEAR ENDED
---------------------------
December 31, January 1,
2005 2005
------------ ------------
Net income (loss)
As reported .............................. $ (26,256) $ (2,042)
Pro forma ................................ $ (28,335) $ (3,085)
Earnings (loss) per common share--basic
As reported .............................. $ (1.56) $ (0.12)
Pro forma ................................ $ (1.68) $ (0.18)
Earnings (loss) per common share--diluted
As reported .............................. $ (1.56) $ (0.12)
Pro forma ................................ $ (1.68) $ (0.18)

Pro forma compensation expense for options is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.

The Black-Scholes option-pricing model is used to estimate the fair
value on the date of grant of each option granted after December 15, 1994. The
assumptions used for stock option grants and employee stock purchase right
grants were as follows:

FISCAL YEAR ENDED
------------------------------------------
DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ------------

Expected volatility ........ N/A N/A 60.0%
Risk-free interest rate .... N/A N/A 3.8%

Expected life of options ... N/A N/A 7 years
Expected dividends ......... N/A N/A 1.2%

The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options with no vesting or transferability
restrictions. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions used
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.

11. SEGMENT REPORTING

The Company operates as a single business consisting of sales of two
products: upholstery fabric and specialty yarns. Management evaluates the
Company's financial performance in the aggregate and allocates the Company's
resources without distinguishing between yarn and fabric products.

Net foreign and export sales from the United States to unaffiliated
customers by major geographical area based upon shipments were as follows:

FISCAL YEAR ENDED
------------------------------------------
DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ------------

United States ............ $ 127,329 $ 195,344 $ 253,101
Canada ................... 7,233 10,111 12,892
Mexico ................... 6,058 6,265 7,915
Middle East .............. 1,499 2,351 4,493
South America ............ 4,544 3,923 2,567
Europe ................... 2,329 3,165 4,168
All other areas .......... 2,672 3,525 4,009
------------ ------------ ------------
$ 151,664 $ 224,684 $ 289,145
============ ============ ============

Net sales by product category are as follows:

FISCAL YEAR ENDED
------------------------------------------
DECEMBER 30, December 31, January 1,
2006 2005 2005
------------ ------------ ------------

Fabric .................... $ 147,126 $ 202,860 $ 268,701
Yarn ...................... 4,538 21,824 20,444
------------ ------------ ------------
$ 151,664 $ 224,684 $ 289,145
============ ============ ============

There were no customers accounting for more than 4.5% of the Company's
net sales during 2006.

12. EMPLOYEE BENEFIT PLANS
(reflects actual dollar amounts)

The Company has established a 401(k) plan (the "401(k) Plan") for
eligible employees of the Company who may contribute up to 100% of their annual
salaries (up to $15,000 for 2006) to the 401(k) Plan. All contributions made by
an employee are fully vested and are not subject to forfeiture. During Fiscal
2005 and Fiscal 2004, the Company contributed on behalf of each participating
employee an amount equal to 100% of the first $200 contributed by each employee
and 25% of the next $800 contributed by such employee, for a maximum annual
Company contribution of $400 per employee. During Fiscal 2005, the Plan was
amended to eliminate the mandatory employer match provision in the 401(k) Plan,
effective December 31, 2005. The Company's matching contribution was $0,
$389,000, and $517,000, in Fiscal 2006, 2005, and 2004, respectively. An
employee is fully vested in the contributions made by the Company upon his or
her completion of five years of participation in the 401 (k) Plan.

13. DEFERRED COMPENSATION PLAN

The Company maintains a deferred compensation plan for certain senior
executives of the Company. Benefits payable upon retirement are grossed up by
the Company's marginal tax rate. During 2005, the Company reduced Other
Long-term Liabilities and Selling, General, and Administrative expenses by
approximately $790, primarily due to the Company's executives contractually
waiving their rights to have their benefits grossed up by the marginal tax rate.

14. SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the results of operations for each of the
quarters within the years ended December 30, 2006 and December 31, 2005.

FIRST SECOND THIRD FOURTH
2006 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------

NET SALES ................................ $ 46,280 $ 42,880 $ 30,311 $ 32,193
GROSS MARGIN ............................. 5,441 5,225 1,997 2,192
GROSS MARGIN PERCENTAGE .................. 11.8% 12.2% 6.6% 6.8%
OPERATING LOSS ........................... (5,187) (17,194) (12,084) (14,191)
OPERATING LOSS PERCENTAGE ................ (11.2%) (40.1%) (39.9%) (44.1%)
LOSS BEFORE PROVISION FOR INCOME TAXES ... $ (6,362) $(18,376) $(12,834) $(16,513)
NET LOSS ................................. $ (4,135) $(12,130) $ (8,438) $(12,929)
LOSS PER COMMON SHARE--BASIC ............. $ (0.25) $ (0.72) $ (0.50) $ (0.77)
LOSS PER COMMON SHARE--DILUTED ........... $ (0.25) $ (0.72) $ (0.50) $ (0.77)

First Second Third Fourth
2005 Quarter Quarter Quarter Quarter
---- -------- -------- -------- --------

Net sales ................................ $ 59,215 $ 68,885 $ 46,457 $ 50,127
Gross margin ............................. 7,681 10,134 6,075 5,030
Gross margin percentage .................. 13.0% 14.7% 13.1% 10.0%
Operating loss ........................... (4,468) (11,526) (10,448) (7,349)
Operating loss percentage ................ (7.5%) (16.7%) (22.5%) (14.7%)
Loss before provision for income taxes ... $ (5,304) $(14,497) $(11,215) $ (8,222)
Net loss ................................. $ (3,090) $(10,342) $ (7,155) $ (5,669)
Loss per common share--basic ............. $ (0.18) $ (0.61) $ (0.43) $ (0.34)
Loss per common share--diluted ........... $ (0.18) $ (0.61) $ (0.43) $ (0.34)

(1) All quarters in 2006 and 2005 were 13 weeks.

(2) Earnings per common share for the quarters presented have each been
calculated separately. Accordingly, quarterly amounts may not sum to the
fiscal year amount presented.

15. ANTI-TAKEOVER PROVISIONS

Certain provisions of Delaware law and the Company's Certificate of
Incorporation could make it more difficult for a third party to acquire control
of the Company, even if such change in control would be beneficial to
stockholders. Also, Quaker's Certificate of Incorporation allows the Company to
issue preferred stock without stockholder approval. Such issuances could also
make it more difficult for a third party to acquire the Company.

