1. During 1998, the Company recorded a charge of $2.9 million for the write-down of assets to be disposed of relating to the acquisition of World.
2. (a)     The Company recorded a one-time charge of $7.0 million in 2000, reflecting the settlement of two class action lawsuits.

3. 
   

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

4. The

   (c)     In 2004, the Company recorded a one-time chargereclassified certain prior period financial statement balances to conform to current presentations to include sales distribution costs in selling, general and administrative costs rather than cost of $17.7 millionsales and certain freight allowances in 1998 for transaction expenses related to the World merger.

5. cost of sales.

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

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

GeneralOverview

      The Company is a leading producer of floor covering products for residential and commercial applications in the United States with net sales in 2004 in excess of $5.8 billion. The Company is the second largest carpet and rugs manufacturer, and a leading manufacturer, marketer and distributor of ceramic tile and natural stone, in the United States. The Company has two reporting segments, the Mohawk segment and the Dal-Tile segment. The Mohawk segment distributes its product lines, which include carpet, rugs, pad, ceramic tile, hardwood, resilient and laminate through its network of approximately 52 regional distribution centers and satellite warehouses using its fleet of company-operated trucks, common carrier or rail transportation. The segment product lines are purchased by independent floor covering retailers, home centers, mass merchandisers, department stores, independent distributors, commercial dealers and commercial end users. The Dal-Tile segment product lines include ceramic tile, porcelain tile and stone products distributed through approximately 244 company-operated sales service centers and regional distribution centers using primarily common carriers and rail transportation. The segment product lines are purchased by tile specialty dealers, tile contractors, floor covering retailers, commercial end users, independent distributors and home centers.

      The primary categories of the United States floor covering industry include carpet and rugs (63%), ceramic tile (12%), hardwood (10%), resilient and rubber (9%) and laminate (6%). Compound average growth rates for all categories, except the resilient and rubber category, for the period from 1998 through 2003 have met or exceeded the growth rates (measured in sales dollars) for both the gross domestic product of the United States and housing starts over the same period. During this period, the three-year period ended December 31, 2002,compound average growth rate was 3.0% for carpet and rugs, 7.0% for ceramic tile, 1.2% for resilient and rubber, 20.9% for laminate, and 7.9% for hardwood.

      The Company reported net earnings of $368.6 million and EPS of $5.46, for 2004, up 19% compared to net earnings of $310.1 million and $4.62 EPS for 2003. The improvement in net earnings and EPS resulted from strong internal sales growth from both the Mohawk and Dal-Tile segments, improved manufacturing efficiencies, better leveraging of selling, general and administrative costs and the Lees Carpet acquisition, offset by higher raw material and energy costs. In addition, the Company continuedhas implemented multiple price increases within the Mohawk segment during 2004 to experience growth both internallyoffset increases in raw material and through acquisitions.

      On November 14, 2000,energy prices. The Company has received formal notice of further cost increases to be implemented during the first quarter of 2005, and believes the continuing high level of commodity costs could continue to impact raw material costs in the future. The Company acquired certain assetsbelieves these costs will stabilize over the long-term but the short-term trend of Crown Crafts. Under the agreement, the Company paid approximately $37 million in cash for substantially all of the fixed assets and inventory of the division. The acquisition was accounted for using the purchase method of accounting.these costs is uncertain.

      On March 20, 2002, the Company acquired all of the outstanding capital stock of Dal-Tile, a leading manufacturer and distributor of ceramic tile in the United States, for approximately $1,469 million consisting of approximately 12.9 million shares of the Company's common stock, options to purchase approximately 2.1 million shares of the Company's commonin stock and $718 million in cash. The Company's common stock and options were valued at $751 million based on the measurement date stock price of $55.04 per share ($710.4 million) and the estimated fair value of options using the Black-Scholes option-pricing model ($40.3 million). The transaction will bewas accounted for using the purchase method of accounting and, accordingly, the results of operations of Dal-Tile have been included in the Company's consolidated financial statements from March 20, 2002. The purchase price was allocated to the assets acquired and liabilities assumed based upon estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $1,168.3 million was recorded as goodwill.since that date. The primary reasonsreason for the acquisition included:

• was to expand the ability to combine Mohawk's current effortsCompany's presence in the hard-flooring business with Dal-Tile's larger, more established ceramic tile and natural stone business;
• markets.

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

  
  

  Results of Operations

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

  	For the Years Ended December 31,
  	2004				2003			2002
  	(In thousands)
  Statement of earnings data:
  Net sales	$ 5,880,372		100.0%		4,999,381	100.0%		4,516,957	100.0%
  Cost of sales	4,259,531		72.4%		3,605,579	72.1%		3,247,865	71.9%
  Gross profit	1,620,841		27.6%		1,393,802	27.9%		1,269,092	28.1%
  Selling, general and administrative
  expenses	985,251		16.8%		851,773	17.0%		747,027	16.5%
  Operating income	635,590		10.8%		542,029	10.9%		522,065	11.6%
  Interest expense	53,392		0.9%		55,575	1.1%		68,972	1.5%
  Other (income) expense, net	4,809		0.1%		(1,980)	0.0%		9,464	0.2%
  	58,201		1.0%		53,595	1.1%		78,436	1.7%
  Earnings before income taxes	577,389		9.8%		488,434	9.8%		443,629	9.8%
  Income taxes	208,767		3.6%		178,285	3.6%		159,140	3.5%
  Net earnings	$    368,622		6.3%		310,149	6.2%		284,489	6.2%

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

        Net sales for the year ended December 31, 2004, were $5,880.4 million, reflecting an increase of $881.0 million, or approximately 17.6%, over the $4,999.4 million reported for the year ended December 31, 2003. The increased net sales are primarily attributable to strong internal sales growth from both the Mohawk and Dal-Tile's existing distribution channels to increaseDal-Tile segments. The Mohawk segment recorded net sales of both carpets$4,368.8 million in 2004 compared to $3,730.8 million in 2003, representing an increase of $638.0 million or approximately 17.1%. The increase was attributable to strong internal growth in all product categories and hard floorcoverings;

• the potentialLees Carpet acquisition. The Dal-Tile segment recorded net sales of $1,511.5 million in 2004, reflecting an increase of $243.0 million or 19.2%, over the $1,268.5 million reported in the year ended December 31, 2003. The increase was mostly attributable to improve servicestrong internal growth in all product categories with stone and reducefloor tile reflecting the strongest growth.

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

  		2004		2003		Change
  First quarter		$     1,389,725		1,083,422		28.3	%
  Second quarter		1,485,897		1,245,870		19.3
  Third quarter		1,529,651		1,301,547		17.5
  Fourth quarter		1,475,099		1,368,542		7.8
  Total year		$     5,880,372		4,999,381		17.6	%

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

        Gross profit was $1,620.8 million (27.6% of net sales) for 2004 and $1,393.8 million (27.9% of net sales) for 2003. The reduction in percentage was primarily attributable to increased raw material costs, by adding Dal-Tile's distribution network to Mohawk's logistical and distribution system;

• the potential to reduce manufacturingenergy costs, transportation costs, and increase quality by identifying manufacturing best practices;higher import costs.
  
  

        Selling, general and

• the potential administrative expenses for 2004 were $985.3 million (16.8% of net sales) compared to reduce$851.8 million (17.0% of net sales) for 2003. The reduction in percentage was attributable to better leveraging of selling, general and administrative overhead and other miscellaneous costs by spreading fixed costs over a larger business.

      Effective November 1, 2000, the Company entered into an agreement with Congoleum Corporation, Inc., to become a national distributor of their vinyl products. This agreement was the final step, which gave the Company access to a complete line of soft and hard floor covering products to supply to customers throughout the United States.expenses.

      Operating income for 2004 was $635.6 million (10.8% of net sales) compared to $542.0 million (10.9% of net sales) in 2003. Operating income attributable to the Mohawk segment was $424.3 million (9.7% of segment net sales) in 2004 compared to $364.0 million (9.8% of segment net sales) in 2003. The primary categoriespercentage decrease in operating income was attributable to the higher raw material costs, energy costs and transportation costs. Operating income attributable to the Dal-Tile segment was $219.8 million (14.5% of the floorcovering industry include carpetsegment net sales) in 2004, compared to $187.2 million (14.8% of segment net sales) in 2003. The decrease in operating income as a percentage of net sales is primarily attributable to higher energy costs, import costs and rugs (65%), ceramic tile (10%), vinyl and rubber (12%), hardwood (9%) and laminate (4%).  Compound average growth ratestransportation costs.

      Interest expense for 2004 was $53.4 million compared to $55.6 million in units sold (measured2003. The decrease in square yards) for all categories, except the vinyl and rubber category, for the period from 1992 through 2001 have exceeded the growth rate for both the gross domestic product of the United States and housing starts over the same period.  During this period, the compound average growth rateinterest expense was 4.5% for carpet and rugs, 9.6% for ceramic tile, 3.1% for vinyl and rubber and 8.1% for hardwood.  Laminate, which is a relatively new product, experienced a compound average growth rate of 33.6% from 1996 through 2001.  Although beginningattributable to larger benefit from a smaller base, the growth ratesfair value adjustment related to an interest rate swap during 2004 when compared to 2003.

      Income tax expense was $208.8 million, or 36.2% of earnings before income taxes for hard floorcoverings may indicate increasing consumer preference2004 compared to $178.3 million, or 36.5% of earnings before income taxes for these products for certain applications.  In response to this increasing demand, the Company has increased its distribution of hard surface products, including ceramic tile, vinyl, hardwood and laminate.2003. The acquisition of Dal-Tile provides a unique opportunity to help the Company achieve its strategic goal of becoming one of the world's leading floorcovering manufacturers and distributors.

      Asimproved rate was a result of the utilization of tax credits.

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

      Net sales for the year ended December 31, 2003, were $4,999.4 million, reflecting an increase of $482.4 million, or approximately 10.7%, over the $4,517.0 million reported in the year ended December 31, 2002. The increased net sales were attributable to the acquisition of Dal-Tile and Lees Carpet and internal growth. The Mohawk segment recorded net sales of $3,730.8 million in 2003 compared to $3,618.8 million in 2002, representing an increase of $112.0 million or approximately 3.0%. The growth was attributable to the Lees Carpet acquisition and internal growth of product lines. The Dal-Tile segment recorded net sales of $1,268.5 million in 2003, reflecting an increase of $370.4 million or 41.2%, over the $898.2 million reported in the year ended December 31, 2002. The Dal-Tile results are not included in the Company's consolidated financial statements prior to the March 20, 2002 acquisition. However, when the Dal-Tile net sales for the year ended December 31, 2003, are compared to the Dal-Tile pro forma net sales of $1,134.2 million for the year ended December 31, 2002 (derived by combining Dal-Tile net sales of $236.0 million prior to the March 20, 2002 acquisition date, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile net sales of $898.2 million for the period ending December 31, 2002), an increase of approximately 11.8% for the period was realized. The growth was primarily attributable to growth within residential products. The Company believes this pro forma net sales information will be useful to investors because it allows investors to compare the results of the two periods.

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

      Gross profit was $1,393.8 million (27.9% of net sales) for 2003 and $1,269.1 million (28.1% of net sales) for 2002. The reduction in percentage was primarily attributable to a change in the selling mix, increased raw material costs, higher energy costs, higher import costs and start up costs related to the new Dal-Tile manufacturing facility.

      Selling, general and administrative expenses for 2003 were $851.8 million (17.0% of net sales) compared to $747.0 million (16.5% of net sales) for 2002. The increased percentage was primarily attributable to the acquisition of Dal-Tile, which has determined that it has two operating segments,higher selling, general and administrative expenses than the Mohawk segment.

      Operating income for 2003 was $542.0 million (10.8% of net sales) compared to $522.1 million (11.6% of net sales) in 2002. Operating income attributable to the Mohawk segment was $364.0 million (9.8% of segment net sales) in 2003 compared to $390.9 million (10.8% of segment net sales) in 2002. The percentage decrease in operating income was attributable to the higher raw material and energy costs and a change in the selling mix. Operating income attributable to the Dal-Tile segment.segment was $187.2 million (14.8% of segment net sales) in 2003, compared to $139.9 million (15.6% of segment net sales) in 2002. The Mohawkdecrease in operating income as a percentage of net sales is primarily attributable to a change in product mix, higher import prices and start up costs of a new manufacturing facility. On a pro forma combined basis, the Dal-Tile segment is comprisedoperating income was $171.7 million (15.1% of all the product lines and operations that were the Company'spro forma segment net sales) for 2002 (derived by combining Dal-Tile operating income of $31.8 million prior to the March 20, 2002 acquisition, after reclassifications to conform to Mohawk's presentation, with reported Dal-Tile acquisition.operating income of $139.9 million for the period ended December 31, 2002). The Company believes that presentation of this pro forma combined operating income information will be useful to investors because it allows investors to compare the results between the two periods.

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

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

Liquidity and Capital Resources

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

      Cash flows generated by operations for 2004 were $242.8 million compared to $309.4 million for 2003. The decrease was primarily attributable to an increase in accounts receivable, which increased from $573.5 million at the beginning of 2004 to $660.7 million at December 31, 2004 and inventories, which increased from $832.4 million at the beginning of 2004 to $1,018.0 million at December 31, 2004. The increases were primarily attributable to organic sales growth within both the Mohawk and Dal-Tile segmentsegments.

      Net cash used in investing activities in 2004 was $121.6 million compared to $498.8 million for 2003. The decrease was primarily attributable to lower capital expenditures and lower expenditures related to acquisitions. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment. Capital expenditures, including $1,116.8 million for acquisitions, have totaled $1,450.0 million over the past three years. Capital spending during 2005 for both the Mohawk and Dal-Tile segments combined, excluding acquisitions, is comprisedexpected to range from $230 million to $270 million, and will be used primarily to purchase equipment and to add manufacturing capacity.

      Net cash used in financing activities for 2004 was $121.2 million compared to cash provided in 2003 of $189.4 million. The primary reason for the change was a reduction in debt levels in 2004, when compared to 2003.

      On September 29, 2004, the Company amended its five-year revolving credit facility with interest rates of either (i) LIBOR plus 0.4% to 1.4%, depending upon the Company's performance measured against certain financial ratios, or (ii) the base rate plus 0-0.5% depending upon the Company's performance measured against certain financial ratios. The facility was increased from $200 million to $300 million. The increase in the facility replaces the $100 million 364-day facility, which expired during the third quarter of 2004. The credit agreement contains customary financial and other covenants. The Company must pay an annual facility fee ranging from .15% to .50% of the Dal-Tile product lines and operations.total credit commitment, depending upon the Company's performance measured against specific coverage ratios, under the revolving credit line.

