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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File No. 000-50025

GUILFORD MILLS, INC.

Registrant’s telephone number, including area code: (336) 316-4000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at March 29, 2003, computed by the last reported trading price on the Over-the-Counter Bulletin Board ($4.00) of the Registrant’s Common Stock on such date: $14,059,200. (Solely for the purposes of the foregoing calculation, affiliates are considered to be Directors, Officers and greater than 10% beneficial owners of the Registrant’s common equity.)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Number of shares of the Registrant’s New Common Stock, par value $.01 per share, outstanding as of December 22, 2003: 5,501,053.

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IMPORTANT INFORMATION REGARDING THIS FORM 10-K

Readers should consider the following information as they review this Form 10-K:

Fresh Start Accounting

In connection with the Company’s bankruptcy reorganization in 2002, the Company has applied Fresh Start Reporting (as defined herein) to its consolidated balance sheet as of September 29, 2002 in accordance with Statement of Position No. 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” as promulgated by the AICPA. (Reference Item 1 in the Business section for information regarding the Company’s bankruptcy reorganization). Under Fresh Start Reporting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date Fresh Start Reporting is applied. On October 4, 2002, the Debtors (as defined herein) emerged from bankruptcy. For financial reporting purposes, September 29, 2002 was considered the emergence date and the effects of the reorganization have been reflected in the accompanying financial statements as if the emergence occurred on that date. As a result of the application of Fresh Start Reporting, the financial statements of the Successor Company (as defined herein) are not comparable to the Predecessor Company’s (as defined herein) financial statements.

Safe Harbor-Forward-Looking Statements

From time to time, the Company may publish forward-looking statements relative to such matters, including, without limitation, anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “plan,” “forecast,” “budget,” “goal” or other words that convey the uncertainty of future events or outcomes.

Various statements contained in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements speak only as of the date of this report; the Company disclaims any obligation to update these statements and cautions against any undue reliance on them. These forward-looking statements are based on current expectations and assumptions about future events. While management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond the Company’s control.

Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include:

•

general economic factors including, but not limited to, changes in interest rates, foreign currency translation rates, consumer confidence, trends in disposable income, changes in consumer demand for goods produced, and cyclical or other downturns

•

the overall level of automotive production and the production of specific car models

•

information and technological advances

•

cost and availability of raw materials, labor and natural and other resources

•

domestic and foreign competition

•

changes in purchasing practices of automotive customers, including price pressures and sourcing of products in Asia

•

domestic and foreign governmental regulations and trade policies

•

reliance on major customers and suppliers

•

inability to successfully effect any necessary restructuring while preserving customer relationships

•

inability to maintain sufficient liquidity to finance the Company’s operations

Fiscal Year End

The Company’s fiscal year ends on the Sunday nearest to September 30. Fiscal year 2003 ended September 28, 2003, fiscal year 2002 ended September 29, 2002 and fiscal year 2001 ended September 30, 2001. Each year includes the results of operations for 52 weeks.

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PART I

General

Guilford Mills, Inc. was incorporated under the laws of Delaware in August 1971, and is the successor by merger to businesses previously conducted since 1946. Guilford Mills, Inc. and its subsidiaries are referred to as the “Company” or “Guilford”, unless the context indicates otherwise.

Historically, Guilford operated as a diversified textile manufacturer and participated in a broad range of markets and segments. During 2001 and 2002, the Company restructured and reorganized its operations, exiting many markets and concentrating its resources and energies in areas which it believes are stable and provide opportunities for profitable growth. As a result, Guilford is now primarily a supplier of automotive textile products. The Company currently participates in the following segments: Automotive, Industrial and Apparel.

Fabrics produced in the Automotive segment are sold to suppliers of original equipment manufacturers (“OEMs”). These fabrics are then used in the production of seats and headliners and other interior components of passenger cars, sports utility vehicles, conversion vans and light and heavy trucks. Guilford is a major producer and supplier of bodycloth and headliner fabric in the United States and Europe and continues to be the leading headliner fabric manufacturer in both markets.

Fabrics produced in the Industrial segment are sold for use in window fashions and in a broad range of specialty applications, including geotextiles, medical and water filtration systems. The Company’s fiber operation, which manufactures and supplies fibers internally and to other external textile manufacturers, is included in this segment.

The Apparel segment fabrics have historically been used predominantly in women’s intimate apparel, ready-to-wear, swimwear garments, team sportswear and linings. Since the fourth quarter of fiscal 2000, the Company has effected the strategic realignment of its apparel operations resulting in the closing of facilities and a substantial decrease in manufacturing capacity. The current focus of this segment is on team sportswear, cap and gown and performance activewear.

The Company previously participated in the Direct-to-Retail Home Fashions market and produced window curtains, knit and/or lace comforters, sheets, shower curtains, pillowcases and bedskirts sold directly to department stores, discount retailers and catalog houses. The Company also produced upholstery fabrics for use in office and residential furniture. The Company no longer manufactures or distributes products in this line of business.

Until the first quarter of the 2004 fiscal year, the Company maintained Automotive and Apparel segment operations in Mexico City, Mexico through certain majority owned Mexican subsidiaries (such companies collectively, the “American Textil Group”). In December 2003, the Company sold all of its capital stock in the American Textil Group to a company (“AT Acquisition”) controlled by the general manager of the American Textil Group (the “General Manager”) and by a person who had been a minority stockholder of a certain American Textil Group company (the “Minority Stockholder”) (the General Manager and the Minority Stockholder collectively referred to as the “Principals”). The terms of such transaction were determined through extensive arm’s length negotiations among the parties. The consideration for the sale of the American Textil Group capital stock consisted of the execution and delivery of certain agreements among the parties, including supply and non-competition agreements as described below, and the release by the Principals of certain claims each had against the Company, including a release (i) by the Minority Stockholder of a claim against the Company arising from his fiscal 2003 exercise of a put right relating to his previously held minority interest in a predecessor to one of the American Textil Group companies and (ii) by the General Manager of claims to certain benefits under Company sponsored employee benefit plans. As part of the American Textil Group sale, the Company purchased from an American Textil Group company certain Automotive segment accounts receivable, with full recourse against the American Textil Group, and certain Automotive segment inventory. Simultaneously with the closing of the sale of the American Textil Group, the Company entered into a supply agreement with the American Textil Group, pursuant to which (i) the Company or one of its subsidiaries will become the vendor of record for virtually all Mexican Automotive segment programs which the American Textil Group had supplied prior to the sale of the American Textil Group and (ii) an American Textil Group company will supply the Company or one of its subsidiaries with certain fabrics to service such programs. Also in connection with the closing of the sale of the American Textil Group, the parties entered into a non-competition agreement pursuant to which the American Textil Group, AT Acquisition and the Principals, on the one hand, and the Company, on the other hand, agreed to refrain from competing with one another in certain Apparel markets for a period of up to two years; the non-competition agreement also prohibits the American Textil Group, AT Acquisition and the Principals from competing with the Company in the Automotive segment anywhere in the world for at least a one year period.