In addition, under the terms of the 2006 Loan Agreements, a Change in
Control would constitute an Event of Default, as those terms are defined in the
2006 Loan Agreements. And finally, the Company is a party to change in control
agreements with each of Quaker's officers. In the event of a Termination of
Employment in connection with a Change in Control, as those terms are defined in
the agreements, the Company would be obligated to make certain payments,
expressed as a percentage of cash compensation, to the terminated officer or
officers. These provisions may have the effect of delaying, deferring or
dissuading a potential acquirer from acquiring outstanding shares of Common
Stock at a price that represents a premium to the then current trading price.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF QUAKER FABRIC CORPORATION:

In our opinion, the consolidated financial statements listed in the
index appearing under item 15(a) (i) present fairly, in all material respects,
the financial position of Quaker Fabric Corporation and its subsidiaries at
December 30, 2006 and December 31, 2005, and the results of their operations and
their cash flows for each of the three years in the period ended December 30,
2006 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(ii) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements 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. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

PricewaterhouseCoopers LLP
- --------------------------
Boston, Massachusetts
March 30, 2007

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Our management, with the participation of our Chief Executive Officer,
or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act), as of December
30, 2006. Based on this evaluation, our CEO and CFO concluded that, as of
December 30, 2006, our disclosure controls and procedures were (1) designed to
ensure that material information relating to us, including our consolidated
subsidiaries, is made known to our CEO and CFO by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

Implementation of the Company's restructuring plan, particularly during
the fourth quarter of 2006, has resulted in staffing reductions in virtually
every functional area of the Company, including those areas responsible for key
controls integral to the operation of the Company's internal controls over
financial reporting, such as our finance and accounting, information technology
("IT"), and purchasing areas. In some cases, a single individual has assumed
responsibility for work previously handled by one or more former Company
employees, resulting in decrease in our ability to provide for appropriate
segregation of duties and in some areas, employees with less experience handling
duties previously handled by more experienced staff members. Also, due to
constraints in our IT department, systems needed to support the Company's
relatively new offshore sourcing initiatives have not been fully developed,
requiring the use of alternate manual procedures, which by their nature increase
the risk of human error. And, due to recent increases in the complexity of the
payment terms and practices affecting our vendor and cash management programs,
manual procedures are also being used more frequently by our accounts payable
staff. Mitigating these changes is the fact that all corporate administrative
functions are centralized in a single location and management oversight with
respect to each functional area is very strong, with most key management
personnel bringing both significant professional experience and significant
years of service at the Company to the task. While management believes that
these recent changes in our internal control over financial reporting
environment have not materially affected the quality of our internal controls
over financial reporting, there can be no assurance that we will be able to
conclude in the future that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act. No other
changes in our internal control over financial reporting occurred during the
fiscal quarter ended December 30, 2006 that has materially effected, or is
reasonably likely to materially affect our internal control system over
financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information with respect to the directors of the Company required by
this item will be included in the Company's definitive proxy statement for its
2007 Annual Meeting of Stockholders (the "Proxy Statement") to be filed pursuant
to Regulation 14A, and such information is incorporated herein by reference.

The executive officers of the Company are as follows:

OFFICER
NAME AGE POSITION SINCE
------ ---- -------- -----

Larry A. Liebenow ... 63 President, Chief Executive Officer, 1989
and Director
James A. Dulude ..... 51 Vice President--Manufacturing 1990
Cynthia L. Gordan ... 59 Vice President, Secretary, and 1989
General Counsel
Paul J. Kelly ....... 62 Vice President--Finance, Chief Financial 1989
Officer and Treasurer
Thomas Muzekari ..... 66 Vice President--Sales 1996
M. Beatrice Spires .. 45 Vice President--Design and Merchandising 1996
Duncan Whitehead .... 64 Vice President--Research and Development 1990

LARRY A. LIEBENOW. Mr. Liebenow has served as President, Chief Executive
Officer, and a Director of the Company since September 1989.

JAMES A. DULUDE. Mr. Dulude has been employed by the Company since May
1986 and has served as Vice President--Manufacturing since August 1995.

CYNTHIA L. GORDAN. Ms. Gordan has been employed by the Company since
March 1988 and has served as Vice President, Secretary, and General Counsel of
the Company since March 1989. Ms. Gordan is also responsible for the Company's
Risk Management, Investor Relations and Human Resources functions.

PAUL J. KELLY. Mr. Kelly has served as Vice President--Finance, Chief
Financial Officer and Treasurer of the Company since December 1989, and since
November 1993 has also had responsibility for working with industry and
institutional analysts.

THOMAS H. MUZEKARI. Mr. Muzekari has served as Vice President--Sales
since March 2003, and was Vice President--Sales and Marketing from October 1998
until March 2003, and Vice President--Marketing from March 1996 until October
1998.

M. BEATRICE SPIRES. Ms. Spires has been employed by the Company since
September 1995 and has served as Vice President--Design and Merchandising since
March 2003, and was Vice President--Styling and Design from March 1996 until
March 2003.

DUNCAN WHITEHEAD. Mr. Whitehead has served as Vice President--Technology
and Development, and Yarn Sales since August 1995.

The Company's President, Secretary, and Treasurer are elected annually
by the Board at its first meeting following the annual meeting of stockholders.
All other executive officers hold office until their successors are chosen and
qualified.

The Company has adopted a code of business conduct applicable to all
directors, officers and employees. The Code of Business Conduct is available on
the Company's website at http//www.quakerfabric.com. Stockholders may request a
free copy of the Code of Business Conduct from:

Quaker Fabric Corporation
941 Grinnell Street
Fall River, MA 02721
Attn: Cynthia L. Gordan, Vice President and General Counsel

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Form 10-K

(i) Financial Statements

Consolidated Balance Sheets--December 30, 2006 and December 31, 2005

Consolidated Statements of Operations--For the years ended December 30,
2006, December 31, 2005, and January 1, 2005

Consolidated Statements of Comprehensive Income (Loss)--For the years
ended December 30, 2006, December 31, 2005, and January 1, 2005

Consolidated Statements of Changes in Stockholders' Equity--For the
years ended December 30, 2006, December 31, 2005, and January 1, 2005

Consolidated Statements of Cash Flows--For the years ended December 30,
2006, December 31, 2005, and January 1, 2005

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

(ii) Financial Statement Schedules

The following financial statement schedule of the Company included
herein should be read in conjunction with the audited financial
statements incorporated by reference in this Form 10-K.

