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Directors' Report for the Six Months Ended
31 December 2006

Financial Performance

The Directors of Cavalier Corporation announce an unaudited operating surplus after tax and minority interests of $7.1 million for the six months to 31 December 2006. This represents a 5.3% increase on last year.

This earnings increase was signalled at our Annual Meeting in November last year and reflects the generally better trading conditions encountered by our carpet and wool operations.

Operating revenue at $102.3 million is 6% up on last year, with the increase spread evenly across all the operations in the Group.

EBITDA (Earnings before interest, tax, depreciation and amortisation) for the Group is $16.3 million, up 5.9% on last year. Interest cost is up by 3%, reflecting the increase in interest rates.

Financial Position

Shareholders' equity decreased by $2.1 million during the period because the Company pays approximately 70% of its annual dividends in the first half of the financial year.

Over that same period, total assets of the Group decreased by $5.9 million to $147.1 million and term and current liabilities decreased by $3.8 million to $84.7 million to leave the Group's proprietorship ratio unchanged on the 42% at June 2006.

Net interest-bearing debt : equity at balance date stood at 49 : 51 which is also unchanged on the position at June 2006.

Segment Reviews

Carpet Operations

Operating revenue for carpets was $83 million, up 6.5% on last year, and operating surplus before interest and tax of $14.8 million was up 2.9% on last year.

After the difficult trading period experienced last year, we started to see some growth in our carpet sales. Of note was the higher volume of retail carpet sales in Australia which mirrored the feedback we were getting from the retail trade about the increase in demand for carpet at the quality and better end of the market. Notable too was the strong sales of our carpet tile operation which enjoyed strong market conditions on both sides of the Tasman.

In New Zealand, our carpet sales were in line with last year which is a good result considering the impact a slower housing sector has on carpet demand.

However, the markets remained as price-competitive as ever, and we experienced pressures on margins in almost all market segments.

Wool Operations

Revenue for the wool operations was $19.3 million, up 5.1% on last year. The operating result before interest and tax was $0.2 million, a turnaround from a loss of $0.3 million last year.

The wool acquisition operation performed well despite the continuing difficult trading conditions brought about by the persistently high NZD. This in turn hindered the ability of our customers, the wool exporters, to sell wool and to trade the margins. As mentioned previously, our business here is not to take positions in wool or in currency, but to act as a service provider to the wool exporting community by sourcing wool from farmers at the farm gate to meet orders.

The other part of our wool operation is commission wool scouring. Our volumes here have improved, but earnings have been eroded by recent increases in freight and energy costs and by the high NZD on wool grease revenues.

Microbial Technologies

Research in this area continues and for the six months to December, $480,000 was incurred compared with $446,000 last year.

Results from the earlier trials proved to be inconclusive, and your Directors have, as a result, approved a further set of trials which should be completed within the next 20 weeks.

Earnings Outlook

We expect the market conditions experienced in the first half to continue into the second half of this financial year.

In our carpet operations, we expect the improved performances in retail and contract sales in Australia to continue and the operating environment to remain stable in New Zealand. And in our wool operations, we expect the same difficult trading conditions as in the first half, but we should at least hold onto the improved performances of the first half.

Overall, our outlook for the full year to 30 June 2007 is for a tax paid profit (before Microbial costs) of around $15.3 million, giving a 5% increase on last year's $14.6 million, which is unchanged on that announced at our last Annual Meeting in November 2006.

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 2007 of 5.5 cents per share, which is 0.5 cent/10% up on last year's second interim dividend of 5 cents per share.

This second interim dividend, together with the first interim of 3 cents per share paid in December 2006, gives a total of 8.5 cents thus far - 6% up on last year's total interim dividends and in line with the 5% increase in operating surplus after tax and minority interest.

The second interim dividend will be paid on Friday, 16th March 2007. The share register will close at 5 p.m. on Friday, 9th March 2007 for the purpose of determining entitlement to the dividend and will reopen on Monday, 12th March 2007.

Non-resident shareholders will also be receiving a supplementary dividend of 0.9706 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

16 February 2007

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