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In October 2003, the Company announced that it retained Goldman, Sachs & Co. as its financial advisor to assist with the exploration of, among other things, a possible sale of Guilford. As of December 22, 2003, the Company has received preliminary indications of interest from several third parties who are currently conducting due diligence reviews of the Company. There is no assurance as to whether this process will result in a sale of the Company or as to the timing of any sale.

Reference is made to Notes 22 and 23 to the Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this Report, for certain financial information regarding the Company’s segments and the geographic areas in which the Company conducts business.

Bankruptcy Reorganization

On March 5, 2002, the Company reached an agreement in principle with its senior lenders on a restructuring of the Company’s approximately $274 million senior indebtedness. To conclude the restructuring as quickly as possible, the Company and its domestic subsidiaries (collectively, the “Debtors”) filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) on March 13, 2002 (the “Filing Date”). The Chapter 11 cases were jointly administered under case no. 02-40667 (BRL) and, pursuant to the Bankruptcy Court’s approval of the Plan as defined below, were substantively consolidated for the purpose of consummating the Plan. During the period from the Filing Date until October 4, 2002 (the “Effective Date”), the Debtors operated their business as debtors-in-possession under Chapter 11 of the Bankruptcy Code. The Company’s non-U.S. subsidiaries did not file voluntary petitions and were, therefore, not Debtors.

As a result of these Chapter 11 filings, actions to collect pre-petition indebtedness were stayed. In addition, under the Bankruptcy Code, the Debtors had the right to assume or reject executory contracts, including real estate leases, employment contracts, personal property leases, service contracts and other unexpired, executory pre-petition contracts, subject to Bankruptcy Court approval. Parties affected by these rejections were permitted to file claims with the Bankruptcy Court in accordance with the Bankruptcy Code. The Company estimated the aggregate amount of the liability that may result from the filing of claims for certain contracts that were rejected and reflected such amount in its fiscal 2002 financial statements.

The Company’s amended joint plan of reorganization dated August 15, 2002, (the “Plan”), was confirmed by the Bankruptcy Court on September 20, 2002, and on October 4, 2002, the Debtors emerged from their bankruptcy proceedings.

On or about the Effective Date, the following transactions or events occurred:

1.

The Company’s senior secured debt of approximately $274 million was discharged, and was replaced with new senior secured notes, due October 4, 2005, totaling $135 million.

2.

All of the Company’s old common stock was cancelled and replaced with 5,501,053 shares of new common stock. Of these new shares, approximately 90% (4,950,000 shares) were issued to the Company’s senior lenders as partial consideration for the debt reduction described above. The remaining shares were issued to the holders of the Company’s old common stock in a ratio of one new share for every 34.776338 old shares, subject to rounding.

3.

The Company transferred approximately $70 million in cash and property to trusts and its senior lenders, as partial consideration for the debt reduction described above.

4.

The Company’s $30 million Debtor-In-Possession Credit Agreement, dated as of March 13, 2002, with Wachovia Bank was cancelled and the Company entered into a $25 million revolving credit facility.

5.

The Company began paying in cash approximately $15.6 million in pre-petition liabilities to its vendors, payment of which had been stayed during the bankruptcy proceedings.

6.

The new members of the board of directors began serving as directors.

Fresh Start Reporting

The Company has applied Fresh Start Reporting to its consolidated balance sheet as of September 29, 2002 in accordance with Statement of Position No. 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“Fresh Start Reporting” or “SOP 90-7”) as promulgated by the AICPA. Under Fresh Start Reporting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date Fresh Start Reporting is applied. On October 4, 2002, the Debtors emerged from bankruptcy. For financial reporting purposes, September 29, 2002 was considered the emergence date and the effects of the reorganization have been reflected in the accompanying financial statements as if the emergence occurred on that date.

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Product Development

Working closely with its customers, the Company conducts research and development in the U.S. and U.K. Such activities involve approximately 75 associates who are primarily responsible for the creation of new fabrics and styles. Sample machinery and equipment are used to develop new fabrics which can be placed into production after customer acceptance. Total expenditures for research and development for fiscal years 2003, 2002 and 2001 were approximately $11.7 million, $9.9 million and $11.5 million, or 2.6%, 1.9% and 1.8% of sales, respectively.

The Company has numerous trademarks, trade names and patents that it uses in connection with the advertising and promotion of its products across segments. Management believes that the loss or expiration of such patents, trademarks and trade names would not have a material adverse effect on the Company’s operations.

Working Capital Practices

The Company generally knits, dyes and finishes fabric based on customer orders and, therefore, significant amounts of finished goods inventory are not needed to meet rapid delivery to the Company’s customers or to assure a continuous allotment of goods from suppliers. Customers are permitted to return or request allowances for goods that are off-quality. To minimize the credit risk on such accounts and to obtain larger credit lines for many customers, the Company maintains credit insurance covering $35.6 million of certain outstanding accounts receivable as of September 28, 2003. In addition, as of that date, approximately 6% of accounts receivable were factored without recourse. The Company has the ability to borrow against such factored receivables (subject to certain limitations), and did not borrow against them during fiscal 2003 but did borrow against them during fiscal 2002. The Company generally takes advantage of discounts offered by vendors.

The Company has a large number of customers. During fiscal 2003, two of the Company’s automotive customers, Johnson Controls, Inc. and Lear Corporation, each of which are suppliers to OEMs, accounted for 20.0% and 10.8% of the Company’s sales, respectively. During fiscal 2002, Johnson Controls, Inc. and Lear Corporation accounted for 14.1% and 10.3% of the Company’s sales, respectively. No customer accounted for 10% or more of total net sales during fiscal 2001. The Company’s net sales reflect substantial indirect sales to certain OEMs. In the Automotive segment, the Company’s direct and indirect customers generally provide regular release information which the Company uses to purchase raw materials and plan its manufacturing process.

The following data summarizes the Company’s fiscal 2002 and 2003 net direct and indirect sales to OEMs (amounts in thousands of dollars):

The backlog of orders believed to be firm as of the end of the current and preceding fiscal years is not considered by management to be material for an understanding of the Company’s business as most orders are deliverable within a few weeks.

Export Sales

U.S. export sales, as a percentage of total worldwide sales of the Company, were approximately 4.7% in fiscal 2003, 1.9% in fiscal 2002 and 4.4% in fiscal 2001.

Raw Materials

Fabrics in all of the Company’s segments are constructed primarily of synthetic yarns: nylon and polyester, the prices of which are generally sensitive to changes in petroleum prices. In fiscal 2003, the Company internally produced approximately 15% to 20% of all yarns used. The Company purchases its remaining yarns from several fiber producers. In fiscal 2003 all yarns were readily available throughout the year and either were or could be purchased from numerous sources. Management believes that an adequate supply of yarns is available to meet the Company’s requirements.

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The chemicals and dyes used in the dyeing and finishing processes in all segments are available in large quantities from various suppliers. The foam backing used in the automotive fabric lamination process is purchased from three suppliers in the United States and three suppliers in Europe. During fiscal 2003, there was an adequate supply of foam. Management believes that an adequate supply of chemicals and dyes and foam are available to meet the Company’s requirements.