      The Company believes that its available credit facilities at December 31, 2004 are adequate to support its operations and working capital requirements. At December 31, 2004, the Company had credit facilities of $300 million under its revolving credit line and $50 million under various short-term uncommitted credit lines. All of these lines are unsecured. At December 31, 2004, a total of approximately $234.1 million was available under both the credit facility and uncommitted credit lines compared to $237.3 million available under both the credit facility and uncommitted credit lines at December 31, 2003. The amount used under both the credit facility and uncommitted credit lines at December 31, 2004, consisted of $37.7 million under the Company's five-year revolving credit facility and unsecured credit lines, $55.6 million standby letters of credit guaranteeing the Company's industrial revenue bonds and $22.6 million standby letters of credit related to various insurance contracts and foreign vendor commitments.

      The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to $350 million based on available accounts receivable. At December 31, 2004, the Company had $90 million outstanding secured by approximately $825.8 million of trade receivables compared to $182 million secured by approximately $649 million of trade receivables at December 31, 2003. During the third quarter of 2004, the Company extended the term of its Securitization Facility until August 2005 and amended certain representations and warranties.

      The Company's Board of Directors has authorized the repurchase of up to 15 million shares of the Company's outstanding common stock. For the year ended December 31, 2004, a total of approximately 250,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $18.4 million. Since the inception of the program in 1999, a total of approximately 11.2 million shares have been repurchased at an aggregate cost of approximately $311.5 million. All of these repurchases have been financed through the Company's operations and banking arrangements.

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

      The following is a summary of the Company's future minimum payments under contractual obligations as of December 31, 2004 (in thousands):

(1)     For fixed rate debt, the Company calculated interest based on the applicable rates and payment dates. For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect at December 31, 2004 to these balances. The interest payments associated with the Company's interest rate swap were based on the difference between the fixed rate and the forward yield curve.

(2)     Includes commitments for natural gas, foreign currency, and raw material purchases.

Critical Accounting PoliciesLiquidity and Capital Resources

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

      Cash flows generated by operations for 2004 were $242.8 million compared to $309.4 million for 2003. The decrease was primarily attributable to an increase in accounts receivable, which increased from $573.5 million at the beginning of 2004 to $660.7 million at December 31, 2004 and inventories, which increased from $832.4 million at the beginning of 2004 to $1,018.0 million at December 31, 2004. The increases were primarily attributable to organic sales growth within both the Mohawk and Dal-Tile segments.

      Net cash used in investing activities in 2004 was $121.6 million compared to $498.8 million for 2003. The decrease was primarily attributable to lower capital expenditures and lower expenditures related to acquisitions. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment. Capital expenditures, including $1,116.8 million for acquisitions, have totaled $1,450.0 million over the past three years. Capital spending during 2005 for both the Mohawk and Dal-Tile segments combined, excluding acquisitions, is expected to range from $230 million to $270 million, and will be used primarily to purchase equipment and to add manufacturing capacity.

      Net cash used in financing activities for 2004 was $121.2 million compared to cash provided in 2003 of $189.4 million. The primary reason for the change was a reduction in debt levels in 2004, when compared to 2003.

      On September 29, 2004, the Company amended its five-year revolving credit facility with interest rates of either (i) LIBOR plus 0.4% to 1.4%, depending upon the Company's performance measured against certain financial condition and results of operations are based on its consolidatedratios, or (ii) the base rate plus 0-0.5% depending upon the Company's performance measured against certain financial statements that were prepared in accordance with accounting principles generally acceptedratios. The facility was increased from $200 million to $300 million. The increase in the United Statesfacility replaces the $100 million 364-day facility, which expired during the third quarter of America.

2004. The credit agreement contains customary financial and other covenants. The Company makes estimates and assumptions when preparing financial statements. These estimates and assumptions affect various matters, including:

• reported amountsmust pay an annual facility fee ranging from .15% to .50% of assets and liabilities inthe total credit commitment, depending upon the Company's Consolidated Balance Sheets atperformance measured against specific coverage ratios, under the dates of the financial statements,
• disclosure of contingent assets and liabilities at the dates of the financial statements, and
• reported amounts of expenses in the Company's Consolidated Statements of Earnings during the reporting periods. These estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict and are beyond management's control. As a result, actual amounts could differ from these estimates.

      The SEC issued disclosure guidance for accounting policies that management believes are most "critical." The SEC defines these critical accounting policies as those that are both most important to the portrayal of a company's financial condition and results and require management's most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.revolving credit line.

      The Company believes that its available credit facilities at December 31, 2004 are adequate to support its operations and working capital requirements. At December 31, 2004, the following accounting policies require itCompany had credit facilities of $300 million under its revolving credit line and $50 million under various short-term uncommitted credit lines. All of these lines are unsecured. At December 31, 2004, a total of approximately $234.1 million was available under both the credit facility and uncommitted credit lines compared to use more significant judgments$237.3 million available under both the credit facility and estimates in preparing its consolidated financial statementsuncommitted credit lines at December 31, 2003. The amount used under both the credit facility and could represent critical accounting policies as defined byuncommitted credit lines at December 31, 2004, consisted of $37.7 million under the SEC.Company's five-year revolving credit facility and unsecured credit lines, $55.6 million standby letters of credit guaranteeing the Company's industrial revenue bonds and $22.6 million standby letters of credit related to various insurance contracts and foreign vendor commitments.

      The Company discusses its significant accounting policies, including those that do not require managementhas an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to make difficult, subjective, or complex judgments or estimates, in Note 1borrow up to the Consolidated Financial Statements.

• Accounts receivable and revenue recognition. Revenues are recognized when goods are shipped, which is when legal title passes to the customer. The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts$350 million based upon historical bad debt and claims experience and periodic evaluation of the aging ofon available accounts receivable. IfAt December 31, 2004, the financial conditionCompany had $90 million outstanding secured by approximately $825.8 million of trade receivables compared to $182 million secured by approximately $649 million of trade receivables at December 31, 2003. During the third quarter of 2004, the Company extended the term of its Securitization Facility until August 2005 and amended certain representations and warranties.

        The Company's Board of Directors has authorized the repurchase of up to 15 million shares of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

• Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the last-in, first-out method (LIFO) predominantly within the Mohawk segment, which matches current costs with current revenues, and the first-in, first-out method (FIFO), which is used to value inventory within the Dal-Tile segment. Inventories on hand are compared against anticipated future usage, which is a function of historical usage, in order to evaluate obsolescence and excessive quantities. Actual results could differ from assumptions used to value obsolete or excessive inventory and additional reserves may be required.

• Goodwill and intangible assets are subject to annual impairment testing. The impairment tests are based on determining the fair value of the specified reporting units based on management judgments and assumptions using estimated future cash flows. These judgments and assumptions could materially change the value of the specified reporting units and, therefore, could materially impact the Company's consolidated financial statements.

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

Results of Operations

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

      Net sales foroutstanding common stock. For the year ended December 31, 2002,2004, a total of approximately 250,000 shares of the Company's common stock were $4,522.3purchased at an aggregate cost of approximately $18.4 million. Since the inception of the program in 1999, a total of approximately 11.2 million reflectingshares have been repurchased at an increaseaggregate cost of $1,076.4 million, or approximately 31.2%, over$311.5 million. All of these repurchases have been financed through the $3,445.9 million reportedCompany's operations and banking arrangements.

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

      The following is a summary of the Company's future minimum payments under contractual obligations as of December 31, 2001. The increased net sales were attributable to2004 (in thousands):

(1)     For fixed rate debt, the Dal-Tile acquisitionCompany calculated interest based on the applicable rates and internal growth ofpayment dates. For variable rate debt, the Mohawk segment product lines. The Mohawk segment recorded net sales of $3,624.2 million in 2002 compared to $3,445.9 million in 2001, representing an increase of $178.2 million or approximately 5.2%. The growth was attributable to all segment product lines. Since the completion of the Dal-Tile acquisition, the Dal-Tile segment recorded net sales of $898.2 million in 2002. A comparison of net salesCompany estimated average outstanding balances for the Dal-Tile segment for 2002respective periods and 2001,applied interest rates in each case including Dal-Tile's net sales (after reclassificationseffect at December 31, 2004 to conform to Mohawk's presentation) prior tothese balances. The interest payments associated with the acquisition, shows an increase of $97.4 million, or approximately 9.4%, from $1,036.8 million to $1,134.2 million.

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

      Gross profit was $1,237.1 million (27.4% of net sales) for 2002 and $832.9 million (24.2% of net sales) for 2001. Gross profit as a percentage of net sales in 2002 was favorably impacted when compared to 2001 by Dal-Tile's higher gross profit percentage and improved manufacturing efficiencies within the Mohawk segment.

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

      Operating income for 2002 was $519.1 million (11.5% of net sales) compared to $327.2 million (9.5% of net sales) in 2001. Operating income attributable to the Mohawk segment was $388.4 million (10.7% of segment net sales) in 2002 compared to $336.7 million (9.8% of segment net sales) in 2001. Operating income attributable to the Dal-Tile segment was $139.9 million (15.6% of segment net sales) in 2002.  A comparison of operating income for the Dal-Tile segment's 2002 and 2001, in each case including Dal-Tile's operating income (after reclassifications to conform to Mohawk's presentation) prior to the acquisition, shows an increase of $17.1 million, or approximately 11.1%, from $154.6 million (14.9% of segment net sales) to $171.7 million (15.1% of segment net sales).

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

      Income tax expense was $159.1 million, or 35.9% of earnings before income taxes(2)     Includes commitments for 2002 compared to $102.8 million, or 35.3% of earnings before income taxes for 2001.natural gas, foreign currency, and raw material purchases.

Year Ended December 31, 2001, as Compared with Year Ended December 31, 2000

      Net sales for the year ended December 31, 2001, were $3,445.9 million, reflecting an increase of $41.9 million, or approximately 1.2%, over the $3,404.0 million reported in the year ended December 31, 2000. The Company believes that the 2001 net sales increase was attributable primarily to internal growth in carpet, rugs, padding and hard surface products.

      Quarterly net sales and the percentage changes in net sales by quarter for 2001 versus 2000 were as follows (dollars in thousands):

      Gross profit was $832.9 million (24.2% of net sales) for 2001 and $822.8 million (24.2% of net sales) for 2000. Favorable material and fuel costs and an improved product mix impacted gross profit dollars for 2001.

      Selling, general and administrative expenses for 2001 were $505.7 million (14.7% of net sales) compared to $505.7 million (14.9% of net sales) for 2000.

      Interest expense for 2001 was $29.8 million compared to $38.0 million in 2000.  The primary factors contributing to the decrease were lower debt levels compared to 2000.

      Income tax expense for 2001 was $102.8 million or 35.3% of earnings before income taxes.  In 2000, income tax expense was $105.0 million, representing 39.2% of earnings before income taxes. The reduction in the effective income tax rate was primarily due to tax credits and other tax strategies.

Liquidity and Capital Resources

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

      Cash flows generated by operations for 2004 were $242.8 million compared to $309.4 million for 2003. The level ofdecrease was primarily attributable to an increase in accounts receivable, which increased from $404.9$573.5 million at the beginning of 20022004 to $501.1$660.7 million at December 31, 2002.  The $96.2 million increase was primarily attributable to the acquisition of Dal-Tile.  Inventories2004 and inventories, which increased from $531.4$832.4 million at the beginning of 20022004 to $678.0$1,018.0 million at December 31, 2002, due2004. The increases were primarily attributable to organic sales growth within both the Mohawk and Dal-Tile segments.

      Net cash used in investing activities in 2004 was $121.6 million compared to $498.8 million for 2003. The decrease was primarily attributable to lower capital expenditures and lower expenditures related to acquisitions. Capital expenditures were incurred primarily to modernize, add and expand manufacturing and distribution facilities and equipment. Capital expenditures, including $1,116.8 million for acquisitions, have totaled $1,450.0 million over the past three years. Capital spending during 2005 for both the Mohawk and Dal-Tile acquisition.segments combined, excluding acquisitions, is expected to range from $230 million to $270 million, and will be used primarily to purchase equipment and to add manufacturing capacity.

      Net cash used in financing activities for 2004 was $121.2 million compared to cash provided in 2003 of $189.4 million. The primary reason for the change was a reduction in debt levels in 2004, when compared to 2003.

      On September 29, 2004, the Company amended its five-year revolving credit facility with interest rates of either (i) LIBOR plus 0.4% to 1.4%, depending upon the Company's performance measured against certain financial ratios, or (ii) the base rate plus 0-0.5% depending upon the Company's performance measured against certain financial ratios. The facility was increased from $200 million to $300 million. The increase in the facility replaces the $100 million 364-day facility, which expired during the third quarter of 2004. The credit agreement contains customary financial and other covenants. The Company must pay an annual facility fee ranging from .15% to .50% of the total credit commitment, depending upon the Company's performance measured against specific coverage ratios, under the revolving credit line.

      The Company believes that its available credit facilities at December 31, 2004 are adequate to support its operations and working capital requirements. At December 31, 2004, the Company had credit facilities of $300 million under its revolving credit line and $50 million under various short-term uncommitted credit lines. All of these lines are unsecured. At December 31, 2004, a total of approximately $234.1 million was available under both the credit facility and uncommitted credit lines compared to $237.3 million available under both the credit facility and uncommitted credit lines at December 31, 2003. The amount used under both the credit facility and uncommitted credit lines at December 31, 2004, consisted of $37.7 million under the Company's five-year revolving credit facility and unsecured credit lines, $55.6 million standby letters of credit guaranteeing the Company's industrial revenue bonds and $22.6 million standby letters of credit related to various insurance contracts and foreign vendor commitments.

      The Company has an on-balance sheet trade accounts receivable securitization agreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to $350 million based on available accounts receivable. At December 31, 2004, the Company had $90 million outstanding secured by approximately $825.8 million of trade receivables compared to $182 million secured by approximately $649 million of trade receivables at December 31, 2003. During the third quarter of 2004, the Company extended the term of its Securitization Facility until August 2005 and amended certain representations and warranties.

      The Company's Board of Directors has authorized the repurchase of up to 15 million shares of the Company's outstanding common stock. For the year ended December 31, 2004, a total of approximately 250,000 shares of the Company's common stock were purchased at an aggregate cost of approximately $18.4 million. Since the inception of the program in 1999, a total of approximately 11.2 million shares have been repurchased at an aggregate cost of approximately $311.5 million. All of these repurchases have been financed through the Company's operations and banking arrangements.

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

      Excluding the acquisition of Dal-Tile, capital expenditures totaled $111.9 million during 2002. The capital expenditures made during 2002 were incurred primarily to modernize and expand manufacturing facilities and equipment.  The Company's capital projects are primarily focused on increasing capacity, improving productivity and reducing costs.  Capital expenditures, including $754.5 million for acquisitions, have totaled $992.8 million over the past three years. The Company's capital spending during 2003, excluding acquisitions, is expected to range from $120 million to $140 million, and will be used primarily to purchase equipment to increase production capacity and productivity.