Schedule II--Valuation and Qualifying Accounts

All other schedules for the Company are omitted because either they are
not applicable or the required information is shown in the financial
statements or notes thereto.

(b) Exhibits

3(i) -- Certificate of Incorporation of the Company, as amended.(1)

3(ii) -- By-laws of the Company.(1)

10.1 -- Loan and Security Agreement, dated as of October 31, 1990, between
the Company and Continental Bank N.A., as amended by Amendments Nos.
1 through 9 thereto.(1)

10.2 -- Securities Purchase Agreement, dated April 13, 1993, among the
Company, MLGA Fund II, L.P. and MLGAL Partners, as amended by
Amendment No. 1 thereto.(1)

10.3 -- Subscription Agreement, dated March 12, 1993, among the Company and
MLGA Fund II, L.P., Nortex Holdings, Inc., QFC Holdings Corporation,
and Larry Liebenow.(1)

10.4 -- Shareholders Agreement, dated March 12, 1993, by and among the
Company, Larry Liebenow, Ira Starr, and Sangwoo Ahn.(1)

10.5 -- Employment Agreement, dated as of March 12, 1993, between the Company
and Larry A. Liebenow.(1)

10.6 -- Director Indemnification Contract, dated October 18, 1989, between
the Company and Larry A. Liebenow.(1)

10.7 -- Director Indemnification Contract, dated October 18, 1989, between
the Company and Roberto Pesaro.(1)

10.8 -- Director Indemnification Contract, dated April 15, 1992, between the
Company and Samuel A. Plum.(1)

10.9 -- Director Indemnification Contract, dated May 2, 1991, between the
Company and Andrea Gotti-Lega.(1)

10.10 -- Severance Contract, dated August 15, 1988, between the Company and
Thomas J. Finneran.(1)

10.11 -- Severance Contract, dated May 26, 1989, between the Company and James
Dulude.(1)

10.12 -- Severance Contract, dated December 1, 1988, between the Company and
Cynthia Gordan.(1)

10.13 -- Equipment Financing Lease Agreement, dated September 18, 1992,
between QFR and United States Leasing Corporation.(1)

10.14 -- Equipment Financing Lease Agreement, dated September 29, 1992,
between QFR and KeyCorp Leasing pursuant to a Notice of Assignment
from U.S. Leasing.(1)

10.15 -- Equipment Financing Lease Agreement, dated February 16, 1989, between
QFR and Key Financial Services, Inc.(1)

10.16 -- Equipment Financing Lease Agreement, dated September 22, 1992,
between QFR and Dana Commercial Credit Corporation (Fleet National
Bank).(1)

10.17 -- Equipment Financing Lease Agreement, dated October 8, 1992, between
QFR and Capital Associates International, Inc.(1)

10.18 -- Equipment Financing Loan Agreement, dated August 31, 1992, between
QFR and HCFS Business Equipment Corporation.(1)

10.19 -- Equipment Financing Lease Agreement, dated September 13, 1991,
between QFR and Sovran Leasing and Finance Corp/NationsBanc Leasing
Corp.(1)

10.20 -- Equipment Financing Lease Agreement, dated December 18, 1990, between
QFR and IBM Credit Corporation.(1)

10.21 -- Equipment Financing Lease Agreement, dated May 5, 1993, between QFR
and The CIT Group.(1)

10.22 -- Equipment Financing Lease Agreement, dated June 30, 1993, between QFR
and AT&T Commercial Finance Corporation.(1)

10.23 -- Chicago, Illinois Showroom Lease, dated July 1, 1989, between the
Company and LaSalle National Bank, Trustee.(1)

10.24 -- Hickory, North Carolina Showroom Lease, dated June 15, 1993, between
the Company and Hickory Furniture Mart, Inc.(6)

10.25 -- High Point, North Carolina Showroom Lease, dated November 6, 1991,
between the Company and Market Square Limited Partnership.(1)

10.26 -- Los Angeles, California Showroom Lease, dated September 23, 1992,
between the Company and The L.A. Mart.(1)

10.27 -- Tupelo, Mississippi Showroom Lease, dated December 14, 1992, between
the Company and Mississippi Furniture Market, Inc.(6)

10.28 -- Mexico City, Mexico Warehouse Lease, dated June 6, 1993, between
Quaker Fabric Mexico, S.A. de C.V. and Irene Font Byrom.(1)

10.29 -- Licensing Agreement, dated May 17, 1990, between the Company as
Licensee and General Electric Company.(1)

10.30 -- Licensing Agreement, dated September 24, 1990, between the Company as
Licensee and Amoco Fabrics and Fibers Company.(1)

10.31 -- Software Licensing Agreement, dated October 29, 1987, between the
Company as Licensee and System Software Associates.(1)

10.32 -- Licensing Agreement, dated June 5, 1974, between the Company and E.I.
DuPont de Nemours & Company, Inc.(1)

10.33 -- Licensing Agreement, dated October 17, 1988, between the Company as
Licensee and Monsanto Company.(1)

10.34 -- Licensing Agreement, dated July 28, 1987, between the Company as
Licensee and Phillips Fibers Corporation.(1)

10.35 -- Software Licensing Agreement, dated July 7, 1988, between the Company
as Licensee and Software 2000, Inc.(1)

10.36 -- Licensing Agreement, dated February 1, 1977, between the Company as
Licensee and 3M.(1)

10.37 -- Software Licensing Agreement, dated April 8, 1992, between the
Company as Licensee and Premenos Corporation.(1)

10.38 -- Software Licensing Agreement, dated March 19, 1993, between the
Company as Licensee and Sophis U.S.A., Inc.(1)

10.39 -- Quaker Fabric Corporation 1993 Stock Option Plan and Form of Option
Agreement thereunder.(1)

10.40 -- Option to Purchase Common Stock issued to Nortex Holdings, Inc.,
effective April 13, 1993.(1)

10.41 -- Amendment No. 1, dated as of October 25, 1993, to Shareholders
Agreement, dated March 12, 1993, by and among the Company, Nortex
Holdings, Inc., MLGA Fund II, L.P., MLGAL Partners, W. Wallace
McDowell, Jr., William Ughetta, and Ira Starr.(1)]

10.42 -- Quaker Fabric Corporation Deferred Compensation Plan and related
Trust Agreement.(2)