Environmental Matters

The production processes, particularly dyeing and finishing operations, involve the use and discharge of certain chemicals and dyes into the air and sewage disposal systems. The Company installs pollution control devices as necessary to meet existing and anticipated national, state and local pollution control regulations. The Company, including its non-U.S. subsidiaries, does not anticipate that compliance with national, state, local and other provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material adverse effect upon its future results of operations and financial position.

Reference is made to Note 16 to the Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this document, for information regarding certain other environmental matters.

Competition

In all of the Company’s segments, the principal methods of competition are pricing, styling and design, customer service and quality. In the Automotive segment, the Company has four major competitors in the North American market and certain other smaller competitors. Guilford’s automotive subsidiary in Europe competes with seven warp knitters in Europe. It also competes with many producers of circular knit and flat woven fabrics. The Industrial fabrics market is highly fragmented, with many textile manufacturers selling products to meet individual customer specifications. None of the Company’s competitors is deemed to be dominant with respect to its markets. In the past few years, the Apparel segment has been significantly impacted by imports of garments.

Employees

As of December 19, 2003, the Company employed approximately 2,600 full-time employees worldwide. Approximately 545 employees (including 203 in the U.S. and 342 in Europe) are represented by collective bargaining agreements.

Set forth below is a listing of facilities owned and leased by the Company as of December 15, 2003:

Management believes the facilities and manufacturing equipment are in generally good condition, well maintained, suitable and adequate for present production, based on the Company’s previously announced restructuring actions. Reference is made to Note 5 to the Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this document for information regarding the restructuring actions. Some of the Company’s manufacturing facilities are utilized by more than one segment. Utilization of the facilities fluctuates from time to time due to the seasonal nature of operations and market conditions. The Company defines full utilization primarily as seven-day, three-shift production. On that basis, the manufacturing facilities are generally utilized approximately 80%.

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From time to time and currently, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company maintains insurance coverage against certain potential third-party claims in amounts that the Company believes to be adequate. As a result of the bankruptcy proceedings described above, holders of claims that were asserted or could be asserted in any action commenced prior to March 13, 2002 retain all rights to proceed against the Company, but only to the extent and limit of applicable insurance coverage. Such claim holders have no direct claim against the Company post-confirmation of bankruptcy including any deductible under an insurance policy or any excess over the policy coverage limits. Although the final outcome of these legal and environmental matters cannot be determined, and therefore no assurances can be given, based on the facts presently known, it is management’s opinion that the final resolution of these matters will not have a material adverse effect on the Company’s financial position or future results of operations. Reference is made to Note 16 to the Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this document for information regarding contingencies including environmental matters.

No matters were submitted to a vote of security holders during the fourth quarter for the fiscal year ended September 28, 2003.

PART II

On December 21, 2001, the Company announced that the New York Stock Exchange (the “NYSE”), which was the principal market for the Company’s old common stock, par value $.02 per share (the “Old Common Stock”), which was cancelled upon the Effective Date, had informed the Company that the Company was not in compliance with certain NYSE continued listing standards. Specifically, the average closing price of the Company’s Old Common Stock, which was traded under the ticker symbol “GFD”, had fallen below $1.00 per share, and the Company’s market capitalization had fallen below $15 million, over a consecutive 30-trading day period.

On February 11, 2002, as a result of the continuation of such non-compliance, the NYSE suspended trading of the Company’s Old Common Stock. Prices for the Company’s Old Common Stock commenced quotation on February 14, 2002 on the Over-the-Counter Bulletin Board (“OTCBB”), under the ticker symbol “GFDM”. Such over the counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.

On September 20, 2002, the Bankruptcy Court confirmed the Plan. On September 24, 2002 the Company’s ticker symbol was temporarily changed to “GFDMQ”. On October 4, 2002, the Company emerged from bankruptcy and issued new common stock, par value $.01 per share (the “New Common Stock”). The ticker symbol for the New Common Stock, the prices for which are quoted on the OCTBB, is “GMIL”.

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The following table contains information about the (i) high and low per share bid price of the New Common Stock which was issued on October 4, 2002 and (ii) high and low per share sales price of the Old Common Stock (during the period that the stock was listed on the NYSE) or per share bid price (during the time the Old Common Stock was listed on the OTCBB) before the Old Common Stock was cancelled effective October 4, 2002. On September 28, 2003 there were 549 record holders of New Common Stock.

Dividend Policy

The Company currently does not anticipate paying dividends on its New Common Stock. The covenants in its senior debt agreements prohibit, without the consent of the lenders, the payment of dividends on the Company’s New Common Stock. Unless the Company prepays borrowings under its senior debt, it will have borrowings outstanding under such debt instruments until October 4, 2005. Any determination to declare or pay dividends out of funds legally available for that purpose after termination, expiration or modification of the senior secured debt will be at the discretion of the board of directors and will depend on future earnings, results of operations, financial condition, capital requirements, future contractual restrictions and other factors the board of directors deems relevant. No cash dividends have been declared or paid during the three most recent fiscal years.

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The following selected consolidated financial information is derived from the Company’s Consolidated Financial Statements for periods both before and after emerging from bankruptcy protection on October 4, 2002. For accounting purposes, the financial statements reflect the reorganization as if it was consummated on September 29, 2002. Therefore, the consolidated balance sheet data and related information at September 28, 2003 and September 29, 2002 and results of operations for the fiscal year ended September 28, 2003 are referred to as “Successor Company” and reflect the effects of the reorganization and the principles of Fresh Start Reporting. Periods presented prior to September 29, 2002 have been designated “Predecessor Company.” Note 3 to the Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this document, provides a reconciliation of the Predecessor Company’s consolidated balance sheet as of September 29, 2002 to that of the Successor Company which presents the adjustments that give effect to the reorganization and Fresh Start Reporting. The data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Company’s Consolidated Financial Statements and Notes thereto. Certain amounts have been reclassified in prior years to conform to the current year presentation.

The consolidated balance sheet information at September 29, 2002 reflects the financial position after the effect of the Plan and the application of the principles of Fresh Start Reporting in accordance with the provisions of SOP 90-7. Accordingly, such financial information at September 29, 2002 and subsequent fiscal year is not comparable to the historical financial information before September 29, 2002.

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements of the Company for the years ended September 28, 2003, September 29, 2002 and September 30, 2001 and the related Notes to Consolidated Financial Statements herein.

Bankruptcy Reorganization

On March 5, 2002, the Company reached an agreement in principle with its senior lenders on a restructuring of the Company’s approximately $274 million senior indebtedness. To conclude the restructuring as quickly as possible, the Debtors filed voluntary petitions under the Bankruptcy Code with the Bankruptcy Court on the Filing Date. The Chapter 11 cases were jointly administered under case no. 02-40667 (BRL) and, pursuant to the Bankruptcy Court’s approval of the Plan, were substantively consolidated for the purpose of consummating the Plan. During the period from the Filing Date until the Effective Date, the Debtors operated their business as debtors-in-possession under Chapter 11 of the Bankruptcy Code. The Company’s non-U.S. subsidiaries did not file voluntary petitions and were, therefore, not Debtors.