      The Company's revolving line of credit agreement provides for an interest rate of either (i) LIBOR plus 0.2% to 0.5%, depending upon the Company's performance measured against certain financial ratios, or (ii) the prime rate less 1.0% and has a termination date of January 28, 2004.  At December 31, 2002, the Company had credit facilities of $450 million under its revolving credit line and $55 million under various short-term uncommitted credit lines. At December 31, 2002, a total of $462.5 million was unused under these lines. All of these lines are unsecured. The credit agreement contains customary financial and other covenants.  The Company must pay an annual facility fee ranging from .0015 to .0025 of the total credit commitment, depending upon the Company's performance measured against specific coverage ratios, under the revolving credit line.

      In connection with the Dal-Tile acquisition, the Company entered into a 364-day term loan facility (the "Bridge Facility") on March 20, 2002, to finance a portion of the acquisition. On April 2, 2002, the Company sold $300 million of its 6.50% senior notes due 2007, Series A and $400 million of its 7.20% senior notes due 2012, Series B through institutional private placements and used the proceeds to repay outstanding indebtedness of approximately $601 million under the Bridge Facility and approximately $0.9 million under the Company's revolving credit facility. On June 13, 2002, the Company exchanged approximately $295 million of its registered 6.50% notes due 2007, Series C for an equal amount of its Series A senior notes and approximately $397.8 million of its registered 7.20% senior notes due 2012, Series D for an equal amount of its Series B senior notes. Interest on each series is payable semiannually.

      The Company has two trade accounts receivable securitization agreements with bank agents for asset-backed commercial paper conduits. These facilities enable the Company to borrow up to $205 million through the Mohawk segment and up to $75 million through its Dal-Tile segment. Each securitization is secured by the respective segment trade receivables and is subject to annual renewal. At December 31, 2002, the Company had no amounts outstanding under either securitization facility, both of which were available up to their respective facility limits. At December 31, 2001, the Mohawk segment had $125 million outstanding secured by approximately $461.1 million of receivables.

      The Company's debt structure also includes a combination of variable rate industrial revenue bonds and fixed rate term notes and senior notes with interest rates ranging from 1.28% up to 8.46%. The industrial revenue bonds mature beginning in 2006 through 2019 and the term and senior notes mature through 2012. The industrial revenue bonds are backed by unsecured letters of credit. The term and senior notes are also unsecured. The aggregate principal amount of industrial revenue bonds, term and senior notes was $815.2 million at December 31, 2002.

      On January 3, 2001, the Company entered into a five-year interest rate swap, which converted a notional amount of approximately $100 million of its variable rate debt to a fixed rate. Under the agreement, payments are made based on a fixed rate of 5.82% and received on a LIBOR based variable rate. Differentials received or paid under the agreement will be recognized as interest expense. During December 2002, the Company determined, based on future cash flow projections, that the cash flow hedge would more than likely become ineffective as strong cash flow has allowed the Company to significantly reduce its outstanding LIBOR based variable rate debt below the $100 million hedged notional amount. The unrealized loss on the interest rate swap previously included in other comprehensive income has been recorded as a realized loss in interest expense in the fourth quarter of 2002. The amount recorded in interest expense was $10.7 million. The Company continues to carry the liability on the consolidated balance sheets at its fair value and the interest rate swap will be marked to market in future reporting periods with any changes being recorded in interest expense.

      The Company's Board of Directors has authorized the repurchase of up to 15 million shares of its outstanding common stock. For the year ended December 31, 2002, a total of approximately 1.4 million shares of the Company's common stock were purchased at an aggregate cost of approximately $64.0 million. Since the inception of the program, a total of approximately 10.4 million shares have been repurchased at an aggregate cost of approximately $265.3 million. All of these repurchases have been financed through the Company's operations and banking arrangements.

The following is a summary of the Company's future minimum payments under contractual obligations as of December 31, 20022004 (in thousands):

(1)     For fixed rate debt, the Company calculated interest based on the applicable rates and payment dates. For variable rate debt, the Company estimated average outstanding balances for the respective periods and applied interest rates in effect at December 31, 2004 to these balances. The interest payments associated with the Company's interest rate swap were based on the difference between the fixed rate and the forward yield curve.

(2)     Includes commitments for natural gas, and foreign currency, and raw material purchases.

RecentCritical Accounting PronouncementsPolicies

      In June 2001,preparing the Financial Accounting Standards Board issued SFAS No. 143 "Accounting for AssetRetirement Obligations"("SFAS No. 143"). SFAS No. 143 provides new guidanceconsolidated financial statements in conformity with accounting principles generally accepted in the United States of America, the Company must make decisions which impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, the recognitionCompany applies judgment based on its understanding and measurementanalysis of an asset retirement obligationthe relevant circumstances and its associated asset retirement cost. It also provideshistorical experience. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared.

      The Company's significant accounting guidance for legal obligations associated withpolicies are described in Note 1 to the retirementconsolidated financial statements included elsewhere in this report. Some of tangible long-lived assets.those significant accounting policies require the Company to make subjective or complex judgments or estimates. Critical accounting policies are defined as those that are both most important to the portrayal of a company's financial condition and results and require management's most difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

      The Company adopted SFAS No. 143believes the following accounting policies require it to use judgments and estimates in preparing its consolidated financial statements and represent critical accounting policies.

• Accounts receivable and revenue recognition. Revenues are recognized when goods are shipped and legal title passes to the customer. The Company provides allowances for expected cash discounts, returns, claims, and doubtful accounts based upon historical bad debt and claims experience and periodic evaluation of specific customer accounts and the aging of accounts receivable. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

• Inventories are stated at the lower of cost or market (net realizable value). Cost is determined using the last-in, first-out method (LIFO) for approximately 80% of the inventory within the Mohawk segment, which matches current costs with current revenues, and the first-in, first-out method (FIFO), which is used to value inventory within the Dal-Tile segment and inventory not valued under the LIFO method in the Mohawk segment. Inventories on January 1, 2003hand are compared against anticipated future usage, which is a function of historical usage and it is notanticipated future selling price, in order to evaluate obsolescence, excessive quantities, and expected sales below cost. Actual results could differ from assumptions used to value obsolete, excessive inventory or inventory expected to be sold below cost and additional reserves may be required.

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

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

• Environmental and legal accruals are estimates based on judgments made by the Company relating to ongoing environmental and legal proceedings, as disclosed in the Company's consolidated financial statements. In determining whether a liability is probable and reasonably estimable, the Company consults with its internal experts. The Company believes that the amounts recorded in the accompanying financial statements are based on the best estimates and judgments available to it.

Recent Accounting Pronouncements

      In April 2002,December 2004, the Financial Accounting Standards BoardFASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, AmendmentStaff Position 109-1, "Application of FASB Statement No. 13, and Technical Corrections." The Statement rescinds 109, "Accounting for Income Taxes" ("SFAS No. 4, "Reporting Gains and Losses109") to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act") provides a tax deduction for income from Extinguishment of Debt," and an amendment of that Statement,qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 64, "Extinguishments109. The Company is currently evaluating the effect that the manufacturer's deduction will have on future results. FSP 109-1 is effective prospectively as of Debt Made to Satisfy Sinking-Fund Requirements."January 1, 2005.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 145 recognizes109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

      In November 2004, the FASB issued SFAS No. 151, "Inventory Costs-An Amendment of ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the useallocation of debt extinguishment canfixed production overheads to the costs of conversion be a partbased on the normal capacity of the risk management strategy of a company and hence, the classification of all early extinguishment of debt as an extraordinary item may no longer be appropriate. In addition, the Statement amendsproduction facilities. SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Provisions of this Statement, as they relate to Statement No. 13, are to be effective for transactions occurring after May 15, 2002. Provisions, which relate to Statement No. 4, are151 is effective for fiscal years beginning after MayJune 15, 2002.2005. The Company adoptedis currently evaluating SFAS No. 145151 and does not expect it to have a material impact on January 1, 2003, and it is not expected to materially impact the Company's consolidated financial statements.

      In November 2002,December 2004, the Financial Accounting Standards BoardFASB issued SFAS No. 146, "Accounting123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for the Costs Associated with Exit or Disposal ActivitiesStock-Based Compensation," ("SFAS 123") and supercedes APB Opinion No. 146").25, "Accounting for Stock Issued to Employees." SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, and123R requires recording costs associated with exit or disposal activities atall share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values when a liability has been incurred. Effective January 1, 2003,beginning with the Company adopted SFAS No. 146 and it is not expected to materially impactfirst interim or annual period after June 15, 2005. Transition may be accomplished using either the Company's consolidated financial statements.

      In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Fin 45"). Fin 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. Fin 45 also requires additional disclosure about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective after December 15, 2002, and are included in footnote 10 to the consolidated financial statements.

      In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure an amendment of FASB Statement No. 123"("SFAS No. 148").

This statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. Effective January 1, 2003, the Company adopted the disclosure requirements of SFAS No. 148 regarding disclosure requirements for condensed consolidated financial statements for interim periods.retrospective methods. The Company has not determined whether it will voluntarily changecurrently measures compensation costs related to the fair value based method of accounting for stock-based employee compensation.

      In January 2003, the Financial Accounting Standards Board issued Interpretationshare-based payments under APB Opinion No. 46, "Consolidation of Variable Interest Entities and Interpretation of ARB No. 51" ("Fin 46"). Fin 46 establishes the criteria for consolidating variable interest entities.25. The Company is currently evaluating Fin 46, which is effective for fiscal years or interim periods beginning after June 15, 2003, to variable entities that were acquired before February 1, 2003. The Company does not expect Fin 46 to materially impact the Company's consolidated financial statements.transition methods under SFAS 123R and will begin expensing stock options in the third quarter of 2005.

Impact of Inflation

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

Seasonality

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

Certain factorsFactors affecting the Company's performancePerformance

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

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

The failure to integrate Mohawk and Dal-Tile successfully by managing the challenges of that integration may result in the Company not achieving the anticipated potential benefits of the merger.

      The Company faces challenges in consolidating functions, integrating its organizations, procedures, operations and product lines in a timely and efficient manner and retaining key personnel.

      These challenges will result principally because the two companies currently:

• maintain executive offices in different locations;
• manufacture and sell different types of products through different distribution channels;
• conduct their businesses from various locations; and
• have different employment and compensation arrangements for their employees.

      In addition, Dal-Tile has a significant manufacturing operation in Mexico, and the Company has not previously operated a manufacturing facility outside of the United States.  As a result, the integration will be complex and will require additional attention from members of management.  The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on the Company's revenues, level of expenses and operating results.

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

      The U.S. floorcoveringfloor covering industry is highly dependent on residential and commercial construction activity, including new construction, as well as remodeling.  New construction activityremodeling and remodeling to a lesser degreereplacement which are cyclical in naturenature. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, a prolonged decline in residential or commercial construction activity could have a material adverse effect on the Company's business, financial conditionbusiness. Additionally, economic changes that result in a prolonged decline in spending for remodeling and results of operations. Construction activity is significantly affected by numerous factors, all of which are beyondreplacement activities could have a material adverse effect on the Company's control, including:business.

• national and local economic conditions;
• interest rates;
• housing demand;
• employment levels;
• changes in disposable income;
• financing availability;
• commercial rental vacancy rates;
• business expenditures;
• federal and state income tax policies; and
• consumer confidence.

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

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

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

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

      As part of its business strategy, the Company intends to pursue acquisitions of complementary businesses.  Although it regularly evaluates acquisition opportunities, it may not be able to:

• to successfully identify suitable acquisition candidates;
• obtain sufficient financing on acceptable terms to fund acquisitions;
• complete acquisitions; or
• profitably manage acquired businesses.

      Acquired operations may not achieve expected performance levels of sales, operating income or productivity comparable to those of its existing operations, or otherwise perform as expected. Acquisitionsand may also involve a number of special risks, some or all of which could have a material and adverse effect on the Company's business, results ofincluding among others an inability to successfully integrate acquired operations and financial condition, including, among others:

• the Company's inability to integrate operations, systems and procedures and to eliminate redundancies and excess costs effectively;

• diversion of management's attention and resources; and
• difficulty retaining and training acquired key personnel.

management resources.

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

      The Company's business is dependent upon a continuous supply of raw materials from third party suppliers. The principal raw materials used in itsthe Company's manufacturing operations include: nylon, fiberpolyester and polypropylene resin,resins and fibers and carpet backings, which are used exclusively in its carpet and rugrugs business; talc, clay, impure nepheline syenite, pure nepheline syenite and various glazes, including frit (ground glass), zircon and stains, which are used exclusively in its ceramic tile business; and other materials. The Company has a single source supplier for all of its impure nepheline syenite and pure nepheline syenite requirements.  An extended interruption in the supply of these or other raw materials used in the Company's business or in the supply of suitable substitute materials would disrupt the Company's operations, which could have a material adverse effect on its business, financial condition and results of operations.business.

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

      Significant increases in the costsThe prices of raw materials and natural gas used in the manufacture of the Company's products could have a material adverse effect on its operating margins and its business, financial condition and results of operations.  The Company purchases nylon fiber, polypropylene resin, talc, clay, impure nepheline syenite, pure nepheline syenite, frit, zircon, stains and other materials from third party suppliers.  The cost of some of these materials, like nylon and polypropylene resin, is related to oil prices. The Company also purchases significant amounts of natural gas to supply the energy required in some of its production processes.  The prices of these raw materials and of natural gas vary with market conditions. Although the Company generally attempts to pass on increases in the costs of raw materials and natural gas to its customers, the Company's ability to do so is to a large extent, dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for its products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered.  During such periods of time, there could be a material adverse effect on the Company's profitability.

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

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

      The nature of the Company's operations, and previous operations by others at real property currently or formerly owned or operated byincluding the Company and the disposalpotential discovery of waste at third party sitespresently unknown environmental conditions, exposes the Company to the risk of claims under environmental, health and safety laws and regulations. The Company could incur material costs or liabilities in connection with such claims.  The Company has been, and will continue to be, subject to these claims.

      The discovery of presently unknown environmental conditions, changes in environmental, health, and safety laws and regulations, enforcement of existing or new requirements or other unanticipated events could give rise to expenditures and liabilities, including fines or penalties, that could have a material adverse effect on the Company's business, operating results or financial condition.

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

      The Company's Monterrey, Mexico manufacturing facility represents a significant portion of the Company's total manufacturing capacity for ceramic tile. Accordingly, an event that has a material adverse impact on the Company's Mexican operations could have a material adverse effect on the tile operations as a whole. The

business, regulatory and political environments in Mexico differ from those in the United States, and the Company's Mexican operations are exposed to a number of inherentlegal, currency, tax, political, and economic risks including:

• changes in international trade laws, such as the North American Free Trade Agreement, or NAFTA, affecting the Company's import and export activities in Mexico;
• changes in Mexican labor laws and regulations affecting the Company's abilityspecific to hire and retain employees in Mexico;
• currency exchange restrictions and fluctuations in the value of foreign currency;
• potentially adverse tax consequences;
• local laws concerning repatriation of profits;
• political conditions in Mexico;
• unexpected changes in the regulatory environment in Mexico; and
• changes in general economic conditions in Mexico.