10.43 -- Form of Split Dollar Agreement with Senior Officers.(2)

10.44 -- Credit Agreement, dated as of June 29, 1994, by and among the
Company, The First National Bank of Boston, and Continental Bank,
N.A.(3)

10.45 -- Equipment Schedule No. 5, dated as of September 14, 1994, to Master
Lease Agreement, dated as of May 5, 1993, between QFR and the CIT
Group/Equipment Financing, Inc.(4)

10.46 -- Commission and Sales Agreement, dated as of April 25,1994, between
QFR and Quaker Fabric Foreign Sales Corporation.(4)

10.47 -- Stock Option Agreement, dated as of July 28, 1995, between the
Company and Eriberto R. Scocimara.(5)

10.48 -- Amended and Restated Credit Agreement, dated December 18, 1995, among
the Company, QFR, Quaker Textile Corporation, Quaker Fabric Mexico,
S.A. de C.V., The First National Bank of Boston, and Fleet National
Bank.(5)

10.49 -- Note Purchase and Private Shelf Agreement, dated December 18, 1995,
among the Company, Prudential Insurance Company of America, and Pruco
Life Insurance Company.(5)

10.50 -- Guarantee Agreement, dated as of December 18, 1995, among the
Company, The Prudential Insurance Company of America, and Pruco Life
Insurance Company.(5)

10.51 -- Amendment Agreement No. 1, dated as of March 21, 1996, to that
certain Amended and Restated Credit Agreement, dated as of December
18, 1995, among the Company, QFR, Quaker Textile Corporation, Quaker
Fabric Mexico, S.A. de C.V., The First National Bank of Boston, and
Fleet National Bank.(5)

10.52 -- 1996 Stock Option Plan for Key Employees of QFR, dated April 26,
1996.(6)

10.53 -- Amendment Agreement No. 2, dated as of October 21, 1996, to that
certain Amended and Restated Credit Agreement, dated as of December
18, 1995, among the Company, QFR, Quaker Textile Corporation, Quaker
Fabric Mexico, S.A. de C.V., The First National Bank of Boston, and
Fleet National Bank.(6)

10.54 -- Software License Agreement dated October 31, 1996 between the Company
and System Software Associates Inc.(6)

10.55 -- Medical Expense Reimbursement Plan.(6)

10.56 -- High Point, North Carolina Warehouse Lease, dated April 1, 1996
between QFR and C&M Investments of High Point, Inc.(6)

10.57 -- Standard Industrial Lease Agreement, dated May 10, 1996, between CIIF
Associates II Limited Partnership and QFR.(6)

10.58 -- Rights Agreement dated March 4, 1997 between the Company and The
First National Bank of Boston relating to the Company's Stockholder
Rights Plan.(6)

10.59 -- 1997 Stock Option Plan.(6)

10.60 -- Amendment, dated as of February 24, 1997, to Employment Agreement
between the Company and Larry A. Liebenow.(6)

10.61 -- Amendment No. 4, dated as of December 19, 1997 to the Amended and
Restated Credit Agreement, dated as of December 18, 1995, by and
among QFR, Quaker Textile Corp., Quaker Fabric Mexico, S.A. de C.V.,
the Company, BankBoston and Fleet National Bank.(7)

10.62 -- Employee Stock Purchase Plan, dated as of October 1, 1997.(7)

10.63 -- Note Purchase Agreement dated October 10, 1997 among QFR, The
Prudential Insurance Company of America, and Pruco Life Insurance
Company.(7)

10.64 -- Guaranty Agreement, dated as of October 10, 1997, by the Company in
favor of the Prudential Insurance Company of America and PrucoLife
Insurance Company.(7)

10.65 -- Commercial Lease between QFR and Clocktower Enterprises, Inc., dated
as of August 1, 1997.(7)

10.66 -- Lease between Robbins Manufacturing Co., Inc. and QFR, dated as of
October 22, 1997.(7)

10.67 -- Lease between Tilly Realty Associates and QFR, dated as of December
9, 1997.(7)

10.68 -- Lease between 1 Lewiston Street, LLC and QFR, dated as of March 16,
1998.(7)

10.69 -- Purchase and Sale Agreement, dated August 7, 1998, between QFR and
Rodney Realty Trust.(8)

10.70 -- Stock Option Agreement, dated as of October 19, 1998, between the
Company and Mark R. Hellwig.(8)

10.71 -- Lease between ADAP, Inc. and QFR, dated as of December 11, 1998.(8)

10.72 -- Purchase and Sale Agreement, dated January 6, 1999, between QFR and
Montaup Electric Company.(8)

10.73 -- Purchase and Sale Agreement, dated January 22, 1999, between QFR and
Jefferson Realty Partnership.(8)

10.74 -- Amendment No. 6, dated as of March 26, 1999 to the Amended and
Restated Credit Agreement, dated as of December 18, 1995, by and
among QFR, Quaker Textile Corp., Quaker Fabric Mexico, S.A. de C.V.,
the Company, BankBoston and Fleet National Bank.(8)

10.75 -- Amendment No. 1, dated as of March 26, 1999 to the Note Purchase
Agreement dated as of October 10, 1997 among QFR, The Prudential
Insurance Company of America, and Pruco Life Insurance Company.(8)

10.76 -- Purchase and Sale Agreement, dated May, 1999, between QFR and The
Center for Child Care and Development, Inc.(9)

10.77 -- Tax Increment Financing Agreement, dated May 27, 1999, between the
City of Fall River and QFR.(9)

10.78 -- Memorandum of Understanding, dated July 1, 1999, between the City of
Fall River and QFR.(9)

10.79 -- Lease between Frank B. Peters, Jr. and QFR, dated as of June 15,
1999.(9)

10.80 -- Amendment No. 7, dated as of September 30, 1999 to the Amended and
Restated Credit Agreement, dated as of December 18, 1995, by and
among QFR, Quaker Textile Corp., Quaker Fabric Mexico, S.A. de C.V.,
the Company, BankBoston and Fleet National Bank.(9)

10.81 -- Lease between Hamriyah Free Zone Authority and QFR, dated as of
November 28, 1999.(9)

10.82 -- Form of change in control agreement, dated December 17, 1999, between
the Company and each of its vice presidents.(9)

10.83 -- Agreement concerning change in control, dated December 17, 1999,
between the Company and its controller.(9)

10.84 -- Amendment No. 1 to the Company's Deferred Compensation Plan, dated
December 17, 1999.(9)