As a result of these Chapter 11 filings, actions to collect pre-petition indebtedness were stayed. In addition, under the Bankruptcy Code, the Debtors had the right to assume or reject executory contracts, including real estate leases, employment contracts, personal property leases, service contracts and other unexpired, executory pre-petition contracts, subject to Bankruptcy Court approval. Parties affected by these rejections were permitted to file claims with the Bankruptcy Court in accordance with the Bankruptcy Code. The Company estimated the aggregate amount of the liability that may result from the filing of claims for certain contracts that were rejected and reflected such amount in its fiscal 2002 financial statements.

The Plan was confirmed by the Bankruptcy Court on September 20, 2002, and on October 4, 2002, the Debtors emerged from their bankruptcy proceedings.

On or about the Effective Date, the following transactions or events occurred:

1.

The Company’s senior secured debt of approximately $274 million was discharged, and was replaced with new senior secured notes, due October 4, 2005, totaling $135 million.

2.

All of the Company’s old common stock was cancelled and replaced with 5,501,053 shares of new common stock. Of these new shares, approximately 90% (4,950,000 shares) were issued to the Company’s senior lenders as partial consideration for the debt reduction described above. The remaining shares were issued to the holders of the Company’s old common stock in a ratio of one new share for every 34.776338 old shares, subject to rounding.

3.

The Company transferred approximately $70 million in cash and property to trusts and its senior lenders, as partial consideration for the debt reduction described above.

4.

The Company’s $30 million Debtor-In-Possession Credit Agreement, dated as of March 13, 2002, with Wachovia Bank was cancelled and the Company entered into a $25 million revolving credit facility.

5.

The Company began paying in cash approximately $15.6 million in pre-petition liabilities to its vendors, payment of which had been stayed during the bankruptcy proceedings.

6.

The new members of the board of directors began serving as directors.

Fresh Start Reporting

The Company has applied Fresh Start Reporting to its consolidated balance sheet as of September 29, 2002 in accordance with SOP 90-7. Under Fresh Start Reporting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date Fresh Start Reporting is applied. On October 4, 2002, the Debtors emerged from bankruptcy. For financial reporting purposes, September 29, 2002 was considered the emergence date and the effects of the reorganization have been reflected in the accompanying financial statements as if it occurred on that date.

The effect of the reorganization and the implementation of Fresh Start Reporting on the Company’s consolidated balance sheet as of September 29, 2002 are discussed in detail in “Item 8 — Financial Statements and Supplementary Data”. As a result of the implementation of Fresh Start Reporting, the financial statements of the Successor Company are not comparable to the Predecessor Company financial statements.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the appropriate application of certain accounting policies, many of which require the Company to make estimates and assumptions about future events and their impact on amounts reported in the financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from the estimates. Such differences could be material to the financial statements. A critical accounting policy is one which is both important to the portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company believes that the following accounting policies fit this definition:

Fresh Start Reporting - Upon emerging from Chapter 11 proceedings, the Company adopted Fresh Start Reporting in accordance with SOP 90-7. In adopting the requirements of Fresh Start Reporting as of September 29, 2002, the Company was required to value its assets and liabilities at fair value as of September 29, 2002. The reorganization value of the Company’s new common equity of approximately $55 million was determined based on an independent valuation by financial specialists after consideration of several factors and by using various valuation methods including appraisals, cash flow multiples, price/earnings ratios and other relevant industry information. The reorganization value of the Company has been allocated to various asset categories pursuant to Fresh Start Reporting principles.

The Company’s reorganization value of its new equity of $55 million was approximately $16 million less than the fair value of the net assets. In accordance with the purchase method of accounting, the excess of the revalued net assets over the reorganization value was allocated to reduce proportionately the value assigned to applicable noncurrent assets. The calculated reorganization value of the Company was based on a variety of estimates and assumptions about future circumstances and events. Such estimates and assumptions are inherently subject to significant economic and competitive uncertainties beyond the Company’s control.

The determination of fair value of assets and liabilities required significant estimates and judgments made by management, particularly as it related to the fair market value of inventory and property. The fair value of inventory was estimated based on selling price less costs to complete, cost of disposal and a reasonable profit margin. The fair value of property was determined based on current market rates and building values with the assistance of outside valuation experts. Results may differ under different assumptions or conditions.

Revenue Recognition - Revenue is recognized at the time goods are shipped in accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” Sales returns and allowances, a component of net sales, are recorded in the period in which the related sales are recorded. A reserve of $1.8 million has been recorded as of September 28, 2003 for such returns and allowances.

Benefit Plans - The Company has pension costs and obligations which are dependent on assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, inflation, salary growth, long-term return on plan assets, retirement rates, mortality rates and other factors. While the Company believes that the assumptions used are appropriate, significant differences in actual experience or significant changes in assumptions would affect its pension costs and obligations.

Income Taxes - The Company is subject to the tax laws of many jurisdictions. The Company is subject to tax audits in each of these jurisdictions, which could result in changes in income taxes. For financial statement purposes, the income tax benefit of net operating loss and credit carryforwards is recognized as a deferred tax asset, subject to appropriate valuation allowances when it is determined that recovery of the deferred tax asset does not meet a “more likely than not” criteria. The Company evaluates the tax benefits of net operating loss and credit carryforwards on an ongoing basis. These assumptions could be affected by changes in future taxable income and its sources and changes in U.S. and non-U.S. tax laws and rates. The effective tax rate of the Company could be impacted by changes in these assumptions.

Inventory Reserves - The Company maintains reserves for inventories valued using the first in, first out (FIFO) method. Such reserves for inventories can be specific to certain inventory or general based on judgements about the overall condition of the inventory. General reserves are established based on percentage markdowns applied to inventories aged for certain time periods. Specific reserves are established based on a determination of the obsolescence of the inventory and whether the inventory value exceeds amounts to be recovered through expected sales prices, less selling costs. Estimating sales prices, establishing markdown percentages and evaluating the condition of the inventories require judgements and estimates, which may impact the ending inventory valuation and gross margins.

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The above listing is not intended to be a comprehensive list of all of the Company’s accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Reference is made to Item 8 “Financial Statements and Supplementary Data” of this Report which contain accounting policies and other disclosures required by generally accepted accounting principles.

GENERAL

Historically, Guilford operated as a diversified textile manufacturer and participated in a broad range of markets and segments. Commencing in July 2000 the Company restructured and reorganized its operations, exiting many markets and concentrating its resources and energies in areas which it believes are stable and provide opportunities for profitable growth. As a result, Guilford is now primarily a supplier of automotive textile products. The Company currently participates in the following segments: Automotive, Industrial and Apparel.

Fabrics produced in the Automotive segment are sold to suppliers of original equipment manufacturers (“OEMs”). These fabrics are then used in the production of seats and headliners and other interior components of passenger cars, sports utility vehicles, conversion vans and light and heavy trucks. Guilford is a major producer and supplier of bodycloth and headliner fabric in the United States and Europe and continues to be the leading headliner fabric manufacturer in both markets.