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

      The United StatesCompany is party to the General Agreement on Tariffs and Trade ("GATT"). Under GATT, the United States currently imposesuncertain what effect reduced import duties on ceramic tile imported from countries outside North America at no more than 12%, to be reduced ratably to no less than 8.5% by 2004. Accordingly, as these duties decrease,under GATT may have on its operations, although these reduced rates may stimulate additional competition from manufacturers in these countries, which now export, or may seek tothat export ceramic tile to the United States. The Company is uncertain what effect GATT may have on its operations.

      The North American Free Trade Agreement ("NAFTA") was entered into by Canada, Mexico and the United States and over a transition period will remove most customs duties imposed on goods traded among the three countries. In addition, NAFTA will remove or limit many investment restrictions, liberalize trade in services, provide a specialized means for settlement of, and remedies for, trade disputes arising under applicable laws and will result in new laws and regulations to further these goals.      Although NAFTA lowers the tariffs imposed on the Company's ceramic tile manufactured in Mexico and sold in the United States and will eliminate such tariffs entirely on January 1, 2008, it may also stimulate competition in the United States and Canada from manufacturers located in Mexico, which could negatively affect the Company's business.Mexico.

Forward-Looking Information

      Certain of the matters discussedstatements in the preceding pages,this Annual Report on Form 10-K, particularly regarding anticipation ofthose anticipating future financial performance, business prospects, growth and operating strategies, proposed acquisitions, new products and similar matters, and those preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends,"forecast," "estimates" or similar expressions constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended.  For those statements, Mohawk claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Those statements are based on assumptions regarding the Company's ability to maintain its sales growth and gross margins and to control costs. These or other assumptions could prove inaccurate and therefore, thereThere can be no assurance that the "forward-looking statements"forward-looking statements will prove to be accurate. Forward-looking statementsaccurate because they are based on many assumptions, which involve a number of risks and uncertainties. The following important factors in addition to those discussed elsewhere in this document, affect thecould cause future results of Mohawk and could cause those results to differ materially from those expressed in the forward-looking statements: materially adversediffer: changes in economic conditions generally in the carpet, rug, ceramic tile and other floorcovering markets served by Mohawk; the successful integration of Dal-Tile into Mohawk's business; competition from other carpet, rug, ceramic tile and floorcovering manufacturers;industry conditions; competition; raw material prices; declines in residential or commercial construction activity; timing and level of capital expenditures; the successful integration of acquisitions, including the challenges inherent in diverting Mohawk management's attention and resources from other strategic matters and from operational matters for an extended period of time; the successfulacquisitions; introduction of new products; the successful rationalization of existing operations; and other risks identified from time to time in the Company'sMohawk's SEC reports and public announcements. Any forward-looking statements represent Mohawk's estimates only as of the date of this report and should not be relied upon as representing Mohawk's estimates as of any subsequent date. While Mohawk may elect to update

forward-looking statements at some point in the future, Mohawk specifically disclaims any obligation to do so, even if Mohawk's estimates change.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk Management

      The Company used an interest rate swap contract to adjust the proportion of total debt that was subject to variable interest rates as compared to fixed interest rates. Under the interest rate swap contract, the Company agreed to pay an amount equal to a fixed-rate of interest times a notional principal amount of $100 million, and to receive in return an amount equal to a specified variable-rate of interest times the same notional principal amount. The notional amounts of the contracts are not exchanged, and no other cash payments are made. The contract fair value is reflected on the consolidated balance sheets and related gains or losses were deferred in other comprehensive income. These deferred gains and losses are recognized in income as an adjustment to interest expense over the same period in which the related interest payments being hedged are recognized in income. However, to the extent that any of these contracts are not considered to be 100% effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of these contracts is immediately recognized in earnings. During December 2002, the Company determined, based on future cash flow projections, that the cash flow hedge would more than likely become ineffective as strong cash flow has allowed the Company to significantly reduce its outstanding LIBOR based variable rate debt below the $100 million hedged notional amount. The unrealized loss on the interest rate swap previously included in other comprehensive income has been recorded as a realized loss in interest expense in the fourth quarter of 2002. The amount recorded in interest expense was $10.7 million. The Company continues to carry the liability on its consolidated balance sheets at its fair value and the interest rate swap will be marked to market in future reporting periods with any changes being recorded in interest expense. The floating interest rate at which the hedge was deemed ineffective was 1.42%. A 50 basis point change in interest rates would reduce/increase interest expense by approximately $1.5 million.

Natural Gas Risk Management

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

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

      Any gain or loss is reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. At December 31, 2002,2004, the Company had natural gas contracts outstandingthat mature from January 2005 to March 2005 with an aggregate notional amount of approximately 1.51 million MMBTU's. The fair value of these contracts which maturewas a liability of $1.3 million. At December 31, 2003, the Company had natural gas contracts that matured from January 20032004 to December 2004 with an aggregate notional amount of approximately 3.9 million MMBTU's. The fair value of these contracts was an asset of $1.9 million, with the$3.6 million. The offset to these assets is recorded in other comprehensive income, net of applicable income taxes. The ineffective portion of the derivative is recognized directly in the cost of goods sold within the consolidated statements of earnings and was not significant for the periods reported. The amount that the Company anticipates  will be reclassified out of accumulated other comprehensive income in the next twelve months is a loss of approximately $1.3 million.

      The Company's natural gas long-term supply agreements are accounted for under the normal purchases provision within SFAS No. 133 and its amendments. At December 31, 2002,2004, the Company hashad normal purchase commitments of approximately 4.61.9 million MMBTU's for periods maturing from January 20032005 through August 2005.March 2006. The contracted value of these commitments was approximately $17.4$9.9 million and the fair value of these commitments was approximately $19.7$11.9 million, at December 31, 2002.2004. At December 31, 2003, the Company had normal purchase commitments of approximately 3.1 million MMBTU's. The contracted value of these commitments was approximately $13.8 million and the fair value of these commitments was approximately $17.0 million.

Foreign Currency Rate Management

      The Company enters into foreign exchange forward contracts to hedge foreign denominated costs associated with its operations in Mexico. The objective of these transactions is to reduce volatility of exchange rates where these operations are located by fixing a portion of their costs in USU.S. currency. Accordingly, these contracts have been designated as cash flow hedges. Gains and losses are reclassified from other comprehensive income and recognized in

cost of goods sold in the same period or periods during which the hedged transaction affects earnings. Accordingly, these contracts have been designated as cash flow hedges. At December 31, 2002, theThe Company had forward contracts maturing from January 2003 through December 2003, to purchase approximately 357.5145.3 million Mexican pesos.pesos at December 31, 2003. The aggregate U.S. Dollardollar value of these contracts at December 31, 20022003 was approximately $34.6$12.7 million. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses at December 31, 2002,2003 were not material.significant. The Company had no forward contracts outstanding at December 31, 2004.

Item 8. Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors' ReportRegistered Public Accounting Firm on Consolidated Financial Statements	2822
Report of Independent Registered Public Accounting Firm on  Internal Control over Financial Reporting	23
Consolidated Balance Sheets as of December 31, 20022004 and 20012003	2925
Consolidated Statements of Earnings for the Years ended December 31, 2002, 20012004, 2003 and 2000 2002	3026
Consolidated Statements of Stockholders' Equity and Comprehensive Income for the Years ended
December 31, 2002, 20012004, 2003 and 20002002	3127
Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 20012004, 2003 and 20002002	3228
Notes to Consolidated Financial Statements	3329

 

INDEPENDENT AUDITORS' REPORTReport of Independent Registered Public Accounting Firm on Consolidated Financial Statements

The Board of Directors and Stockholders

Mohawk Industries, Inc.:

      We have audited the consolidated financial statementsbalance sheets of Mohawk Industries, Inc. and subsidiaries as listedof December 31, 2004 and 2003, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the accompanying index.three-year period ended December 31, 2004. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedulesschedule as listed in Item 15(a)2. These consolidated financial statements and financial statement schedulesschedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedulesschedule based on our audits.

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

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mohawk Industries, Inc. and subsidiaries as of December 31, 20022004 and 2001,2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002,2004, in conformity with accounting principlesU.S. generally accepted in the United States of America.accounting principles.  Also in our opinion, the related financial statement schedules,schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

      As discussedWe also have audited, in notes 1accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and 5our report dated March 11, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting.

Atlanta, Georgia
March 11, 2005

Report of Independent Registered Public Accounting Firm on  Internal Control over Financial Reporting

The Board of Directors and Stockholders

Mohawk Industries, Inc.:

We have audited management's assessment, included in the "Management's Report on Internal Control over Financial Reporting" set forth in Item 9A of Mohawk Industries, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2004, that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Mohawk Industries, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment, and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audit.

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

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

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

In our opinion, management's assessment that Mohawk Industries, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Mohawk Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Mohawk Industries, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of earnings, stockholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated March 11, 2005 expressed an unqualified opinion on those consolidated financial statements the Company changed its method of accounting for goodwill and other intangible assets in 2002..

 /s/: KPMG LLP

KPMG LLP

Atlanta, Georgia
February 6, 2003March 11, 2005

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
(In thousands, except per share data)
ASSETS		2002		2001
Current assets:
Receivables		$     501,129		404,875
Inventories		678,008		531,405
Prepaid expenses		37,368		24,884
Deferred income taxes		82,074		70,058
Total current assets		1,298,579		1,031,222
Property, plant and equipment, net		855,324		619,703
Goodwill		1,277,453		109,167
Other intangible assets		146,700		-
Other assets		18,687		8,393
		$  3,596,743		1,768,485
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt		$       27,427		158,366
Accounts payable and accrued expenses		589,283		423,495
Total current liabilities		616,710		581,861
Deferred income taxes		186,996		84,955
Long-term debt, less current portion		793,000		150,067
Other long-term liabilities		17,158		3,051
Total liabilities		1,613,864		819,934
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares authorized; no shares issued		-		-
Common stock, $.01 par value; 150,000 shares authorized; 76,371
and 61,408 shares issued in 2002 and 2001, respectively		763		614
Additional paid-in capital		1,006,550		197,247
Retained earnings		1,231,612		947,123
Accumulated other comprehensive income (loss)		1,126		(2,837)
		2,240,051		1,142,147
Less treasury stock at cost; 10,006 and 8,715 shares in 2002 and 2001, respectively		257,172		193,596
Total stockholders' equity		1,982,879		948,551
Commitments and contingencies (Note 14)
		$  3,596,743		1,768,485

See accompanying notes to consolidated financial statements.MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
December 31, 2004 and 2003

(In thousands, except  per share data)

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 2002, 2001 and 2000
(In thousands, except per share data)
		2002		2001		2000
Net sales		$  4,522,336		3,445,945		3,404,034
Cost of sales		3,285,222		2,613,043		2,581,185
Gross profit		1,237,114		832,902		822,849
Selling, general and administrative expenses		718,002		505,745		505,734
Class action legal settlement		-		-		7,000
Operating income		519,112		327,157		310,115
Other expense (income):
Interest expense		68,972		29,787		38,044
Other expense		12,425		7,780		5,660
Other income		(5,914)		(1,826)		(1,218)
		75,483		35,741		42,486
Earnings before income taxes		443,629		291,416		267,629
Income taxes		159,140		102,824		105,030
Net earnings		$     284,489		188,592		162,599
Basic earnings per share		$           4.46		3.60		3.02
Weighted-average common shares outstanding		63,723		52,418		53,769
Diluted earnings per share		$           4.39		3.55		3.00
Weighted-average common and dilutive potential
common shares outstanding		64,861		53,141		54,255

ASSETS		2004		2003
Current assets:
Receivables		$     660,650		573,500
Inventories		1,017,983		832,415
Prepaid expenses		49,381		43,043
Deferred income taxes		55,311		84,260
Total current assets		1,783,325		1,533,218
Property, plant and equipment, net		905,332		919,085
Goodwill		1,377,349		1,368,700
Other intangible assets		322,646		325,339
Other assets		14,466		17,233
		$  4,403,118		4,163,575
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt		$     191,341		302,968
Accounts payable and accrued expenses		623,061		637,940
Total current liabilities		814,402		940,908
Deferred income taxes		191,761		183,669
Long-term debt, less current portion		700,000		709,445
Other long-term liabilities		30,618		31,752
Total liabilities		1,736,781		1,865,774
Stockholders' equity:
Preferred stock, $.01 par value; 60 shares authorized;
no shares issued		-		-
Common stock, $.01 par value; 150,000 shares authorized; 77,514
and 77,050 shares issued in 2004 and 2003, respectively		775		770
Additional paid-in capital		1,058,537		1,035,733
Retained earnings		1,910,383		1,541,761
Accumulated other comprehensive (loss) income		(2,441)		2,313
		2,967,254		2,580,577
Less treasury stock at cost; 10,755 and 10,515 shares in 2004
and 2003, respectively		300,917		282,776
Total stockholders' equity		2,666,337		2,297,801
		$  4,403,118		4,163,575

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2002, 2001 and 2000
(In thousands)
									Accumulated
					Additional				other				Total
	Common stock				paid-in		Retained		comprehensive		Treasury		stockholders'
	Shares		Amount		capital		earnings		income (loss)		stock		equity
Balances at December 31, 1999	60,657		$        607		179,993		595,932		-		(83,986)		692,546
Stock options exercised	181		1		2,396		-		-		-		2,397
Purchase of treasury stock	-		-		-		-		-		(106,689)		(106,689)
Grant to employee profit sharing plan	-		-		-		-		-		2,593		2,593
Tax benefit from exercise of stock options	-		-		914		-		-		-		914
Net earnings	-		-		-		162,599		-		-		162,599
Balances at December 31, 2000	60,838		608		183,303		758,531		-		(188,082)		754,360
Stock options exercised	570		6		9,097		-		-		-		9,103
Purchase of treasury stock	-		-		-		-		-		(8,159)		(8,159)
Grant to employee profit sharing plan	-		-		-		-		-		2,500		2,500
Grant for executive incentive program	-		-		-		-		-		145		145
Tax benefit from exercise of stock options	-		-		4,847		-		-		-		4,847
Comprehensive Income:
Unrealized loss on hedge instruments	-		-		-		-		(2,837)		-		(2,837)
Net earnings	-		-		-		188,592		-		-		188,592
Total Comprehensive income													185,755
Balances at December 31, 2001	61,408		614		197,247		947,123		(2,837)		(193,596)		948,551
Stock options exercised	2,056		20		50,165		-		-		-		50,185
Purchase of Dal-Tile	12,907		129		750,558		-		-		-		750,687
Purchase of treasury stock	-		-		-		-		-		(64,034)		(64,034)
Grant to employee profit sharing plan	-		-		3,040		-		-		282		3,322
Grant for executive incentive program	-		-		77		-		-		176		253
Tax benefit from exercise of stock options	-		-		5,463		-		-		-		5,463
Comprehensive Income:
Discontinued hedge on interest rate swap	-		-		-		-		6,768		-		6,768
Unrealized loss on hedge instruments	-		-		-		-		(2,805)		-		(2,805)
Net earnings	-		-		-		284,489		-		-		284,489
Total Comprehensive income													288,452
Balances at December 31, 2002	76,371		$        763		1,006,550		1,231,612		1,126		(257,172)		1,982,879