10.85 -- Amendment No. 1 to the Split Dollar Insurance Agreements between QFR
and each of its officers.(9)

10.86 -- Amendment, dated as of December 17, 1999, to Employment Agreement
between the Company and Larry A. Liebenow.(9)

10.87 -- 1999 Stock Purchase Loan Program and form of related Secured
Promissory Note and Stock Pledge Agreement.(9)

10.88 -- Amendment No. 2, dated as of December 28, 1999 to the Note Purchase
Agreement dated as of October 10, 1997 among QFR, The Prudential
Insurance Company of America, and Pruco Life Insurance Company.(9)

10.89 -- Software License Agreement, dated December 29, 1999, between QFR as
Licensee and Paragon Management Systems, Inc.(9)

10.90 -- Mexico City, Mexico Warehouse Lease, dated February 6, 2000, between
Quaker Fabric Mexico, S.A. de C.V. and Irene Font Byrom.(10)

10.91 -- Amendment to the 1997 Stock Option Plan.(10)

10.92 -- Lease between Sayre A. Litchman and QFR, dated June 30, 2000.(10)

10.93 -- Software License Agreement dated April 30, 2001 between QFR and SSA
Global Technologies, Inc.(11)

10.94 -- Purchase and Sale Agreement, dated June 29, 2001, between QFR and
Whaling Mfg. Co., Inc.(11)

10.95 -- High Point, North Carolina Warehouse Lease Extension Agreement, dated
July 29, 2001, between QFR and Bresmiro Associates, LLC.(11)

10.96 -- Purchase and Sale Agreement, dated September 4, 2001, between QFR and
Charles McAnsin Associates, LP.(11)

10.97 -- Los Angeles Warehouse First Amendment to Standard Industrial Lease
Agreement, dated September 24, 2001, between QFR and CIIF Associates
II, LP.(11)

10.98 -- Energy Supply Agreement, dated December 4, 2001, between QFR and
Select Energy, Inc.(11)

10.99 -- Second Amended and Restated Credit Agreement, dated February 14,
2002, among QFR, Quaker Textile Corp., Quaker Fabric Mexico, S.A. de
C.V., the Company, and Fleet National Bank.(11)

10.100 -- Note Purchase and Private Shelf Agreement, dated February 14, 2002,
between QFR and The Prudential Insurance Company of America.(11)

10.101 -- Form of stock option agreement between the Company and outside
directors, prior to participation in the 1997 Stock Option Plan.(12)

10.102 -- Natural Gas Service Terms Agreement, dated May 20, 2002, between QFR
and AllEnergy Gas and Electric Marketing Company, L.L.C.(12)

10.103 -- Form of extension of change in control agreement, dated December 13,
2002, between the Company, each of its vice presidents, and its
controller.(12)

10.104 -- Form of indemnification agreement, dated December 13, 2002, between
the Company and each of its directors and officers.(12)

10.105 -- Software License Agreement dated December 31, 2002 between QFR and
SPSS, Inc.(12)

10.106 -- Mexico City, Mexico Warehouse Lease, dated February 6, 2003, between
Quaker Fabric Mexico, S.A. de C.V. and Irene Font Byrom.(12)

10.107 -- Amendment No. 1 to Software License Agreement, dated February 24,
2003, between QFR and Adexa, Inc.(12)

*10.108 -- Amended and Restated Employment Agreement, dated as of March 17,
2004, between the Company and Larry A. Liebenow.(13)

10.109 -- Quaker Fabric Corporation 2004 Stock Incentive Plan.(14)

10.110 -- Purchase and Sale Agreement with respect to 81 Commerce Drive, Fall
River, Massachusetts dated July 2, 2004 by and among Charles McAnsin
Associates, A Limited Partnership, as Seller, Joan Fabrics
Corporation, Main Street Textiles, L.P., Quaker Fabric Corporation of
Fall River, as Purchaser, and Stewart Title Guaranty Company, as
Escrow Agent.(15)

10.111 -- Amendment effective as of October 1, 2004 to the Note Agreement dated
as of October 10, 1997 between Quaker Fabric Corporation of Fall
River, Pruco Life Insurance Company and the Prudential Insurance
Company of America.(16)

10.112 -- Amendment effective as of October 1, 2004 to the Note Purchase and
Private Shelf Agreement dated as of February 14, 2002 between Quaker
Fabric Corporation of Fall River, Pruco Life Insurance Company and
The Prudential Insurance Company of America.(16)

10.113 -- Amendment No. 1 to Second Amended and Restated Credit Agreement dated
as of August 16, 2004 by and among Quaker Fabric Corporation of Fall
River, Quaker Textile Corporation and Quaker Fabric Mexico, S.A. de
C.V., as Borrowers, Quaker Fabric Corporation, as Parent, and Fleet
National Bank, as the Lender.(16)

10.114 -- Lease Agreement dated December 16, 2004 by and between Charles
McAnsin Associates, A Limited Partnership, as Landlord, and Quaker
Fabric Corporation of Fall River, as Tenant.(17)

10.115 -- Lease Guaranty dated December 16, 2004 executed by Quaker Fabric
Corporation, as Guarantor.(17)

10.116 -- Use and Occupancy Agreement dated December 16, 2004 by and between
Quaker Fabric Corporation of Fall River, as Licensor, and Joan
Fabrics Corporation, as Licensee.(17)

10.117 -- Escrow Agreement dated December 16, 2004 by and among Wilmer Cutler
Pickering Hale and Dorr LLP, as Escrow Agent, Quaker Fabric
Corporation of Fall River, Quaker Fabric Corporation, and Charles
McAnsin Associates, A Limited Partnership.(17)

10.118 -- Waiver Agreement dated as of December 22, 2004 to the Note Agreement
dated as of October 10, 1997 and the Note Purchase and Private Shelf
Agreement, dated as of February 14, 2002 by and among Quaker Fabric
Corporation of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America.(18)

10.119 -- Waiver and Amendment dated as of December 20, 2004 to the Second
Amended and Restated Credit Agreement dated as of February 14, 2002
by and among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Borrowers,
Quaker Fabric Corporation, as Parent, and Fleet National Bank, as the
Lender.(18)

10.120 -- Escrow Extension Agreement dated January 14, 2005 by and among Wilmer
Cutler Pickering Hale and Dorr LLP, as Escrow Agent, Quaker Fabric
Corporation of Fall River, Quaker Fabric Corporation and Charles
McAnsin Associates, A Limited Partnership.(19)