Fabrics produced in the Industrial segment are sold for use in window fashions and in a broad range of specialty applications, including geotextiles, medical and water filtration systems. The Company’s fiber operation, which manufactures and supplies fibers internally and to other external textile manufacturers, is included in this segment.

The Apparel segment fabrics have historically been used predominantly in women’s intimate apparel, ready-to-wear, swimwear garments, team sportswear and linings. Since the fourth quarter of fiscal 2000, the Company has effected the strategic realignment of its apparel operations resulting in the closing of facilities and a substantial decrease in manufacturing capacity. The current focus of this segment is on team sportswear, cap and gown and performance activewear.

The Company previously participated in the Direct-to-Retail Home Fashions market and produced window curtains, knit and/or lace comforters, sheets, shower curtains, pillowcases and bedskirts sold directly to department stores, discount retailers and catalog houses. The Company also produced upholstery fabrics for use in office and residential furniture. The Company no longer manufactures or distributes products in this line of business.

Guilford’s business has undergone significant changes over the last decade and, in particular, over the last five years. Guilford had for many years been known primarily as a producer of fabrics for apparel applications. While Guilford had diversified into automotive fabrics in the 1970s, sales of apparel fabrics remained dominant through most of the 1990s. Guilford, along with substantially all other domestic textile manufacturers, was dramatically impacted by staggering increases in imported apparel fabrics and garments during the late 1990s.

In July 2000, the Company announced a strategic realignment of its apparel operations designed to improve the Company’s cost structure and increase profitability. As conditions worsened, the Company expanded and accelerated its apparel realignment plan in fiscal 2001. By the end of fiscal 2001, the Company had closed or committed to close all but one of its domestic apparel dyeing and finishing facilities. The Company further de-emphasized its apparel business in 2002, closing its Altamira manufacturing facility in Mexico and another in the U.S. The Company has continued to participate in the apparel segment, but on a much smaller scale.

Early in 2002, it became necessary for the Company to exit the Direct-to-Retail Home Fashions business as a result of continued weakness in sales and declining margins and the Company announced its intent to sell certain of its assets and its business. As the impact of all these factors accumulated, it became clear that the Company needed to undergo a significant financial restructuring, and on March 13, 2002, the Company and its domestic subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code and emerged therefrom on October 4, 2002. The bankruptcy proceedings are discussed in greater detail elsewhere herein.

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Until the first quarter of the 2004 fiscal year, the Company maintained Automotive and Apparel segment operations in Mexico City, Mexico through certain majority owned Mexican subsidiaries (such companies collectively, the “American Textil Group”). In December 2003, the Company sold all of its capital stock in the American Textil Group to a company (“AT Acquisition”) controlled by the general manager of the American Textil Group (the “General Manager”) and by a person who had been a minority stockholder of a certain American Textil Group company (the “Minority Stockholder”) (the General Manager and the Minority Stockholder collectively referred to as the “Principals”). The terms of such transaction were determined through extensive arm’s length negotiations among the parties. The consideration for the sale of the American Textil Group capital stock consisted of the execution and delivery of certain agreements among the parties, including supply and non-competition agreements as described below, and the release by the Principals of certain claims each had against the Company, including a release (i) by the Minority Stockholder of a claim against the Company arising from his fiscal 2003 exercise of a put right relating to his previously held minority interest in a predecessor to one of the American Textil Group companies and (ii) by the General Manager of claims to certain benefits under Company sponsored employee benefit plans. As part of the American Textil Group sale, the Company purchased from an American Textil Group company certain Automotive segment accounts receivable, with full recourse against the American Textil Group, and certain Automotive segment inventory. Simultaneously with the closing of the sale of the American Textil Group, the Company entered into a supply agreement with the American Textil Group, pursuant to which (i) the Company or one of its subsidiaries will become the vendor of record for virtually all Mexican Automotive segment programs which the American Textil Group had supplied prior to the sale of the American Textil Group and (ii) an American Textil Group company will supply the Company or one of its subsidiaries with certain fabrics to service such programs. Also in connection with the closing of the sale of the American Textil Group, the parties entered into a non-competition agreement pursuant to which the American Textil Group, AT Acquisition and the Principals, on the one hand, and the Company, on the other hand, agreed to refrain from competing with one another in certain Apparel markets for a period of up to two years; the non-competition agreement also prohibits the American Textil Group, AT Acquisition and the Principals from competing with the Company in the Automotive segment anywhere in the world for at least a one year period.

In October 2003, the Company announced that it retained Goldman, Sachs & Co. as its financial advisor to assist with the exploration of, among other things, a possible sale of Guilford. As of December 22, 2003, the Company has received preliminary indications of interest from several third parties who are currently conducting due diligence reviews of the Company. There is no assurance as to whether this process will result in a sale of the Company or as to the timing of any sale.

For fiscal 2003, approximately 68%, 23% and 9% of the Company’s net sales originated from the United States, Europe and Mexico, respectively. Guilford’s non-U.S. operations are subject to fluctuations in foreign exchange rates that affect the Company’s operating results and financial position due to translation gains and losses recognized in converting such activity to local currency and to U.S. dollars.

The Successor Company expects to continue to allocate its resources primarily to its Automotive business. This business, because of its highly technical specifications, research and development requirements and critical logistics, is believed by management to be less susceptible to competition from foreign imports than apparel and home fashions fabrics, although there can be no assurance that such business segment will not be negatively impacted from such imports in the future.

RESULTS OF OPERATIONS

2003 Compared to 2002

As a result of the application of Fresh Start Reporting, the financial statements of the Successor Company are not comparable to the financial statements of the Predecessor Company.

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The following table sets forth the results of operations for the fiscal year ended September 29, 2002 compared to September 28, 2003 (dollars in thousands):

Net sales for fiscal 2003 were $446.0 million, a decrease of $67.2 million, or 13.1% from net sales of $513.2 million for fiscal 2002. Sales decline in the apparel and direct-to-retail home fashion segments accounted for the majority of this decline as the Company chose to exit a significant portion of these businesses during fiscal 2002. Sales from exited businesses represented $72.9 million of the $513.2 million in sales for fiscal 2002.

Automotive segment sales, which comprised 81.8% of consolidated sales, increased 2.9% in fiscal 2003 to $364.8 million as compared to $354.7 million in fiscal 2002. The increase was primarily related to increased headliner market share in Europe associated with new business awards from BMW, Volkswagen and NissanRenault. Sales of headliner fabric in the U.S. declined due mostly to a 2.9% reduction in the North American car build rates while sales of bodycloth fabric increased as a result of new business awards from Honda. North American car build decreased approximately 2.5% during fiscal 2003 to approximately 15.9 million units compared to the car build during fiscal 2002 of approximately 16.3 million units. Automotive fabric sales in Mexico City operations declined due to program losses and an overall reduction in Mexican car build rates.