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
(In thousands)
		2002		2001		2000
Cash flows from operating activities:
Net earnings		$     284,489		188,592		162,599
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization		101,942		84,167		82,346
Deferred income taxes		33,712		5,563		32,179
Tax benefit on stock options exercised		5,463		4,847		914
Loss on sale of property, plant and equipment		2,762		2,910		205
Changes in assets and liabilities, net of  effects of acquisitions:
Receivables		34,657		(46,066)		(18,248)
Inventories		(15,215)		43,190		(70,209)
Accounts payable and accrued expenses		105,464		48,754		33,770
Other assets and prepaid expenses		(13,111)		(811)		(3,257)
Other liabilities		9,347		101		27
Net cash provided by operating activities		549,510		331,247		220,326
Cash flows from investing activities:
Additions to property, plant and equipment		(111,934)		(52,913)		(73,475)
Acquisitions		(717,638)		-		(36,844)
Net cash used in investing activities		(829,572)		(52,913)		(110,319)
Cash flows from financing activities:
Net change in revolving line of credit		(29,491)		(181,964)		(168,595)
Proceeds from issuance of senior notes		700,000		-		-
Proceeds from bridge credit facility		600,000		-		-
Repayment of bridge credit facility		(600,000)		-		-
Net change in asset securitizations		(125,000)		(66,104)		191,104
Payments on term loans		(32,208)		(32,212)		(32,226)
Redemption of acquisition indebtedness		(202,564)		-		-
Industrial revenue bonds and other, net of payments		(1,307)		(1,115)		3,480
Change in outstanding checks in excess of cash		(15,519)		2,117		522
Acquisition of treasury stock		(64,034)		(8,159)		(106,689)
Common stock transactions		50,185		9,103		2,397
Net cash provided by (used in) financing activities		280,062		(278,334)		(110,007)
Net change in cash		-		-		-
Cash, beginning of year		-		-		-
Cash, end of year		$                -		-		-

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings
Years Ended December 31, 2004, 2003 and 2002

(In thousands, except  per share data)

		2004		2003		2002
Net sales		$  5,880,372		4,999,381		4,516,957
Cost of sales		4,259,531		3,605,579		3,247,865
Gross profit		1,620,841		1,393,802		1,269,092
Selling, general and administrative expenses		985,251		851,773		747,027
Operating income		635,590		542,029		522,065
Other expense (income):
Interest expense		53,392		55,575		68,972
Other expense		9,731		6,252		13,455
Other income		(4,922)		(8,232)		(3,991)
		58,201		53,595		78,436
Earnings before income taxes		577,389		488,434		443,629
Income taxes		208,767		178,285		159,140
Net earnings		$     368,622		310,149		284,489
Basic earnings per share		$           5.53		4.68		4.46
Weighted-average common shares outstanding		66,682		66,251		63,723
Diluted earnings per share		$           5.46		4.62		4.39
Weighted-average common and dilutive potential
common shares outstanding		67,557		67,121		64,861

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 2004, 2003 and 2002

(In thousands)

<

									Accumulated
					Additional				other						Total
	Common stock				paid-in		Retained		comprehensive		Treasury stock				shareholders'
	Shares		Amount		capital		Earnings		income (loss)		Shares		Amount		equity
Balances at December 31, 2001	61,408		$      614		$        197,247		$             947,123		$    (2,837)		(8,715)		$    (193,596)		$         948,551
Stock options exercised	2,056		20		50,165		-		-		-		-		50,185
Purchase of Dal-Tile	12,907		129		750,558		-		-		-		-		750,687
Purchase of treasury stock	-		-		-		-		-		(1,371)		(64,034)		(64,034)
Grant to employee profit sharing plan	-		-		3,040		-		-		72		282		3,322
Grant to executive incentive plan	-		-		77		-		-		8		176		253
Tax benefit from exercise of stock
options	-		-		5,463		-		-		-		-		5,463
Comprehensive Income:
Discontinued hedge on
nterest rate swap	-		-		-		-		6,768		-		-		6,768
Unrealized loss on hedge instruments
net of taxes	-		-		-		-		(2,805)		-		-		(2,805)
Net earnings	-		-		- ��		284,489		-		-		-		284,489
Total Comprehensive Income															288,452
Balances at December 31, 2002	76,371		763		1,006,550		1,231,612		1,126		(10,006)		(257,172)		1,982,879
Stock options exercised	679		7		18,283		-		-		-		-		18,290
Purchase of treasury stock	-		-		-		-		-		(593)		(27,839)		(27,839)
Grant to employee profit sharing plan	-		-		2,080		-		-		72		1,929		4,009
Grant to executive incentive plan	-		-		63		-		-		12		306		369
Tax benefit from exercise of stock
options	-		-		8,757		-		-		-		-		8,757
Comprehensive Income:
Currency translation adjustment	-		-		-		-		47		-		-		47
Unrealized gain on hedge instruments
net of taxes	-		-		-		-		1,140		-		-		1,140
Net earnings	-		-		-		310,149		-		-		-		310,149
Total Comprehensive Income															311,336
Balances at December 31, 2003	77,050		770		1,035,733		1,541,761		2,313		(10,515)		(282,776)		2,297,801
Stock options exercised	464		5		14,952		-		-		-		-		14,957
Purchase of treasury stock	-		-		-		��                      -		-		(250)		(18,413)		(18,413)
Grant to executive incentive plan
and other	-		-		307		-		-		10		272		579
Tax benefit from exercise of stock
options	-		-		7,545		-		-		-		-		7,545
Comprehensive Income:
Currency translation adjustment	-		-		-		-		(1,675)		-		-		(1,675)
Unrealized loss on hedge instruments
net of taxes	-		-		-		-		(3,079)		-		-		(3,079)
Net earnings	-		-		-		368,622		-		-		-		368,622
Total Comprehensive Income															363,868
Balances at December 31, 2004	77,514		775		1,058,537		1,910,383		(2,441)		(10,755)		(300,917)		2,666,337

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years Ended December 31, 2004, 2003 and 2002

(In thousands)

		2004		2003		2002
Cash flows from operating activities:
Net earnings		$     368,622		310,149		284,489
Adjustments to reconcile net earnings to net cash
provided  by operating activities:
Depreciation and amortization		123,088		106,615		101,942
Deferred income taxes		38,700		34,775		22,137
Tax benefit on stock options exercised		7,545		8,757		5,463
Loss on sale of property, plant and equipment		3,037		3,267		2,762
Changes in assets and liabilities, net of
effects of acquisitions:
Receivables		(85,417)		(47,443)		34,657
Inventories		(179,765)		(104,964)		(15,215)
Accounts payable and accrued expenses		(25,241)		(2,769)		117,039
Other assets and prepaid expenses		(6,598)		(5,592)		(13,111)
Other liabilities		(1,134)		6,595		9,347
Net cash provided by operating activities		242,837		309,390		549,510
Cash flows from investing activities:
Additions to property, plant and equipment		(106,601)		(114,631)		(111,934)
Acquisitions		(14,998)		(384,121)		(717,638)
Net cash used in investing activities		(121,599)		(498,752)		(829,572)
Cash flows from financing activities:
Net change in revolving line of credit		(3,981)		37,299		(29,491)
Proceeds from issuance of senior notes		-		-		700,000
Proceeds from bridge credit facility		-		-		600,000
Repayment of bridge credit facility		-		-		(600,000)
Net borrowing change in asset securitizations		(92,000)		182,000		(125,000)
Payments on term loans		(25,034)		(26,492)		(32,208)
Redemption of acquisition indebtedness		-		-		(202,564)
Payments of other debt		(57)		(821)		(1,307)
Change in outstanding checks in excess of cash		3,290		6,925		(15,519)
Acquisition of treasury stock		(18,413)		(27,839)		(64,034)
Common stock transactions		14,957		18,290		50,185
Net cash (used in) provided by financing activities		(121,238)		189,362		280,062
Net change in cash		-		-		-
Cash, beginning of year		-		-		-
Cash, end of year		$                -		-		-

See accompanying notes to consolidated financial statements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
December 31, 2002, 20012004, 2003 and 2000
2002

(In thousands, except  per share data)

(1) Summary of Significant Accounting Policies

(a) Basis of Presentation

      The consolidated financial statements include the accounts of Mohawk Industries, Inc. and its subsidiaries (the "Company" or "Mohawk").  All significant intercompany balances and transactions have been eliminated in consolidation.

      The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

(b) Accounts Receivable and Revenue Recognition

      The Company is principally a broadloom carpet, rug and ceramic tile manufacturer and sells carpet, rugs, ceramic tile, natural stone, hardwood, resilient and other floorcovering materialslaminate flooring products throughout the United States principally for residential and commercial use. The Company grants credit to customers, most of whom are retail-flooring dealers and commercial end users, under credit terms that are customary in the industry.

      Revenues are recognized when goods are shipped, which is when the legal title passes to the customer. The Company provides allowances for expected cash discounts, returns, claims and doubtful accounts based upon historical bad debt and claims experience and periodic evaluations of the aging of the accounts receivable.specific customer accounts.

(c) Inventories

      Inventories are stated at the lower of cost or market (net realizable value).  Cost is determined using the last-in, first-out (LIFO) method, which matches current costs with current revenues, for substantially allapproximately 80% of the inventories within the Mohawk segment and the first-in, first-out (FIFO) method for the Dal-Tile segment inventories.and the remaining inventories within the Mohawk segment.

(d) Property, Plant and Equipment

      Property, plant and equipment isare stated at cost, including interest on funds borrowed to finance the acquisition or construction of major capital additions.capitalized interest.  Depreciation is calculated on a straight-line basis over the estimated remaining useful lives, which are 3525-35 years for buildings and improvements, 155-15 years for extrusionmachinery and equipment, 10 years for tufting equipment, the shorter of the estimated useful life or life of the lease for leasehold improvements fiveand 3-7 years for vehicles and seven years for other equipment, and furniture and fixtures.

(e) Goodwill and Other Intangible Assets

      In accordance with the provisions of SFASStatement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" the Company tests goodwill and other intangible assets with indefinite lives for impairment on an annual basis (or on an interim basis if an event occurs that might reduce the fair value of the reporting unit below its carrying value). The Company conducts testing for impairment during the fourth quarter of its fiscal year. Intangible assets that do not have indefinite lives are amortized based on average lives.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

(f) Income Taxes

      Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.bases and operating loss and tax credit carry-forwards.  Deferred tax assets and liabilities are

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

(g) Financial Instruments

      The Company's financial instruments consist primarily of accounts receivable,receivables, accounts payable, accrued expenses and long-term debt.  The carrying amount of accounts receivable,receivables, accounts payable and accrued expenses approximates their fair value because of the short-term maturity of such instruments. The carrying amount of the Company's floating rate debt approximates its fair value. Interest rates that are currently available to the Company for issuance of long-term debt with similar terms and remaining maturities are used to estimate the fair value of the Company's long-term debt. The estimated fair value of the Company's long-term debt at December 31, 20022004 and 20012003 was $894,462$961,120 and $311,617,$1,095,590, compared to a carrying amount of $820,427$891,341 and $308,433,$1,012,413, respectively.

(h) Derivative Instruments

      Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.133") and its amendments which require requires the Company to recognize all derivatives on the consolidated balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through earnings. If the derivative is a hedge, depending on the nature of the hedge, changes in its fair value are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The Company engages in activities that expose it to market risks, including the effects of changes in interest rates, exchange rates and  changes in natural gas prices. Financial exposures are managed as an integral part of the Company's risk management program, which seeks to reduce the potentially adverse effect that the volatility of the interest rate, exchange rate and natural gas markets may have on operating results. The Company does not regularly engage in speculative transactions, nor does it regularly hold or issue financial instruments for trading purposes. There was no impact on the consolidated financial statements upon adoption of SFAS No.133.

      The Company formally documents all hedging instruments and hedging items, as well as its risk management objective and strategy for undertaking hedged items. This process includes linking all derivatives that are designated as fair value and cash flow hedges to specific assets or liabilities on the consolidated balance sheet or to forecasted transactions. The Company also formally assesses, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective, the derivative expires, or is sold, terminated, or exercised, or the derivative is discontinued because it is unlikely that a forecasted transaction will occur, the Company discontinues hedge accounting for that specific hedge instrument.

(i) Fiscal Year

      The Company ends its fiscal year on December 31.  Each of the first three quarters in the fiscal year ends on the Saturday nearest the calendar quarter end.

(j)i) Advertising Costs and Vendor Consideration

      Advertising and promotion expenses are charged to earnings during the period in which they are incurred.  Advertising and promotion expenses included in selling, administrative, and general expenses were $31,474 in 2004, $26,990 in 2003 and $31,829 in 2002, $28,845 in 2001 and $25,526 in 2000.

      In 2001, the EITF reached consensus on Issue No. 01-09 "Accounting for Consideration Given by a Vendor to a Customer" ("EITF 01-09"). This issuance provides guidance primarily on income statement classification of consideration from a vendor to a purchaser of the vendor's products. Generally, cash consideration is to be2002.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      Vendor consideration, generally cash, is classified as a reduction of net sales, unless specific criteria are met regarding goods or services that the vendor may receive in return for this consideration. The Company makes various payments to customers, including slotting fees, advertising allowances, buy-downs and co-op advertising. All of these payments reduce gross sales with the exception of co-op advertising. Co-op advertising is classified as a selling, general and administrative expense. Co-op advertising expenses, a component of advertising and promotion expenses, were $10,389 in 2004, $9,355 in 2003 and $14,090 in 2002, $11,803 in 2001 and $11,570 in 2000.2002.

(k)(j) Impairment of Long-Lived Assets

      In 2002,      Long-lived assets and intangibles subject to amortization are reviewed for impairment when changes in circumstances indicate that the Company adopted Statementcarrying amount of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposalasset may not be recoverable. If the carrying amount of Long-Lived Assets."  SFAS No. 144 replaced SFAS No. 121, "Accounting for the Impairmentasset exceeds the expected undiscounted cash flows of Long-Livedthe asset, an impairment charge is recognized equal to the amount by which the carrying amount exceeds the expected undiscounted cash flows. Assets to Be Disposed Of." SFAS No. 144 establishes a single accounting model for the impairment or disposal of long-lived assets including discontinued operations. On determining that assets have been impaired or are to be disposed of including discontinued operations, the Company measuresare reported at the lower of the carrying valueamount or fair value less estimated costs of disposal and are no longer depreciated.