10.121 -- Escrow Extension Agreement dated January 20, 2005 by and among Wilmer
Cutler Pickering Hale and Dorr LLP, as Escrow Agent, Quaker Fabric
Corporation of Fall River, Quaker Fabric Corporation and Charles
McAnsin Associates, A Limited Partnership.(19)

10.122 -- Waiver and Amendment dated as of March 4, 2005 to Second Amended and
Restated Credit Agreement dated as of February 14, 2002 by and among
Quaker Fabric Corporation of Fall River, Quaker Textile Corporation
and Quaker Fabric Mexico, S.A. de C.V., as Borrowers, Quaker Fabric
Corporation, as Parent, and Fleet National Bank, as the Lender.(20)

10.123 -- Waiver Agreement dated as of March 4, 2005 to the Note Agreement
dated as of October 10, 1997 and the Note Purchase and Private Shelf
Agreement, dated as of February 14, 2002 by and among Quaker Fabric
Corporation of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America.(20)

10.124 -- Waiver and Amendment dated as of February 28, 2005 to Second Amended
and Restated Credit Agreement dated as of February 14, 2002 by and
among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Borrowers,
Quaker Fabric Corporation, as Parent, and Fleet National Bank, as the
Lender.(20)

10.125 -- Waiver Agreement dated as of February 28, 2005 to the Note Agreement
dated as of October 10, 1997 and the Note Purchase and Private Shelf
Agreement, dated as of February 14, 2002 by and among Quaker Fabric
Corporation of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America.(20)

10.126 -- Forbearance and Amendment dated as of March 11, 2005 to Second
Amended and Restated Credit Agreement dated as of February 14, 2002
by and among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Borrowers,
Quaker Fabric Corporation, as Parent, and Fleet National Bank, as the
Lender.(21)

10.127 -- Forbearance Agreement dated as of March 11, 2005 to the Note
Agreement dated as of October 10, 1997 and the Note Purchase and
Private Shelf Agreement, dated as of February 14, 2002 by and among
Quaker Fabric Corporation of Fall River, Pruco Life Insurance Company
and The Prudential Insurance Company of America.(21)

10.128 -- Intercreditor and Collateral Agency Agreement (dated as of March 31,
2005) by and among Fleet National Bank, (the "Bank"), Pruco Life
Insurance Company and The Prudential Insurance Company of America
(the "Noteholders" and, together with the Bank, the "Lenders") and
Fleet National Bank, as Collateral Agent on behalf of the
Lenders.(22)

10.129 -- Security Agreement (dated as of March 31, 2005) between Quaker Fabric
Corporation of Fall River, Quaker Textile Corporation and Quaker
Fabric Mexico, S.A. de C.V., as Borrowers, Quaker Fabric Corporation,
as the Parent, and Fleet National Bank, as Collateral Agent.(22)

10.130 -- Second Amended and Restated Pledge Agreement (dated as of March 31,
005) among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation, Quaker Fabric Mexico, S.A. de C.V., and Quaker Fabric
Corporation, (the "Companies"), and Fleet National Bank, (the
"Bank"), Pruco Life Insurance Company and The Prudential Insurance
Company of America (the "Noteholders" and, together with the Bank,
the "Lenders") and Fleet National Bank, as Collateral Agent on behalf
of the Lenders.(22)

10.131 -- Guaranty Agreement (dated as of March 31, 2005) by Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Guarantors, in
favor of Pruco Life Insurance Company and The Prudential Insurance
Company of America with respect to the Senior Note Agreement.(22)

10.132 -- Guaranty Agreement (dated as of March 31, 2005) by Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as Guarantors, in
favor of Pruco Life Insurance Company and The Prudential Insurance
Company of America with respect to the Series A Note Agreement.(22)

10.133 -- Revolving Credit and Term Loan Agreement (dated as of May 18, 2005)
by and among Quaker Fabric Corporation of Fall River, as Borrower;
Bank of America, N.A. and the Other Lending Institutions which are or
may become parties thereto (the "Lenders"); Bank of America, N.A., as
Administrative Agent and Issuing Bank; Fleet National Bank, as Cash
Management Bank; and Banc of America Securities LLC, as Sole Lead
Arranger and Book Manager (the "2005 Credit Agreement").(23)

10.134 -- Security Agreement (dated as of May 18, 2005) among Quaker Fabric
Corporation of Fall River, as Borrower; Quaker Textile Corporation,
Quaker Fabric Mexico, S.A. de C.V., and Quaker Fabric Corporation, as
Guarantors; and Bank of America, N.A., as Administrative Agent on
behalf of the Lenders.(23)

10.135 -- Guaranty Agreement (dated as of May 18, 2005) by Quaker Fabric
Corporation, Quaker Textile Corporation and Quaker Fabric Mexico,
S.A. de C.V., as Guarantors, in favor of Bank of America, N.A. and
the other lenders which are or may become parties to the 2005 Credit
Agreement.(23)

10.136 -- Amendment No. 1 (dated as of July 26, 2005 and effective as of July
1, 2005) to Revolving Credit and Term Loan Agreement (dated as of May
18, 2005) by and among Quaker Fabric Corporation of Fall River, as
Borrower; Bank of America, N.A. and the Other Lending Institutions
which are or may become parties thereto; Bank of America, N.A., as
Administrative Agent and Issuing Bank; Fleet National Bank, as Cash
Management Bank; and Banc of America Securities LLC, as Sole Lead
Arranger and Book Manager.(24)

10.137 -- Amendment No. 2 (dated as of October 25, 2005 and effective as of
October 21, 2005) to Revolving Credit and Term Loan Agreement (dated
as of May 18, 2005) by and among Quaker Fabric Corporation of Fall
River, as Borrower; Bank of America, N.A. and the Other Lending
Institutions which are or may become parties thereto; Bank of
America, N.A., as Administrative Agent and Issuing Bank; Fleet
National Bank, as Cash Management Bank; and Banc of America
Securities LLC, as Sole Lead Arranger and Book Manager.(25)

10.138 -- Amended and Restated Non-Exclusive Licensing Agreement (dated as of
November 1, 2005) between Quaker Fabric Corporation of Fall River,
and Hi-Tex, Inc.