Fiscal 2003 sales in the Industrial segment, which comprised 11.9% of consolidated sales, increased 1.2% to $53.0 million as compared to $52.4 million in fiscal 2002. Sales of industrial fabric products declined 5.3% from the prior fiscal year due to the adverse effects of the general economy on the particular markets, primarily window fashions. External fiber sales and commission processing increased approximately 24% due to focused marketing efforts aimed at utilizing available capacity.

Sales in the Apparel segment for fiscal 2003 which comprised 6.3% of consolidated sales, declined 61.3% to $28.2 million from $72.8 million in fiscal 2002. The decrease is attributed to the Company’s reduced participation in this segment in connection with its apparel restructuring plan and lower sales volumes in the Mexico City operations.

During fiscal 2002, the Company recorded $33.3 million of sales in its Direct-to-Retail Home Fashions segment. As described elsewhere herein, the Company exited this business during fiscal 2002, and the Company had no sales in this business during fiscal 2003.

Gross profit for fiscal 2003 increased to $67.3 million or 15.1% of net sales, from $26.1 million or 5.1% of net sales for fiscal 2002. The impact of higher sales revenue in Europe and operating improvements in the U.S. operations favorably impacted results. The Company’s Mexico City operations performed poorly throughout the year in all areas and offset some of the improvements achieved elsewhere in the Company. In fiscal 2003, gross profit increased from fiscal 2002 as a result of a reduction in depreciation expense of approximately $18.6 million as a result of Fresh Start Reporting. In addition, fiscal 2002 results were affected by $21.2 million in inventory impairment charges and other costs related to plant closings.

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For fiscal 2003, selling and administrative expenses were $43.7 million or 9.8% of net sales, compared to $65.4 million or 12.7% of net sales, for fiscal 2002. The decrease from the prior year was due primarily to reduced selling and administrative staffing levels, as a result of the Company’s exit from the Direct-to-Retail Home Fashions business and its significant decrease in participation in the Apparel segment. In addition, the Company also reduced its professional fee expenses, as the fiscal 2002 amount included fees for financial advisors and other professionals retained to assist the Company in restructuring its debt. In fiscal 2003, the Company benefited from lower bad debt expense as a result of improved collection experience as compared to the prior year that included $5.0 million of bad debt expense mostly related to the planned shutdown of the Company’s plant in Altamira, Mexico.

Restructuring and impaired asset charges for fiscal 2003 were approximately $16.6 million compared to $71.0 million for fiscal 2002. The fiscal 2003 charges consisted primarily of fixed asset impairments and other costs related to the planned sale of the Mexico City operations in early fiscal 2004. The fiscal 2002 charges consisted primarily of fixed asset impairments and severance costs related to the shutdown of the apparel plant in Altamira, Mexico and its associated knitting plant in Lumberton, North Carolina, and the exit of the Direct-to-Retail Home Fashions business in Herkimer, New York.

During fiscal 2003, the Company incurred reorganization costs of $1.3 million, consisting primarily of professional fees related to the Company’s emergence from bankruptcy. During fiscal 2002, the Company recognized reorganization costs of $14.4 million.

Operating income in fiscal 2003 improved $130.4 million to $5.7 million compared to an operating loss of $124.7 million in fiscal 2002. Fiscal 2003 depreciation expense declined $20.8 million from fiscal 2002 as a result of Fresh Start Reporting. In the Automotive segment, fiscal 2003 operating income improved $16.3 million to $22.4 million compared to $6.1 million in fiscal 2002. In fiscal 2003, the Company’s U.S. automotive operations improved manufacturing and operating efficiencies, whereas in Europe, higher sales volume contributed to the improvement. The Mexico City automotive business results, which included lost programs and reserves for inventory impairments, offset some of this improvement. Fiscal 2002 also included the losses reported in Brazil because of the plant shutdown. Operating income in the Industrial segment increased $3.3 million to $1.3 million in fiscal 2003 compared to a $2.0 million loss in fiscal 2002. The Industrial segment benefited from lower depreciation expense in fiscal 2003 of $5.5 million and improved capacity utilization at its fiber operations that was partially offset by lower fabric sales in window fashions. Operating income in the Apparel segment improved $49.7 million to a loss of $16.6 million in fiscal 2003 from a loss of $66.3 million in fiscal 2002. Fiscal 2002 included restructuring charges of $44.2 million compared to $9.7 million in fiscal 2003. In addition, fiscal 2002 included significant shutdown costs related to the closure of the Altamira, Mexico plant and other apparel businesses. The Mexico City operations also negatively impacted fiscal 2003 results. The Direct-to-Retail Home Fashions operating loss was $48.2 million in fiscal 2002. The Company did not participate in this segment in fiscal 2003. See Note 22 to the Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this document for a reconciliation of segment measures to consolidated amounts.

Interest expense in fiscal 2003 was $15.6 million compared to $14.1 million for fiscal 2002. The change in interest expense in fiscal 2003 compared with fiscal 2002 is attributable to significantly decreased debt levels, as the Predecessor Company’s senior secured debt of approximately $274 million was replaced with $135 million of new debt upon the Company’s emergence from bankruptcy, offset by the Predecessor Company not incurring interest expense during fiscal 2002 on the senior secured debt after its March 2002 bankruptcy filing.

Other income in fiscal 2003 was $0.1 million compared to $3.0 million in fiscal 2002. Other income in fiscal 2002 included $3.8 million of income related to death benefits from life insurance polices that the Company received covering certain key associates who died during the year, partially offset by other losses of $0.8 million.

The effective tax rate for fiscal 2003 was 12.0% or a $1.2 million benefit compared to 11.7% or a $16.4 million benefit for fiscal 2002. The low effective rates are the result of recording valuation allowances that were necessary because the Company has net operating loss and tax credit carryforwards that, due to restructuring actions and other factors, could expire unused. For fiscal 2003, the Company recorded a $2.4 million income tax benefit to reverse deferred tax liabilities as a result of restructuring Mexico City operations. In fiscal 2002, as a result of a change in the U.S. tax laws, the Company carried back net operating losses to prior years, generating refunds of approximately $15.8 million.

For fiscal 2003, net loss was $8.6 million, or $1.56 per diluted share, compared to a net loss of $123.3 million, or $6.66 per diluted share, for fiscal 2002.

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2002 Compared to 2001

The following table sets forth the results of operations for the fiscal year ended September 30, 2001 compared to September 29, 2002 (dollars in thousands):

Consolidated net sales for fiscal 2002 were $513.2 million, a decrease of 20.2% from net sales in fiscal 2001 of $643.5 million. Sales declines in the Apparel and Direct-to-Retail Home Fashions segments accounted for the largest amount of the decrease.

The Automotive segment represented 69.1% of consolidated net sales in fiscal 2002, an increase from 51.8% in fiscal 2001. Automotive segment sales were $354.7 million in fiscal 2002 and increased 6.4% from $333.5 million in fiscal 2001. This primarily resulted from a 10.0% increase in sales by the Company’s U.S. automotive operation. North American car build increased approximately 3.8% during fiscal 2002 to approximately 16.3 million units compared to car build during fiscal 2001 of approximately 15.7 million units. The Company also improved its market share of both headliner and bodycloth fabric. Sales volume in Europe grew 7.0% in fiscal 2002 compared to fiscal 2001 due to new program rollouts at two major auto manufacturers. Automotive fabric sales in Mexico decreased by approximately $3.6 million primarily due to the loss of certain programs during fiscal 2002. Sales in Brazil comprised only 1.3% of Guilford’s Automotive segment sales in fiscal 2002 and declined over 40% compared to 2001, as a result of the Company’s decision to cease production in Brazil.