(k) Foreign Currency Translation

      The Company's subsidiaries that operate outside the United States use their local currency as the functional currency, with the exception of operations carried out in Canada and Mexico, in which case the functional currency is the U.S. dollar. Other than Canada and Mexico, the functional currency is translated into U.S. dollars for balance sheet accounts using the month end rates in effect as of the balance sheet date and average exchange rate for revenue and expense accounts for each respective period. The translation adjustments are deferred as a separate component of stockholders' equity, within other comprehensive income. Gains or losses resulting from transactions denominated in foreign currencies are included in other income or expense, within the consolidated statements of earnings. The assets and liabilities of the Company's Canada and Mexico operations are re-measured using a month end rate, except for non-monetary assets and liabilities, which are re-measured using the historical exchange rate. Income and expense accounts are re-measured using an average monthly rate for the period, except for expenses related to sell, whetherthose balance sheet accounts that are re-measured using historical exchange rates. The resulting re-measurement adjustment is reported in continuingthe consolidated statements of operations or discontinued operations. SFAS No. 144 also broadens the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity.when incurred.

(l) Earnings per Share ("EPS")

      The Company applies the provisions of Financial Accounting Standards Board SFAS No. 128, EarningsBasic net earnings per Share, which requires companies to present basic EPS and diluted EPS.  Basic EPS excludes dilution andshare ("EPS") is computed by dividing incomecalculated using net earnings available to common stockholders divided by the weighted-average number of common shares outstanding for the period.  Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock outstanding during the year. Diluted EPS is similar to basic EPS except that then shared in the earningsweighted-average number of shares is increased to include the Company. number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.

      Dilutive common stock options are included in the diluted EPS calculation using the treasury stock method.  Common stock options that were not included in the diluted EPS computation because the options' exercise price was greater than the average market price of the common shares for the periods presented are immaterial.were 21, 605 and 571 for 2004, 2003 and 2002, respectively.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
 

Computations of basic and diluted earnings per share are presented in the following table:

		Years Ended December 31,
		2002		2001		2000
								Years Ended December 31,
		(In thousands, except per share data)						2004		2003		2002
Net earnings		$     284,489		188,592		162,599		$     368,622		310,149		284,489
Weighted-average common and dilutive potential
common shares outstanding:
Weighted-average common shares outstanding	Weighted-average common shares outstanding	63,723		52,418		53,769	Weighted-average common shares outstanding	66,682		66,251		63,723
Add weighted-average dilutive potential common
shares - options to purchase common shares, net .		1,138		723		486
shares - options to purchase common shares, net								875		870		1,138
Weighted-average common and dilutive potential
common shares outstanding	common shares outstanding	64,861		53,141		54,255		67,557		67,121		64,861
Basic earnings per share		$           4.46		3.60		3.02		$           5.53		4.68		4.46
Diluted earnings per share		$           4.39		3.55		3.00		$           5.46		4.62		4.39

(m) Effect of New Accounting PronouncementsStock-Based Compensation

      In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for AssetRetirement Obligations"("SFAS No. 143"). SFAS No. 143 provides new guidance on the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. The Company adopted SFAS No. 143 on January 1, 2003, and it is not expected to materially impact the Company's consolidated financial statements.

      In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of Financial Accounting Standards Board Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." The Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 recognizes that the use of debt extinguishment can be a part of the risk management strategy of a company and hence, the classification of all early extinguishment of debt as an extraordinary item may no longer be appropriate. In addition, the Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Provisions of this Statement, as they relate to Statement No. 13, are to be effective for transactions occurring after May 15, 2002. Provisions, which relate to Statement No. 4, are effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 on January 1, 2003 and it is not expected to materially impact the Company's consolidated financial statements.

      In November 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for the Costs Associated with Exit or Disposal Activities," ("SFAS No. 146"). SFAS No. 146 is effective for exit or

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

disposal activities initiated after December 31, 2002 and requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred.      Effective January 1, 2003, the Company adopted SFAS No. 146 and it is not expected to materially impact the Company's consolidated financial statements.

      In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("Fin 45"). Fin 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantee. Fin 45 also requires additional disclosure about the guarantor's obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective after December 15, 2002 and are included in footnote 10 to the consolidated financial statements.

      In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting"Accounting for Stock-Based Compensation-Transition and Disclosure an amendment of FASB Statement No. 123Disclosure."("SFAS No. 148"). This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and amends therequires prominent disclosure requirements of SFAS 123 to require prominent disclosures in both the annual and interim financial statements aboutof the method of accounting used and the financial impact of stock-based compensation. As permitted by SFAS No. 123, the Company accounts for stock-based employeestock options granted as prescribed under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes compensation cost based upon the intrinsic value of the award.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

      If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under its plans, the Company's net earnings per share would have been reduced as follows:

		2004		2003		2002
Net earnings as reported		$     368,622		310,149		284,489
Deduct: Stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax effects		(7,519)		(6,284)		(4,972)
Pro forma net earnings		$     361,103		303,865		279,517
Net earnings per common share (basic)
As reported		$           5.53		4.68		4.46
Pro forma		$           5.42		4.59		4.39
Net earnings per common share (diluted)
As reported		$           5.46		4.62		4.39
Pro forma		$           5.36		4.54		4.31

      The average fair value of options granted during 2004, 2003 and 2002 was $34.39, $24.73 and $26.72, respectively. This fair value was estimated using the Black-Scholes option pricing model based on a weighted-average market price at grant date of $74.62 in 2004, $53.93 in 2003 and $62.11 in 2002 and the following weighted-average assumptions:

			2004		2003		2002
Dividend yield			-		-		-
Risk-free interest rate			2.9%		2.3%		3.0%
Volatility			43.1%		44.9%		39.7%
Expected life (years)			6		6		6

(n) Effect of New Accounting Pronouncements

      In December 2004, the FASB issued FASB Staff Position 109-1, "Application of FASB Statement No. 109, "Accounting for Income Taxes" ("SFAS No. 109") to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP 109-1"). The American Jobs Creation Act of 2004 (the "Jobs Act") provides a tax deduction for income from qualified domestic production activities. FSP 109-1 provides the treatment for the deduction as a special deduction as described in SFAS No. 109. The Company is currently evaluating the effect that the manufacturer's deduction will have on future results. FSP 109-1 is effective prospectively as of January 1, 2005.

      In December 2004, the FASB issued FASB Staff Position 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004" ("FSP 109-2"), which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Jobs Act on enterprises' income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the method usedJobs Act on reported results. The transition and annual disclosure provisionsits plan for reinvestment or repatriation of SFASforeign earnings for purposes of applying FASB Statement No. 148 are effective for fiscal years ending after December 15, 2002. Effective January 1, 2003, the Company adopted the disclosure requirements of SFAS No. 148 regarding disclosure requirements for condensed consolidated financial statements for interim periods.109. The Company has not yet determined whether it will voluntarily changecompleted evaluating the impact of the repatriation provisions and has not adjusted its tax expense or deferred tax liability to reflect the fair value based methodrepatriation provisions of accounting for stock-based employee compensation.the Jobs Act.

      In January 2003,November 2004, the Financial Accounting Standards BoardFASB issued InterpretationSFAS No. 46, "Consolidation of Variable Interest Entities and Interpretation151, "Inventory Costs-An Amendment of ARB No. 51"43, Chapter 4" ("Fin 46"SFAS 151"). Fin 46 establishesSFAS 151 amends the criteriaguidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for consolidating variable interest entities. The Company is evaluating Fin 46, whichabnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years or interim periods beginning after June 15, 2003, to variable entities that were acquired before February 1, 2003.2005. The Company is currently evaluating SFAS 151 and does not expect Fin 46it to materiallyhave a material impact on the Company's consolidated financial statements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

      In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supercedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. Transition may be accomplished using either the prospective or retrospective methods. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25. The Company is currently evaluating the transition methods under SFAS 123R and will begin expensing stock options in the third quarter of 2005.

(o) Fiscal Year

      The Company ends its fiscal year on December 31.  Each of the first three quarters in the fiscal year ends on the Saturday nearest the calendar quarter end.

(p) Reclassifications

      In 2004, the Company reclassified certain prior period financial statement balances to conform to current presentations.

(2) Acquisitions

      On November 14, 2000, the Company acquired certain fixed assets and inventory of Crown Crafts, Inc., using the purchase method of accounting and accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on estimated fair values at the date of acquisition. The estimated fair values were $37,284 for assets acquired and $440 for liabilities assumed.

      On March 20, 2002, the Company acquired all of the outstanding capital stock of Dal-Tile International Inc. ("Dal-Tile"), a leading manufacturer and distributor of ceramic tile in the United States, for approximately $1,468,325, consisting of approximately 12,900 shares of the Company's common stock, options to purchase approximately 2,100 shares of the Company's common stock and approximately $717,638 in cash, including direct acquisition costs. The Company's common stock and options were valued at approximately $750,687 based on the measurement date stock price of $55.04 per share ($710,420) and the estimated fair value of the options using the Black-Scholes option-pricing model ($40,267). The acquisition was accounted for by the purchase method and, accordingly, the results of operations of Dal-Tile have been included in the Company's consolidated financial statements from March 20, 2002. The purchase price was allocated to the assets acquired and liabilities assumed based upon the estimated fair values at the date of acquisition. The trademark value was established based upon an independent appraisal. The excess of the purchase price over the fair value of the net identifiable assets acquired of approximately $1,168,286 was recorded as goodwill. None of the goodwill is expected to be deductible for income tax purposes. The primary reasonsreason for the acquisition included:

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Noteswas to Consolidated Financial Statements (Continued)

• expand the ability to combine Mohawk's current effortsCompany's presence in the hard-flooring business with Dal-Tile's larger, more established ceramic tile and natural stone business;
• the opportunity to use Mohawk and Dal-Tile's existing distribution channels to increase sales of both carpets and hard floorcoverings;
• the potential to reduce overhead and other costs by adding Dal-Tile's distribution network to Mohawk's logistical and distribution system;
• the potential to reduce manufacturing costs and increase quality by identifying manufacturing best practices; and
• the potential to reduce general, administrative, overhead and other miscellaneous costs by spreading fixed costs over a larger business.

markets.

      Mohawk considered whether identifiable intangible assets, such as customer relationships, patents, covenants not to compete, software, production backlog, marketing agreements, unpatented technology and trade secrets, might exist and none were identified other than trademarks, during the purchase price negotiations and during the subsequent purchase price allocation evaluation. Accordingly, the valuation resulted in the recognition of goodwill and trademarks.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

      In accordance with Statement of Financial Accounting StandardsSFAS No. 142, "Goodwill"Goodwill and Other Intangible Assets"("Assets" ("SFAS No. 142"), goodwill recorded in the Dal-Tile acquisition will not be amortized. Additionally, the Company determined that the trademark intangible assets have indefinite useful lives because they are expected to generate cash flows indefinitely. Goodwill and the trademark intangible assets are subject to annual impairment testing.

      The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

	Current assets		$        322,042
	Property, plant and equipment		223,267
	Goodwill		1,168,286
	Intangible assets-trademarks		146,700
	Other assets		4,930
	Total assets acquired		1,865,225
	Current liabilities		132,124
	Long-term debt		181,300
	Other liabilities		83,476
	Total liabilities assumed		396,900
	Net assets acquired		$     1,468,325

      The following unaudited pro forma financial information presents the combined results of operations of Mohawk and Dal-Tile as if the acquisition had occurred at the beginning of 2001,2002, after giving effect to certain adjustments, including increased interest expense on debt related to the acquisition, the elimination of goodwill amortization and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had Mohawk and Dal-Tile constituted a single entity during such periods. The following table discloses the results for the fiscal yearsyear ended December 31:

			2002
	Net sales		$      4,753,002
	Net earnings		294,846
	Basic earnings per share		4.39
	Diluted earnings per share		4.32

      On May 5, 2003, the Company acquired certain assets of International Marble and Granite of Colorado, Inc., a distributor of natural stone slabs and tile. The primary reason for the acquisition was to expand the Company's presence in the stone flooring and countertop slab market. The acquisition was accounted for by the purchase method and, accordingly, the results of operations are included within the Dal-Tile segment from May 5, 2003. The purchase price was not significant.

      On June 30, 2003, the Company acquired certain assets of a manufacturer and distributor of washable bath rugs. The primary reason for the acquisition was to expand the Company's presence in the bath mat market. The acquisition was accounted for by the purchase method and, accordingly, the results of operations are included within the Mohawk segment from June 30, 2003. The purchase price was not significant.

      On November 10, 2003, the Company acquired the assets and assumed certain liabilities of the carpet division of Burlington Industries, Inc. ("Lees Carpet") from W.L. Ross & Company for approximately $352,009 in cash. The results of Lees Carpet have been included with the Mohawk segment results in the Company's consolidated financial statements since that date. The primary reason for the acquisition was to expand the Company's presence in the commercial carpet market.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
 

		2002		2001
Net sales		$  4,758,380		4,482,741
Net earnings		294,846		242,601
Basic earnings per share		4.39		3.63
Diluted earnings per share		4.32		3.58

      The following table summarizes the fair values of the assets acquired and the liabilities assumed at the date of acquisition for Lees Carpet.

	Current assets		$          62,939
	Property, plant and equipment		53,424
	Goodwill		78,083
	Intangible assets		178,340
	Other assets		52
	Total assets acquired		372,838
	Current liabilities		12,829
	Other liabilities		8,000
	Total liabilities assumed		20,829
	Net assets acquired		$        352,009

      Of the approximately $178,340 of acquired intangible assets, approximately $125,580 was assigned to trade names and not subject to amortization. The remaining $52,760 was assigned to customer relationships with a weighted-average useful life of approximately 15 years. Goodwill of approximately $78,083 was assigned to the Mohawk segment. The goodwill is deductible for income tax purposes.

      The following unaudited pro forma financial information presents the combined results of operations of Mohawk and Lees Carpet as if the acquisition had occurred at the beginning of 2002, after giving effect to certain adjustments, including increased interest expense on debt related to the acquisition, the amortization of customer relationships, depreciation and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had Mohawk and Lees Carpet constituted a single entity during such periods. The following table discloses the results for the fiscal years ended December 31:

		2003		2002
Net sales		$  5,216,312		4,777,526
Net earnings		316,386		290,996
Basic earnings per share		4.78		4.57
Diluted earnings per share		4.71		4.49

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

(3) Receivables

Receivables are as follows:
		2002		2001
						2004		2003
Customers, trade	Customers, trade	$        578,429		479,219	Customers, trade	$        746,233		663,269
Other		7,373		5,037		9,720		4,648
						755,953		667,917
		585,802		484,256
Less allowance for discounts, returns, claims and
doubtful accounts	doubtful accounts	84,673		79,381	doubtful accounts	95,303		94,417
Net receivables	Net receivables	$        501,129		404,875	Net receivables	$        660,650		573,500

(4) Inventories

The components of inventories are as follows:
		2002		2001
						2004		2003
Finished goods		$        436,080		287,525		$        665,565		535,645
Work in process		67,907		68,088		86,883		72,981
Raw materials		174,021		175,792		265,535		223,789
Total inventories	Total inventories	$        678,008		531,405	Total inventories	$     1,017,983		832,415

      The carrying value of LIFO inventory approximates replacement value at December 31, 2004 and 2003, respectively. There were no LIFO liquidations in either 2004 or 2003.

