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Cavalier Corporation Limited & Subsidiary Companies
Directors' Report

Financial Performance

The Directors of Cavalier Corporation announce an unaudited operating surplus after tax and minority interests of $6.7 million for the six months to 31 December 2005. This represents a 38% decrease on last year

Operating revenue at $96.3 million is 5% down on last year, with most of the reduction coming from our broadloom carpet operation.

The EBITDA for our operational businesses, which excludes the research costs relating to the Microbial project, of $15.9 million is down 23% on last year. Interest cost is up by 39%, brought about by increased borrowings and higher interest rates.

The reduction in earnings was signalled at our Annual Meeting in November last year and reflects the softer and more challenging conditions faced by our carpet and wool operations.

Financial Position

Segment Reviews

Carpet Operations

Operating revenue for carpets was $78 million, down 6% on the previous year, and operating surplus before interest and tax of $14.4 million was down 21% on the previous year.

Market conditions for the broadloom carpet business have been particularly challenging over the last six months because of the slow down in the housing sector and the resulting drop off in demand for carpet.

We have seen this slow down in residential carpet sales in Australia, our main off-shore market, for some time now and are starting to experience the same in New Zealand.

Trading conditions in the contract flooring business, where our broadloom and tile carpet businesses operate, were much better, but margins came under pressure as carpet manufacturers diverted their surplus capacity into this segment of the market. Despite this, our tile operation, Ontera Modular, which operates exclusively in the contract market, performed relatively well and was able to increase its sales by 7% on last year.

Wool Operations

Revenue for the wool businesses was $18.3 million, virtually the same as last year. The operating result before interest and tax was a loss of $0.3 million, a turnaround from a profit of $0.8 million last year.

The wool acquisition business found trading conditions to be very difficult. The high NZD and a lack of demand for NZ wool have taken their toll on wool prices which have been the lowest for some years now. Our wool operation does not take positions in wool so there is no trading risk involved. It only buys wool from farmers when there are corresponding buy orders from wool exporters. However, its margins have been eroded by the difficulty of the wool exporter in selling wool profitably at the current high NZD.

Our main wool business is commission wool scouring and this too is finding the trading environment challenging as it grapples with higher operating costs, such as freight and energy, and lower wool grease revenues due to the high NZD.

Microbial Technologies

Costs relating to the Microbial project for this six month period were charged against profit as incurred. Previously, these costs were capitalised to development costs in the Balance Sheet and so had no impact on earnings.

$446,000 were spent on the project for the six months to 31 December 2005.

As noted in the Managing Director's address at the Annual Meeting, we are continuing with the Microbial project to explore several important aspects that could alter the commercial dynamics of the project significantly. Trials are being conducted at the moment, but it is too early to provide any meaningful results at this stage. The results should be available within the next few months, and they will be pivotal to our future involvement in this project. We will inform shareholders of our decision at the time.

Earnings Outlook

Our earnings at this half way stage of the current financial year are down 38% on last year which is in line with the projections given at the Annual Meeting in November last year.

Our outlook for the full year is for operating earnings to be 20% to 30% down on last year's $19.5 million, both before Microbial costs. This outlook is unchanged from that provided at last November's Annual Meeting.

If there are any material changes to our year-end outlook, we will let shareholders know.

Dividends

The policy of paying dividends three times a year continues.

The Directors have declared a fully imputed second interim dividend for the year ending 30 June 2006 of 5 cents per share, 3 cents down on the 8 cents per share second interim dividend for the previous year.

This second interim dividend, together with the first interim of 3 cents per share paid in December 2005, gives a total of 8 cents thus far - 4.5 cents down on the 12.5 cents per share for the previous year.

The second interim dividend will be paid on Friday, 17th March 2006. The share register will close at 5 p.m. on Friday, 10th March 2006 for the purpose of determining entitlement to the dividend and will reopen on Monday, 13th March 2006.

Non-resident shareholders will also be receiving a supplementary dividend of 0.8824 cent per share together with their second interim dividend.



For and on behalf of the Board of Directors:



A M James W K Chung
Chairman Managing Director

17 February 2006

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