Sales in the Apparel segment decreased 61.8% to $72.8 million in fiscal 2002 from $190.6 million in fiscal 2001 and accounted for 14.2% of consolidated net sales in fiscal 2002. As a result of the continued declines in this segment and the Predecessor Company’s financial difficulties, the Company has substantially exited the production of apparel fabrics in the United States. The Company has closed all but one of its apparel facilities in the U.S., and has also closed its dyeing and finishing plant in Altamira, Mexico.

Sales in the Industrial segment fell 13.1% to $52.4 million in fiscal 2002 from $60.3 million in fiscal 2001. The Industrial segment represented 10.2% of consolidated net sales in fiscal 2002. Higher sales of the Company’s industrial fabrics used in air and water filtration processes were more than offset by declines in other industrial products sales, which were negatively impacted by the slowing economy.

The Direct-to-Retail Home Fashions segment accounted for 6.5% of consolidated net sales in fiscal 2002 and sales decreased 43.7% from fiscal 2001. Sales for fiscal 2002 were $33.3 million versus $59.1 million in fiscal 2001. During fiscal 2002, the Company decided to exit this business and sold all of its direct-to-retail operations.

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Gross profit decreased by $4.7 million to $26.1 million or 5.1% of net sales in fiscal 2002, from $30.8 million, or 4.8% of net sales in fiscal 2001. The Company has exited the Direct-to-Retail Home Fashions segment and significantly decreased its participation in the Apparel segment, incurring approximately $21.2 million for inventory impairment and other charges related to plant closings. These declines were partially offset by improved margins in both the U.S. and European automotive businesses, primarily as a result of increased sales. The industrial fabrics business also improved its margin in fiscal 2002 with increased capacity utilization.

Selling and administrative expenses decreased 20.5% to $65.4 million, or 12.7% of sales, in fiscal 2002 from $82.3 million, or 12.8% of sales, in fiscal 2001. The decrease from fiscal 2001 was due primarily to headcount reductions in apparel and at corporate. The Company further reduced the number of selling and administrative employees by more than 70 during fiscal 2002.

As described in greater detail in Note 5 to the Consolidated Financial Statements, the Company closed its manufacturing facilities in Altamira, Mexico and in Brazil, and sold its operations in Herkimer, New York and Portugal. The Company recorded $71.0 million in restructuring costs, consisting primarily of asset impairments. In addition, the Company recorded $15.5 million of inventory impairments related to these actions in fiscal 2002. The Company filed for and subsequently emerged from Chapter 11 bankruptcy protection during fiscal 2002, as described in greater detail elsewhere herein. The Company retained the services of attorneys, financial advisers and other professionals to assist with the bankruptcy process. The Company incurred $14.4 million, primarily related to fees for those professionals, as reorganization costs during fiscal 2002.

The Company’s operating loss was $124.7 million in fiscal 2002 compared to $122.8 million in fiscal 2001. The change of $1.9 million consisted of selling and administrative expense decreases of $16.9 million, partially offset by lower gross margin of $4.7 million in fiscal 2002 and the inclusion in fiscal 2002 of $14.4 million of reorganization costs. Operating income in the Automotive segment declined to $6.1 million in fiscal 2002 from $13.2 million in fiscal 2001 as a result of a $4.8 million increase in restructuring expenses in fiscal 2002. Included in such restructuring expenses in fiscal 2002 were losses and asset impairments associated with the closure and sale of the Company’s automotive operations in Brazil and Portugal, respectively. Operating profit declined as a result of price reductions granted to automotive customers and excess freight costs, offset by margin on the increased level of sales. The Apparel segment experienced an operating loss of $66.3 million in fiscal 2002 compared to a loss of $119.6 million in fiscal 2001. The majority of fiscal 2002 loss was the result of the Company’s restructuring actions, as well as decreased sales and soft pricing. Operating loss in the Direct-to-Retail Home Fashions segment rose to a loss of $48.2 million in fiscal 2002, compared with a fiscal 2001 loss of $7.9 million due primarily to $18.8 million of restructuring charges in fiscal 2002. This decline was due to the lower fabric sales volume, weak pricing, and the effect of the decision to exit this business. The Industrial segment’s operating loss was $2.0 million in fiscal 2002, compared to the $8.5 million loss in the previous year. This improvement is the result of the reorganization and downsizing of the Pine Grove facility, and improved efficiencies in the Company’s fiber operations. See Note 22 to the Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this document for a reconciliation of segment measures to consolidated amounts.

Interest expense decreased $11.2 million to $14.1 million in fiscal 2002 from $25.3 million in fiscal 2001. In connection with the Company’s bankruptcy reorganization, the Company was not required to pay the interest on the senior debt during the period that the Company was under Chapter 11 protection. The average per annum short-term interest rate was approximately 8% in fiscal 2002 and 9% in fiscal 2001. In addition, the average debt outstanding decreased to $281.3 million in fiscal 2002 from $283.3 million in fiscal 2001.

Other income was $3.0 million in fiscal 2002 compared to $0.9 million of expense in fiscal 2001. Fiscal 2002 included $3.8 million of income related to death benefits from life insurance policies that the Company received covering associates who died during the year, partially offset by other losses of $0.8 million. Fiscal 2001 included $2.8 million in equity investee losses, partially offset by a $1.2 million gain from shares returned to the Company related to a 1996 acquisition of a business and $0.7 million of casualty insurance proceeds.

The effective income tax rate for fiscal 2002 was 11.7% compared to 2.7% for fiscal 2001. These low effective rates are the result of valuation allowances recorded in fiscal 2001 and fiscal 2002. These valuation allowances were necessary because the Company has net operating loss and tax credit carryforwards that, due to restructuring actions and other factors, could expire unused. Management’s assessment is that the character and nature of future taxable income may not allow the Company to realize certain tax benefits of net operating losses and tax credits within the prescribed carryforward period. In addition, as a result of a change in the tax laws during 2002, the Company carried back net operating losses to prior years, generating refunds of approximately $15.8 million in fiscal 2002.

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Net loss in fiscal 2002 was $123.3 million or 24.0% of sales, compared to fiscal 2001’s net loss of $160.8 million or 25.0% of sales. Loss per share was $6.66 and $8.48 per basic and diluted share for fiscal years 2002 and 2001, respectively. Average shares outstanding remained essentially unchanged from fiscal 2001 to fiscal 2002.