(5) Goodwill and Other Intangible Assets

      Effective January 1, 2002, theThe Company adopted SFAS No. 142,which requires the Company to evaluateevaluates its goodwill and indefinite life intangibles on an annual basis for impairment. Furthermore, any goodwill that was acquired in a purchase business combination completed after June 30, 2001 will not be amortized. Goodwill that was acquired in business combinations completed before July 1, 2001 is no longer being amortized. The Company has two reportable units,reporting segments, the Mohawk unitsegment and the Dal-Tile unit,segment and, accordingly, has assigned the acquired goodwill and indefinite life intangibles to the respective reporting units. The amount assigned to the Mohawk unit was $109,167 and $1,168,286 to the Dal-Tile unit.segments. During the fourth quarter of 2002,2004, the Company evaluated both reporting unitsthe goodwill and indefinite life intangibles using the discounted cash flow approach and determined that there was no impairment for either reportable unit.impairment.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
 

 

The following table disclosessummarizes the Company's earnings, assumingcomponents of intangible assets:

		2004		2003
Carrying amount of amortized intangible assets:
Customer relationships		$          54,160		53,010
Patents		600		600
		$          54,760		53,610
Accumulated amortization of amortized intangible assets:
Customer relationships		$            4,324		541
Patents		70		10
		$            4,394		551
Indefinite life intangible assets:
Trade names		$        272,280		272,280
Total other intangible assets		$        322,646		325,339
Aggregate amortization expense
For the year ended December 31.		$            3,843		551
Estimated amortization expense for years ended
December 31, are as follows:
2005		$            4,002
2006		4,002
2007		3,779
2008		3,619
2009		3,591

      The changes in the exclusioncarrying amount of goodwill amortization for the fiscal years ended December 31:31, 2004 and 2003 are as follows:

		2002		2001		2000
Net earnings		$      284,489		188,592		162,599
Add back: Goodwill amortization, net
of income taxes		-		2,022		2,006
Adjusted net earnings		$      284,489		190,614		164,605
Basic earnings per share		$            4.46		3.60		3.02
Add back: Goodwill amortization, net
of income taxes		-		0.04		0.04
Adjusted net earnings		$            4.46		3.64		3.06
Diluted earnings per share		$            4.39		3.55		3.00
Add back: Goodwill amortization, net
of income taxes		-		0.04		0.03
Adjusted net earnings		$            4.39		3.59		3.03

		Mohawk		Dal-Tile		Total
Balance as of January 1, 2003		$     109,167		1,168,286		1,277,453
Goodwill acquired during the year		85,916		5,331		91,247
Balances as of December 31, 2003		195,083		1,173,617		1,368,700
Goodwill acquired during the year		1,549		7,100		8,649
Balances as of December 31, 2004		$     196,632		1,180,717		1,377,349

      The increase in goodwill during 2004 was attributable to an acquisition made within the Dal-Tile reporting segment and an earn-out payment related to an acquisition made within the Mohawk reporting segment during 2003.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

(6) Property, Plant and Equipment

Following is a summary of property, plant and equipment:
		2002		2001
						2004		2003
Land		$          56,671		24,355		$          59,638		59,621
Buildings and improvements		339,630		275,174		378,389		367,007
Machinery and equipment		1,052,567		910,454		1,233,140		1,154,387
Furniture and fixtures		42,421		34,677		44,371		45,680
Leasehold improvements		16,354		6,405		24,120		19,912
Construction in progress	Construction in progress	77,468		26,654	Construction in progress	78,165		88,883
						1,817,823		1,735,490
		1,585,111		1,277,719
Less accumulated depreciation and amortization	Less accumulated depreciation and amortization	729,787		658,016	Less accumulated depreciation and amortization	912,491		816,405
Net property, plant and equipment		$        855,324		619,703		$        905,332		919,085

      Property, plant and equipment includes capitalized interest of $3,197, $5,634 and $2,126 $1,855in 2004, 2003 and $3,097 in 2002, 2001respectively. Depreciation expense was $117,768, $104,450 and 2000,$96,819 for 2004, 2003 and 2002, respectively.

      Effective January 1, 2000, the Company extended the estimated useful lives on certain property, plant and equipment. The impact of the change was to increase net earnings for 2000 by approximately $14,600, or $0.27 per share.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(7) Long-Term Debt

      The Company'sOn September 29, 2004, the Company amended its five-year revolving line of credit agreement provides for anfacility with interest raterates of either (i) LIBOR plus 0.2%0.4% to 0.5%1.4%, depending upon the Company's performance measured against certain financial ratios, or (ii) the primebase rate less 1.0% and has a termination dateplus 0-0.5%, depending upon the Company's performance measured against certain financial ratios. The facility was increased from $200,000 to $300,000. The increase in the facility replaces the $100,000 364-day facility, which expired during the third quarter of January 28, 2004.  At December 31, 2002, the Company had credit facilities of $450,000 under its revolving credit line and $55,000 under various short-term uncommitted credit lines. At December 31, 2002, a total of $462,501 was unused under these lines. All of these lines are unsecured. The credit agreement contains customary financial and other covenants. The Company must pay an annual facility fee ranging from .0015.15% to .0025.50% of the total credit commitment, depending upon the Company's performance measured against specific coverage ratios, under the revolving credit line.

      In connection with the Dal-Tile acquisition, the Company entered intoratios. At December 31, 2004, a 364-day term loan facility (the "Bridge Facility") on March 20, 2002 to finance a portion of the acquisition. On April 2, 2002, the Company sold $300,000 of its 6.50% senior notes due 2007, Series A and $400,000 of its 7.20% senior notes due 2012, Series B through institutional private placements and used the proceeds to repay outstanding indebtednesstotal of approximately $601,000$234,130 was available under both the Bridge Facilitycredit facility and approximately $90,000uncommitted credit lines compared to $237,344 available under both the credit facility and uncommitted credit lines at December 31, 2003. The amount used under both the credit facility and uncommitted credit lines at December 31, 2004, consisted of $37,721 under the Company's revolving credit facility. On June 13, 2002,facility and unsecured credit lines, $55,599 standby letters of credit guaranteeing the Company exchanged $294,965Company's industrial revenue bonds and $22,550 standby letters of its registered 6.50% notes due 2007, Series C for an equal amount of its Series A senior notescredit related to various insurance contracts and $397,800 of its registered 7.20% senior notes due 2012, Series D for an equal amount of its Series B senior notes. Interest on each series is payable semiannually.foreign vendor commitments. The revolving credit facility and uncommitted credit lines are unsecured.

      The Company has twoan on-balance sheet trade accounts receivable securitization agreements with bank agents for asset-backed commercial paper conduits. These facilities enableagreement (the "Securitization Facility"). The Securitization Facility allows the Company to borrow up to $205,000 through the Mohawk segment and up to $75,000 through its Dal-Tile segment. Each securitization is secured by the respective segment trade receivables and is subject to annual renewal.$350,000 based on available accounts receivable. At December 31, 2002,2004, the Company had no amounts outstanding under either securitization facility, both of which were available up to their respective facility limits. At December 31, 2001, the Mohawk segment had $125,000$90,000 outstanding secured by approximately $461,072$825,799 million of receivables.

      The Company guarantees the Industrial Revenue Bonds with various standby letterstrade receivables compared to $182,000 secured by approximately $649,018 of credit, which were in aggregate $55,200trade receivables at December 31, 20022003. During the third quarter of 2004, the Company extended the term of its Securitization Facility until August 2005 and 2001.amended certain representations and warranties.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
 

Long-term debt consists of the following:
		2002		2001
Revolving line of credit, due January 28, 2004		$            4,402		33,893
Asset securitization, due October 24, 2003		-		125,000
6.50% senior notes, payable April 15, 2007
interest payable semiannually		300,000		-
7.20% senior notes, payable April 15, 2012
interest payable semiannually		400,000		-
8.46% senior notes, payable in annual principal
installments beginning in 1998, due September 16, 2004,
interest payable quarterly		28,571		42,857
7.14%-7.23% senior notes, payable in annual principal
installments beginning in 1997, due September 1, 2005,
interest payable semiannually		28,333		37,778
8.48% term loans, payable in annual principal installments,
due October 26, 2002, interest payable quarterly		-		5,714
7.58% senior notes, payable in annual principal installments
beginning in 1997, due July 30, 2003, interest payable semiannually		1,428		2,857
6% term note, payable in annual principal and interest
installments beginning in 1998, due July 23, 2004		2,671		4,007
Industrial revenue bonds and other		55,022		56,327
Total long-term debt		820,427		308,433
Less current portion		27,427		158,366
Long-term debt, excluding current portion		$        793,000		150,067
The aggregate maturities of long-term debt as of
December 31, 2002 are as follows:
2003		$          27,427
2004		29,380
2005		9,448
2006		6,500
2007		300,000
Thereafter		447,672
		$        820,427

Long-term debt consists of the following:
		2004		2003
Short term uncommitted credit lines		$          37,721		-
364-Day Credit Agreement, due September 29, 2004		-		41,701
Securitization Facility, due August 1, 2005		90,000		182,000
6.50% senior notes, payable April 15, 2007
interest payable semiannually		300,000		300,000
7.20% senior notes, payable April 15, 2012
interest payable semiannually		400,000		400,000
8.46% senior notes, payable in annual principal
installments beginning in 1998, due September 16, 2004,
interest payable quarterly		-		14,286
7.14%-7.23% senior notes, payable in annual principal
installments beginning in 1997, due September 1, 2005,
interest payable semiannually		9,447		18,889
6% term note, payable in annual principal and interest
installments beginning in 1998, due July 23, 2004		-		1,336
Industrial revenue bonds and other		54,173		54,201
Total long-term debt		891,341		1,012,413
Less current portion		191,341		302,968
Long-term debt, excluding current portion		$        700,000		709,445
The aggregate maturities of long-term debt as of
December 31, 2004 are as follows:
2005		$        191,341
2006		-
2007		300,000
2008		-
2009		-
Thereafter		400,000
		$        891,341

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
 

(8) Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses are as follows:
		2002		2001
						2004		2003
Outstanding checks in excess of cash	Outstanding checks in excess of cash	$          23,504		45,012	Outstanding checks in excess of cash	$          33,719		30,429
Accounts payable, trade		236,272		171,620		277,851		245,746
Accrued expenses		222,868		132,944		180,978		185,099
Income taxes payable						16,143		76,913
Accrued compensation		106,639		73,919		114,370		99,753
Total accounts payable and accrued expenses	Total accounts payable and accrued expenses	$        589,283		423,495	Total accounts payable and accrued expenses	$        623,061		637,940

(9) Derivative Financial Instruments

Interest Rate Risk Management

      The Company used an interest rate swap contract to adjust the proportion of total debt that was subject to variable interest rates as compared to fixed interest rates. Under the interest rate swap contract, the Company agreed to pay an amount equal to a fixed-rate of interest times a notional principal amount of $100,000, and to receive in return an amount equal to a specified variable-rate of interest times the same notional principal amount. The notional amounts of the contracts are not exchanged, and no other cash payments are made. The contract fair value is reflected on the consolidated balance sheets and related gains or losses were deferred in other comprehensive income. These deferred gains and losses are recognized in income as an adjustment to interest expense over the same period in which the related interest payments being hedged are recognized in income. However, to the extent that any of these contracts are not considered to be 100% effective in offsetting the change in the value of the interest payments being hedged, any changes in fair value relating to the ineffective portion of these contracts is immediately recognized in earnings. During December 2002, the Company determined, based on future cash flow projections, that the cash flow hedge would more than likely become ineffective as strong cash flow has allowed the Company to significantly reduce its outstanding LIBOR based variable rate debt below the $100,000 hedged notional amount. The unrealized loss on the interest rate swap previously included in other comprehensive income has been recorded in interest expense in the fourth quarter of 2002. The amount recorded in interest expense was $10,700. The Company continues to carry the liability on the consolidated balance sheets at its fair value and it will be marked to market in future reporting periods with any changes being recorded in interest expense.

Natural Gas Risk Management

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

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

      Any gain or loss is reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. At December 31, 2002,2004, the Company had natural gas contracts that mature from January 2005 to March 2005 with an aggregate notional amount of approximately 1,010 MMBTU's. The fair value of these contracts was a liability of $1,280. At December 31, 2003, the Company had natural gas contracts outstanding with an aggregate notional amount of approximately 1,4503,950 MMBTU's. The fair value of these contracts which mature from January 2003 to December 2004, was an asset of $1,911, with the$3,565. The offset to these assets is recorded in other comprehensive income, net of applicable income taxes. The ineffective portion of the derivative is recognized in the cost of goods sold within the consolidated statements of earnings and was not significant for the periods reported. The amount that the Company anticipates that will be reclassified out of accumulated other comprehensive income in the next twelve months is a loss of approximately $1,280.

      The Company's natural gas long-term supply agreements are accounted for under the normal purchases provision within SFAS No. 133 and its amendments. At December 31, 2002,2004, the Company hashad normal purchase commitments of approximately 4,5601,892 MMBTU's for periods maturing from January 20032005 through August 2005.March 2006. The contracted

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

value of these commitments was approximately $17,441$9,879 and the fair value of these commitments was approximately $19,694,$11,941, at December 31, 2002.2004. At December 31, 2003, the Company had normal purchase commitments of approximately 3,095 MMBTU's. The contracted value of these commitments was approximately $13,774 and the fair value of these commitments was approximately $17,018.

Foreign Currency Rate Management

      The Company enters into foreign exchange forward contracts to hedge foreign denominated costs associated with its operations in Mexico. The objective of these transactions is to reduce volatility of exchange rates where these operations are located by fixing a portion of their costs in USU.S. currency. Accordingly, these contracts have been designated as cash flow hedges. Gains and losses are reclassified from other comprehensive income and recognized in cost of goods sold in the same period or periods during which the hedged transaction affects earnings. Accordingly, these contracts have been designated as cash flow hedges. At December 31, 2002, theThe Company had forward contracts maturing from January 2003 through December 2003, to purchase approximately 357,522145,284 Mexican pesos.pesos at December 31, 2003. The aggregate U.S. Dollardollar value of these contracts at December 31, 20022003 was approximately $34,581.$12,665. The contracts are marked to market in other current liabilities with the offset to other comprehensive income, net of applicable income taxes. Unrealized losses at December 31, 2002,2003 were not material.significant. The Company had no forward contracts outstanding at December 31, 2004.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

(10) Product warranties

      The Company warrants certain qualitative attributes of its products for up to 20 years. The Company records a provision for estimated warranty and related costs, based on historical experience and periodically adjusts these provisions to reflect actual experience.