10.139 -- Amendment No. 3 (dated as of February 3, 2006 and effective as of
December 30, 2005) to Revolving Credit and Term Loan Agreement (dated
as of May 18, 2005) by and among Quaker Fabric Corporation of Fall
River, as Borrower; Bank of America, N.A. and the Other Lending
Institutions which are or may become parties thereto; Bank of
America, N.A., as Administrative Agent and Issuing Bank; Fleet
National Bank, as Cash Management Bank; and Banc of America
Securities LLC, as Sole Lead Arranger and Book Manager.(26)

10.140 -- Purchase and Sale Agreement dated March 3, 2006 by and between Quaker
Fabric Corporation of Fall River, as Seller, and Strictly Realty LLC,
as Buyer.(27)

10.141 -- Purchase and Sale Agreement dated March 14, 2006 by and between
Quaker Fabric Corporation of Fall River, as Seller, and Fred Smith of
Cumberland, Rhode Island, as Buyer.(28)

10.142 -- Waiver and Amendment No. 4 dated as of March 22, 2006 to Revolving
Credit and Term Loan Agreement (dated as of May 18, 2005) by and
among Quaker Fabric Corporation of Fall River, as Borrower; Bank of
America, N.A. and the Other Lending Institutions which are or may
become parties thereto; Bank of America, N.A., as Administrative
Agent and Issuing Bank; Fleet National Bank, as Cash Management Bank;
and Banc of America Securities LLC, as Sole Lead Arranger and Book
Manager.(29)

10.143 -- Engagement Letter dated March 22, 2006 by and between Quaker Fabric
Corporation and Alvarez and Marsal.(30)

10.144 -- Amendment No. 5 dated as of May 6, 2006 to Revolving Credit and Term
Loan Agreement (dated as of May 18, 2005) by and among Quaker Fabric
Corporation of Fall River, as Borrower; Bank of America, N.A. and the
other Lending Institutions which are or may become parties thereto;
Bank of America, N.A., as Administrative Agent and Issuing Bank;
Fleet National Bank, as Cash Management Bank; and Banc of America
Securities LLC, as Sole Lead Arranger and Book Manager.(31)

10.145 -- Amended and Restated Revolving Credit Agreement (dated as of November
9, 2006) by and among Quaker Fabric Corporation of Fall River, as
Borrower; Bank of America, N.A. and the Other Lending Institutions
which are or may become parties thereto (the "Revolving Credit
Lenders"); and Bank of America, N.A., as Administrative Agent for the
Revolving Credit Lenders, Issuing Bank and Cash Management Bank (the
"2006 Revolving Credit Agreement").(32)

10.146 -- Amendment and Reaffirmation of Loan Documents (dated as of November
9, 2006) among Quaker Fabric Corporation of Fall River, as Borrower;
Quaker Textile Corporation, Quaker Fabric Mexico, S.A. de C.V., and
Quaker Fabric Corporation, as Guarantors; and Bank of America, N.A.,
as Administrative Agent on behalf of the Revolving Credit
Lenders.(32)

10.147 -- Environmental Indemnity Agreement (dated as of November 9, 2006) by
and among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation, Quaker Fabric Mexico, S.A. de C.V. and Quaker Fabric
Corporation, as Indemnitors, and the Revolving Credit Lenders and
Bank of America, N.A., as Administrative Agent for the Revolving
Credit Lenders, as Indemnitees.(32)

10.148 -- Term Loan Agreement (dated as of November 9, 2006) by and among
Quaker Fabric Corporation of Fall River, as Borrower; 1903 Debt Fund,
LP, and the Other Lending Institutions which are or may become
parties thereto (the "Term Loan Lenders") and GB Merchant Partners,
LLC, as Administrative Agent for the Term Loan Lenders (the "2006
Term Loan Agreement").(32)

10.149 -- Security Agreement (dated as of November 9, 2006) among Quaker Fabric
Corporation of Fall River, as Borrower; Quaker Textile Corporation,
Quaker Fabric Mexico, S.A. de C.V., and Quaker Fabric Corporation, as
Guarantors; and GB Merchant Partners, LLC, as Administrative Agent on
behalf of the Term Loan Lenders.(32)

10.150 -- Guaranty Agreement (dated as of November 9, 2006) by Quaker Fabric
Corporation, Quaker Textile Corporation and Quaker Fabric Mexico,
S.A. de C.V., as Guarantors, in favor of 1903 Debt Fund, LP and the
Other Lending Institutions which are or may become parties to the
2006 Term Loan Agreement.(32)

10.151 -- Environmental Indemnity Agreement (dated as of November 9, 2006) by
and among Quaker Fabric Corporation of Fall River, Quaker Textile
Corporation, Quaker Fabric Mexico, S.A. de C.V. and Quaker Fabric
Corporation, as Indemnitors, and 1903 Debt Fund, LP, the Other
Lending Institutions which are or may become parties to the 2006 Term
Loan Agreement and GB Merchant Partners, LLC, as Administrative Agent
for the Term Loan Lenders, as Indemnitees.(32)

10.152 -- Intercreditor Agreement (dated as of November 9, 2006) by and among
Bank of America, N.A., as Administrative Agent for the Revolving
Credit Lenders, GB Merchant Partners, LLC, as Administrative Agent
for the Term Loan Lenders, Quaker Fabric Corporation of Fall River,
as Borrower, Quaker Fabric Corporation, Parent, and the other Credit
Parties named on the signature pages of the Agreement.(32)

10.153 -- Amendment No. 1 (dated as of December 1, 2006) to the Term Loan
Agreement (dated as of November 9, 2006) by and among Quaker Fabric
Corporation of Fall River, as Borrower; 1903 Debt Fund, LP, and the
Other Lending Institutions which are or may become parties thereto
(the "Term Loan Lenders") and GB Merchant Partners, LLC, as
Administrative Agent for the Term Loan Lenders (the "2006 Term Loan
Agreement").(33)

10.154 -- Plant C Purchase and Sale Agreement dated February 20, 2007 by and
between Quaker Fabric Corporation of Fall River, as Seller, and
Rosewood Management Associates, Inc., a Massachusetts corporation, as
Buyer. (34)

-- Subsidiaries.(5)

*23 -- Consent of PricewaterhouseCoopers LLP.

*31 -- Certificates of Chief Executive Officer and Chief Financial Officer
pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a)
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
dated March 30, 2007.

*32 -- Certificate of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. section 1350 dated March 30, 2007.

- ----------

(1) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 33-69002, initially filed with the Securities
and Exchange Commission on September 17, 1993, as amended.

(2) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 1, 1994.

(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 2, 1994.

(4) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994.

(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 30, 1995.

(6) Incorporated by reference to the Company's Registration Statement on
Form S-1, Registration No. 333-21957, initially filed with the
Securities and Exchange Commission on February 25, 1997, as amended.

(7) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 3, 1998.

(8) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 2, 1999.

(9) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 1, 2000.

(10) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 30, 2000.

(11) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended December 29, 2001.

(12) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 4, 2003.

(13) Incorporated by reference to the Company's Annual Report on Form 10-K
for the fiscal year ended January 3, 2004.

(14) Incorporated by reference to the Company's 2004 Proxy Statement.

(15) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 2, 2004.

(16) Incorporated by reference to the Company's Current Report on Form 8-K
dated October 12, 2004.

(17) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 16, 2004.

(18) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 20, 2004.

(19) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 21, 2005.

(20) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 28, 2005.

(21) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 11, 2005.

(22) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 31, 2005.

(23) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 18, 2005.

(24) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 26, 2005.

(25) Incorporated by reference to the Company's Current Report on Form 8-K
dated October 25, 2005.

(26) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 3, 2006.

(27) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 3, 2006.

(28) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 14, 2006.

(29) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 22, 2006.

(30) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 22, 2006.

(31) Incorporated by reference to the Company's Current Report on Form 8-K
dated June 5, 2006.

(32) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 9, 2006.

(33) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 1, 2006.

(34) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 20, 2007.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 30, 2007.

QUAKER FABRIC CORPORATION

By: /s/ LARRY A. LIEBENOW
----------------------------
LARRY A. LIEBENOW
CHIEF EXECUTIVE OFFICER,
PRESIDENT, AND DIRECTOR

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- -----

/s/ LARRY A. LIEBENOW Chief Executive Officer, March 30, 2007
- ------------------------------- President, and Director
(LARRY A. LIEBENOW)

/s/ PAUL J. KELLY Vice President--Finance March 30, 2007
- ------------------------------- (Chief Financial and
(PAUL J. KELLY) Accounting Officer)

/s/ SANGWOO AHN Chairman of the Board March 30, 2007
- -------------------------------
(SANGWOO AHN)

/s/ JERRY I. PORRAS Director March 30, 2007
- -------------------------------
(JERRY I. PORRAS)

/s/ ERIBERTO R. SCOCIMARA Director March 30, 2007
- -------------------------------
(ERIBERTO R. SCOCIMARA)

SCHEDULE II

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 1, 2005, DECEMBER 31, 2005 AND DECEMBER 30, 2006
(DOLLARS IN THOUSANDS)

NET BALANCE
BALANCE AT PROVISIONS DEDUCTIONS AT END
BEGINNING CHARGED TO FROM OF
DESCRIPTIONS OF PERIOD OPERATIONS ALLOWANCES PERIOD
----------- ---------- ---------- ---------- ----------

Year Ended January 1, 2005
Bad Debt Reserve ........................ $ 846 $ 1,141 $ (1,027) $ 960
Sales Returns & Allowances Reserve ...... $ 1,243 $ 3,531 $ (3,700) $ 1,074
Obsolete and Excess Inventory Reserve ... $ 1,360 $ 800 $ (1,337) $ 823
Year Ended December 31, 2005
Bad Debt Reserve ........................ $ 960 $ 606 $ (683) $ 883
Sales Returns & Allowances Reserve ...... $ 1,074 $ 3,014 $ (3,508) $ 580
Obsolete and Excess Inventory Reserve ... $ 823 $ 500 $ (1,002) $ 321
Year Ended December 30, 2006
Bad Debt Reserve ........................ $ 883 $ 1,652 $ (1,181) $ 1,354
Sales Returns & Allowances Reserve ...... $ 580 $ 2,683 $ (2,598) $ 665
Obsolete and Excess Inventory Reserve ... $ 321 $ 1,279 $ (24) $ 1,576

GENERAL INFORMATION

DIRECTORS
- ---------

SANGWOO AHN DR. JERRY I. PORRAS,
CHAIRMAN OF THE BOARD LANE PROFESSOR OF ORGANIZATIONAL
BEHAVIOR AND CHANGE, EMERITUS
Graduate School of Business--
Stanford University
LARRY A. LIEBENOW
PRESIDENT AND CEO
QUAKER FABRIC CORPORATION ERIBERTO R. SCOCIMARA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Hungarian-American Enterprise Fund

COMMITTEES
- ----------

AUDIT COMMITTEE NOMINATING AND CORPORATE GOVERNANCE
Sangwoo Ahn COMMITTEE
Jerry I. Porras Sangwoo Ahn
Eriberto R. Scocimara Jerry I. Porras
Eriberto R. Scocimara
COMPENSATION AND STOCK OPTION COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

OFFICERS
- --------

LARRY A. LIEBENOW PAUL J. KELLY
PRESIDENT AND VICE PRESIDENT--FINANCE,
CHIEF EXECUTIVE OFFICER TREASURER AND CHIEF FINANCIAL OFFICER

THOMAS H. MUZEKARI
MICHAEL E. COSTA VICE PRESIDENT
CONTROLLER SALES

JAMES A. DULUDE BEATRICE SPIRES
VICE PRESIDENT VICE PRESIDENT
MANUFACTURING DESIGN AND MERCHANDISING

CYNTHIA L. GORDAN DUNCAN WHITEHEAD
VICE PRESIDENT, SECRETARY VICE PRESIDENT
AND GENERAL COUNSEL RESEARCH AND DEVELOPMENT

CORPORATE DATA
- --------------

CORPORATE OFFICE INDEPENDENT REGISTERED PUBLIC
Quaker Fabric Corporation ACCOUNTING FIRM
941 Grinnell Street PricewaterhouseCoopers LLP
Fall River, Massachusetts 02721 125 High Street
(508) 678-1951 Boston, Massachusetts 02110

ANNUAL MEETING LEGAL COUNSEL
11:00 a.m., May 25, 2006 Proskauer Rose LLP
Quaker Fabric Corporation 1585 Broadway
1082 Davol Street New York, New York 10036
Fall River, Massachusetts 02720

TRANSFER AGENT AND REGISTRAR NASDAQ: QFAB
Computershare Investor Services
250 Royall Street
Canton, MA 02021
(781) 575-2000
http://www.computershare.com