Product warranties are as follows:
		2002		2001		2000
								2004		2003		2002
Balance at beginning of year	Balance at beginning of year	$          7,021		6,506		6,532		$        24,063		28,919		32,406
Warranty claims		(61,718)		(52,125)		(49,426)
Warranty claims.								(45,553)		(50,040)		(55,999)
Warranty expense	Warranty expense	61,881		52,640		49,400		44,963		45,184		52,512
Balance at end of year	Balance at end of year	$          7,184		7,021		6,506		$        23,473		24,063		28,919

(11) Stock Options, Stock Compensation and Treasury Stock

      Under the 2002 Long-Term Incentive Plan, options may be granted to directors and key employees through 2012 to purchase a maximum of 3,200 shares of common stock. Under the 2002 plan, options that were not issued from the 1992, 1993 and 1997 plans were cancelled.  During 2002, 2001,2004, 2003 and 20002002, options to purchase 731, 704,411, 565 and 181731 shares, respectively, were granted under the 1992, 1993, 1997 and 2002 plans. Options granted under each of these plans expire 10 years from the date of grant and become exercisable at such dates and at prices as determined by the Compensation Committee of the Company's Board of Directors. In connection with the acquisition of Dal-Tile in 2002, the Company issued 2,096 options to employees of Dal-Tile in exchange for their respective options.

      During 1996, the Company adopted the 1997 Non-Employee Director Stock Compensation Plan.  The plan provides for awards of common stock of the Company for non-employee directors to receive in lieu of cash for their annual retainers.  During 2002, 2001,2004, 2003 and 20002002, a total of two, two,1, 1 and four2 shares, respectively, were awarded to the non-employee directors under the plan.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
 

      Additional information relating to the Company's stock option plans follows:

			2002		2001		2000
Options outstanding at beginning of year			1,916		1,868		2,043
Options granted for Dal-Tile acquisition			2,096		-		-
Options granted			731		704		184
Options exercised			(2,056)		(570)		(181)
Options canceled			(283)		(86)		(178)
Options outstanding at end of year			2,404		1,916		1,868
Options exercisable at end of year			796		599		931
Option prices per share:
Options granted during the year		$	38.73-65.02		23.33-53.01		20.13-26.26
Options exercised during the year		$	5.67-49.09		5.67-35.13		5.67-19.70
Options canceled during the year		$	9.58-63.14		5.67-42.86		6.67-35.14
Options outstanding at end of year		$	6.67-65.02		5.61-53.01		5.61-35.13
Options exercisable at end of year		$	6.67-53.01		5.61-35.13		5.61-35.13

      As allowed under SFAS No. 123, "Accounting for Stock Based Compensation", the Company accounts for stock options granted as prescribed under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which recognizes compensation cost based upon the intrinsic value of the award. Accordingly, no compensation expense has been recognized in the consolidated statements of earnings for any stock options granted in 2002, 2001 and 2000. The following table represents pro forma net earnings and pro forma earnings per share had the Company elected to account for stock option grants using the fair value based method.

		2002		2001		2000
Net earnings as reported		$     284,489		188,592		162,599
Deduct: Stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax effects		(4,972)		(3,198)		(2,286)
Pro forma net earnings		$     279,517		185,394		160,313
Net earnings per common share (basic)
As reported		$           4.46		3.60		3.02
Pro forma		$           4.39		3.54		2.98
Net earnings per common share (diluted)
As reported		$           4.39		3.55		3.00
Pro forma		$           4.31		3.49		2.95

      This pro forma impact only takes into account options granted since January 1, 1996 and is likely to increase in future years as additional options are granted and amortized ratably over the vesting period. The average fair value of options granted during 2002, 2001 and 2000 was $26.72, $15.27 and $13.00, respectively. This fair value was estimated using the Black-Scholes option pricing model based on a weighted-average market price at grant date of $62.11 in 2002, $31.91 in 2001 and $22.69 in 2000 and the following weighted-average assumptions:

			2004		2003		2002
Options outstanding at beginning of year			2,413		2,624		1,916
Options granted for Dal-Tile acquisition			-		-		2,096
Options granted			411		565		731
Options exercised			(464)		(679)		(2,056)
Options canceled			(79)		(97)		(63)
Options outstanding at end of year			2,281		2,413		2,624
Options exercisable at end of year			791		765		1,017
Option prices per share:
Options granted during the year		$	61.33-90.97		48.50-74.93		38.73-65.02
Options exercised during the year		$	9.33-65.02		6.67-63.14		5.67-49.09
Options canceled during the year		$	11.17-82.50		9.33-63.90		9.58-63.14
Options outstanding at end of year		$	9.33-90.97		9.33-74.93		6.67-65.02
Options exercisable at end of year		$	9.33-74.93		9.33-65.02		6.67-53.01

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

		2002		2001		2000
Dividend yield		-		-		-
Risk-free interest rate		3.0%		4.1%		5.1%
Volatility		39.7%		43.3%		48.1%
Expected life (years)		6		6		7

      Summarized information about stock options outstanding and exercisable at December 31, 2002,2004, is as follows:

		Outstanding						Exercisable
Exercise price range		Number of Shares		Average Life (1)		Average Price (2)		Number of Shares		Average Price (2)
Under $19.69		575		4.42		$   15.46		467		$   14.49
$19.93-30.50		249		7.08		22.77		105		23.19
$30.53-30.53		499		8.16		30.53		68		30.53
$30.69-53.53		425		7.34		37.45		156		34.56
$58.00-58.00		42		9.95		58.00		-		-
$63.14-65.20		614		9.18		63.37		-		-
Total		2,404						796

		Outstanding						Exercisable
Exercise price range		Number of Shares		Average Life (1)		Average Price (2)		Number of Shares		Average Price (2)
Under $30.53		650		4.56		$   23.09		446		$   20.08
$30.69-48.50		509		7.24		44.40		159		37.39
$49.09-63.14		493		7.39		60.93		119		60.87
$63.90-73.45		555		8.60		70.27		66		65.54
$73.54-84.85		67		9.48		81.42		1		74.93
$90.97-90.97		7		9.96		90.97		-		-
Total		2,281		6.91		49.41		791		33.55

                           
1)       Weighted average(1)       Weighted-average contractual life remaining in years.
2)       Weighted average(2)       Weighted-average exercise price.

      The Company's Board of Directors has authorized the repurchase of up to 15,000 shares of its outstanding common stock. For the year ended December 31, 2002,2004, a total of approximately 1,371250 shares of the Company's common stock werewas purchased at an aggregate cost of approximately $64,034.$18,413. Since the inception of the program, a total of approximately 10,36411,207 shares havehas been repurchased at an aggregate cost of approximately $265,291.$311,543. All of these repurchases have been financed through the Company's operations and banking arrangements.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

(12) Employee Benefit Plans

      The Company has a 401(k) retirement savings plan (the "Mohawk Plan") open to substantially all of its employees who have completed 90 days of eligible service. TheFor the Mohawk segment, the Company contributes $0.50 for every $1.00 of employee contributions up to a maximum of 4% of the employee's salary and an additional $0.25 for every $1.00 of employee contribution in excess of 4% of the employee's salary up to a maximum of 6%. Employee and employer contributions to the Mohawk Plan were $20,237 and $7,359 in 2002, $18,322 and $6,521 in 2001, and $16,926 and $6,055 in 2000, respectively. The Company also made a discretionary contribution to the Mohawk Plan of approximately $3,797, $2,500 and $2,500 in 2002, 2001 and 2000, respectively.

      The Dal-Tile International Inc. Employees' Retirement Savings Plan (the "Dal-Tile Plan") is a defined contribution 401(k) plan covering substantially all Dal-Tile employees.  Employees were eligible to participate after completion of 60 days of service. Under the terms ofFor the Dal-Tile Plan, Dal-Tilesegment, the Company contributes $.50 for every $1.00 of employee contributions up to a maximum of 6% of the employee's salary and employees are vested in the contributions based on years of credited service.salary. Employee and employer contributions to the Dal-TileMohawk Plan were $5,026$35,440 and $2,103$13,896 in 2004, $28,807 and $10,995 in 2003, and $20,237 and $7,359 in 2002, respectively. The Dal-Tile Plan was merged intoCompany also made a discretionary contribution to the Mohawk Plan effective January 1, 2003. Dal-Tile also maintains a performance based profit sharing planof approximately $5,214, $4,595 and $3,797 in which the Company contributed approximately $1,588 in 2002.

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
2004, 2003 and 2002, respectively.

(13) Income Taxes

      Income tax expense attributable to earnings before income taxes for the years ended December 31, 2002, 20012004, 2003 and 2000,2002, consists of the following:

		Current		Deferred		Total		Current		Deferred		Total
2004:
U.S. federal								$     158,704		32,541		191,245
State, local and other							State, local and other	11,363		6,159		17,522
								$     170,067		38,700		208,767
2003:
U.S. federal								$     132,849		38,696		171,545
State, local and other							State, local and other	10,661		(3,921)		6,740
								$     143,510		34,775		178,285
2002:
U.S. federal		$     133,914		9,859		143,773		$     133,914		9,859		143,773
State, local and other	State, local and other	3,089		12,278		15,367	State, local and other	3,089		12,278		15,367
								$     137,003		22,137		159,140
		$     137,003		22,137		159,140
2001:
U.S. federal		$       82,246		5,728		87,974
State, local and other		15,015		(165)		14,850
		$       97,261		5,563		102,824
2000:
U.S. federal		$       64,444		28,466		92,910
State, local and other		8,407		3,713		12,120
		$       72,851		32,179		105,030

      Income tax expense attributable to earnings before income taxes differs from the amounts computed by applying the U.S. statutory federal income tax rate to earnings before income taxes as follows:

		2002		2001		2000
								2004		2003		2002
Computed "expected" tax expense		$     155,270		101,996		93,670		$     202,087		170,952		155,270
State and local income taxes, net of federal
income tax benefit		9,989		9,652		7,878		11,675		5,071		8,741
Amortization of goodwill		-		709		700
Foreign income taxes								(892)		2,495		1,248
Tax credits		(5,000)		(5,000)		-		(1,821)		(2,312)		(5,000)
Other, net		(1,119)		(4,533)		2,782		(2,282)		2,079		(1,119)
								$     208,767		178,285		159,140
		$     159,140		102,824		105,030

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

      The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 20022004 and 2001,2003, are presented below:

		2002		2001
Deferred tax assets:
Accounts receivable		$                -		3,286
Inventories		16,526		19,089
Prepaid expenses		655		-
Accrued expenses		67,706		49,030
Gross deferred tax assets		84,887		71,405
Deferred tax liabilities:
Plant and equipment		(105,443)		(72,934)
Trademarks		(57,929)		-
Prepaid expenses		-		(1,347)
Other		(26,437)		(12,021)
Gross deferred tax liabilities		(189,809)		(86,302)
Net deferred tax liability		$   (104,922)		(14,897)

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Statements (Continued)

		2004		2003
Deferred tax assets:
Accounts receivable		$       32,008		41,582
Inventories		9,641		25,312
State net operating loss		7,020		7,142
Accrued expenses		62,767		61,003
Gross deferred tax assets		111,436		135,039
Deferred tax liabilities:
Plant and equipment		(129,287)		(117,857)
Intangibles		(83,545)		(72,954)
Other liabilities		(35,054)		(43,637)
Gross deferred tax liabilities		(247,886)		(234,448)
Net deferred tax liability		$   (136,450)		(99,409)

      Based upon the expected reversal of deferred tax liabilities and the level of historical and projected taxable income over periods in which the deferred tax assets are deductible, the Company's management believes it is more likely than not the Company will realize the benefits of these deductible differences atdifferences.

      Income tax expense of $1,659 was recorded in other comprehensive income related to the Company's hedge instruments as of December 31, 2002.2004.

      The Company does not provide for U.S. federal and state income taxes on the cumulative undistributed earnings of its foreign subsidiaries because such earnings are reinvested and will continue to be reinvested indefinitely. At December 31, 2004, the Company had not provided federal income taxes on earnings of approximately $48,172 from its foreign subsidiaries. Should these earnings be distributed in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes in various international jurisdictions. These taxes will be partially offset by U.S. foreign tax credits.

      The American Jobs Creation Act of 2004 was enacted on October 22, 2004. This new law made numerous and substantive changes in the taxation of foreign-sourced and domestic income. As of this date, the U.S. Treasury Department has not issued regulations providing implementation guidance for this new law. Due to the lack of guidance and the complex calculations involved, the Company has not completed its analysis of the effect this legislation may have on it.

      In the normal course of business, the Company's tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities, and the Company has accrued a liability when it believes that it is probable that it will be assessed. Differences between the estimated and actual amounts determined upon ultimate resolution, individually or in the aggregate, are not expected to have a material adverse effect on the Company's consolidated financial position but could possibly be material to the Company's consolidated results of operations or cash flow of any one period.

(14) Commitments and Contingencies

      The Company is obligated under various capital and operating leases for office and manufacturing space, machinery, and equipment.

      Future minimum lease payments under non-cancelable capital and operating leases (with initial or remaining lease terms in excess of one year) atas of December 31:

		Capital Leases		Operating Leases		Total Future Payments
2003		$            798		60,936		61,734
2004		-		49,346		49,346
2005		-		37,248		37,248
2006		-		27,754		27,754
2007		-		16,944		16,944
Thereafter		-		26,235		26,235
Total payments		$            798		218,463		219,261
Less amount representing interest		34
Present value of capitalized lease payments
with a weighted interest rate of 7.60%		$            764

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)
 

 The Company assumed several capitalized leases from recent acquisitions for machinery and equipment, at a cost of $5,010 as of December 31, 2002 and 2001. The amortization of these capital leases is included in depreciation expense. Accumulated amortization was $4,245 and $2,038 as of December 31, 2002 and 2001.

	2005		$       81,803
	2006		67,656
	2007		50,934
	2008		39,980
	2009		31,133
	Thereafter		61,786
	Total payments		$     333,292

      Rental expense under operating leases was $87,659, $78,007 and $62,066 $39,072in 2004, 2003 and $36,392 in 2002, 2001 and 2000, respectively.

      The Company has approximately $19,600$36,693 and $23,433 as of December 31, 2004 and 2003 in standby letters of credit for various insurance contracts and commitments to foreign vendors that expire within two years.

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

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

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

MOHAWK INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Continued)

(15) Consolidated Statements of Cash Flows Information

      Supplemental disclosures of cash flow information are as follows:

		2002		2001		2000
								2004		2003		2002
Net cash paid during the year for:
Interest		$        43,866		31,789		39,866		$        60,744		61,424		43,866
Income taxes		$        59,931		73,498		74,592		$      226,227		139,914		59,931
Supplemental schedule of non-cash
investing and financing activities:
Fair value of assets acquired in acquisition		$   1,865,225		-		37,284		$                  -		407,320		1,865,225
Liabilities assumed in acquisition		(396,900)		-		(440)	Liabilities assumed in acquisition	-		(23,199)		(396,900)
Issuance of common stock and options
in acquisition		(750,687)		-		-		-		-		(750,687)
								$                  -		384,121		717,638
		$      717,638		-		36,844

(16) Other Income and Expense

Other income and expense are as follows:
		2002		2001		2000
Miscellaneous  income		$          5,914		1,826		1,218
Miscellaneous  expense		$        12,425		3,966		2,010
Amortization expense		-		3,814		3,650
		$        12,425		7,780		��     5,660