Liquidity and Capital Resources

The Company’s principal sources of liquidity for operations and expansion are funds generated internally and borrowings under its Revolving Credit Facility, as defined herein. In connection with the reorganization, on October 4, 2002, the Company entered into a new Credit, Security, Guaranty and Pledge Agreement, which expires October 4, 2005, with a group of lenders. The new facility provides for a revolving credit loan facility and letters of credit (the “Revolving Credit Facility”) in a maximum principal amount equal to the lesser of (a) $25 million or (b) a specified borrowing base, which is based upon eligible receivables and eligible inventory. The Revolving Credit Facility restricts investments (including investments in non-U.S. subsidiaries), capital expenditures, acquisitions, dividends and the incurrence of additional debt. The Revolving Credit Facility contains customary financial covenants relating to minimum levels of EBITDA, minimum net worth, minimum fixed charge coverage ratios and a maximum leverage ratio, all as defined therein. The Revolving Credit Facility is secured by a first lien on substantially all of the assets of the Company and its domestic subsidiaries, as well as on the stock of all of the Company’s subsidiaries (with the latter, in the case of the Company’s non-U.S. subsidiaries, being limited to 65% of the capital stock) (collectively, the “Collateral”). Upon the Company’s receipt of proceeds from certain transactions, such as certain asset sales (including net cash proceeds arising from the Company’s beneficial interest in the Altamira Trust), the Company is required to prepay with such proceeds any loans then outstanding under the Revolving Credit Facility. The Company is currently in compliance with all of the restrictions and covenants of its new Revolving Credit Facility, as amended. All loans outstanding under the Revolving Credit Facility bear interest at the Base Rate plus applicable interest margin or the LIBOR rate plus an applicable interest margin based upon the Company’s debt to EBITDA ratio. As of September 28, 2003, the Company had no outstanding borrowings and had approximately $18.8 million available for borrowing under the Revolving Credit Facility.

The Company’s U.K. operation has a separate secured bank and credit arrangement which is available to finance operations at that location. This agreement, which expires on December 31, 2004, generally provides for the borrowing of up to approximately $5.1 million in local currencies at variable interest rates that, for fiscal 2003, averaged 7.75%. As of September 28, 2003, the Company had no outstanding borrowings under that facility. The credit facility is considered by management to be adequate.

Cash provided by operations totaled $11.3 million in fiscal 2003, compared to $41.7 million in fiscal 2002. Fiscal 2003 was negatively affected by the payments of pre-petition liabilities pursuant to the Plan. In fiscal 2002, cash was generated through reductions of receivables and inventory, although the Company sustained significant losses.

Working capital was $115.0 million at September 28, 2003 compared to working capital of $112.8 million at September 29, 2002. The increase in working capital in fiscal 2003 was the result of an overall reduction in accounts payable offset by the writedown of the Mexico City net assets. In addition, the Company increased cash and cash equivalents by $14.1 million during fiscal 2003.

Cash provided by investing activities totaled $6.1 million in fiscal 2003, compared to cash provided by investing activities of $36.0 million in fiscal 2002. Capital expenditures increased to $10.8 million in fiscal 2003 from $7.3 million in fiscal 2002. Proceeds from dispositions of assets totaled $0.6 million during fiscal 2003, compared to $29.0 million in fiscal 2002. Fiscal 2002 included dispositions primarily from the sale of idle plant and machinery from closed facilities. Fiscal 2003 also included proceeds from the surrender of life insurance policies of $18.1 million compared to $12.0 million in fiscal 2002.

Cash used in financing activities totaled $3.4 million in fiscal 2003, compared to cash used in financing activities of $58.1 million in fiscal 2002. During fiscal 2003, the Company paid $2.5 million on long term debt. In fiscal 2003, the Mexico City operations converted approximately $6.2 million of its short-term debt to long term. The Company repaid short-term borrowings of $27.3 million during fiscal 2002 and, in connection with the bankruptcy reorganization, paid $32.3 million in cash to the Company’s senior lenders.

Based upon the ability to generate working capital through its operations, cash on hand and its Revolving Credit Facility, the Company believes that it has the financial resources necessary to implement its business plan, make all necessary contributions to its defined benefit retirement plans, which contributions are expected to be approximately $4.2 million in fiscal 2004, and fund its capital expenditures, which are primarily for process improvement, cost reduction and maintenance and are expected to be approximately $12.0 million in fiscal 2004.

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Inflation

The Company believes that the relatively moderate inflation rate of the past decade has not significantly impacted its operations. Monetary assets (such as cash and cash equivalents) lose purchasing power as a result of inflation, while monetary liabilities (such as accounts payable and indebtedness) can be settled with dollars of diminished purchasing power. The Company’s monetary liabilities exceed its monetary assets, which provides a hedge against the effects of future inflation. While the Company is exposed to future inflation, the degree of impact, if any, cannot be predicted.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, which was effective for business combinations initiated after June 30, 2001. The Company did not acquire any entity subsequent to June 2001, however, the principles of SFAS No. 141 were applied in accordance with Fresh Start Reporting.

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 provides for cessation of amortization of goodwill and other intangibles considered to have indefinite lives and includes requirements for periodic tests of goodwill and indefinitely lived intangible assets for impairment. The Company adopted SFAS 142 as part of its Fresh Start Reporting. The impact of adopting this pronouncement was not material to the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 requires that one accounting model be used for impairments of long-lived assets which are to be either used in a business or disposed of by sale, and broadens the presentation of discontinued operations to encompass more discrete components of a business enterprise than were included under previous standards. The Company adopted SFAS No.144 as part of its Fresh Start Reporting. The impact of adopting this pronouncement was not material to the Company’s financial statements.

In April 2002, the FASB issued SFAS 145, Rescission of FASB Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections. One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. Accordingly, the Company will follow APB 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” in determining whether such extinguishment of debt may be classified as extraordinary. The Company adopted SFAS No. 145 as part of its Fresh Start Reporting. As a result, the Company has classified gains and losses from debt restructuring as a component of other expense. Reference is made to Item 8 - Financial Statements and Supplementary Data — Consolidated Statements of Operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that were previously accounted for pursuant to the guidance that the Emerging Issues Task Force (“EITF”) has set forth in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs incurred in a Restructuring). A fundamental conclusion reached by the Board in this Statement is that an entity’s commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. Therefore, this SFAS eliminates the definition and requirements for recognition of exit costs in EITF Issue No. 94-3. This statement also establishes that fair value is the objective for initial measurement of the liability. The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement or an individual deferred-compensation contract. The Company implemented the provisions of this accounting pronouncement connected with the restructuring of its operations in fiscal 2003, as described in Note 5 to the Consolidated Financial Statements under Item 8 “Financial Statements and Supplementary Data” of this document.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. This Statement, which is effective for fiscal years ending after December 15, 2002, amends SFAS No. 123, Accounting for Stock-Based Compensation, and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 regardless of the accounting method used to account for stock-based compensation. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company implemented the enhanced disclosure provisions as defined by Statement No. 148 during the second quarter of fiscal 2003.

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In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities. The Statement is primarily effective for transactions occurring after June 30, 2003. The Company adopted this Statement in the fourth quarter of fiscal 2003, and such adoption did not have a material effect on the Company’s results of operations and financial position.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company adopted this Statement in its fourth quarter of fiscal 2003, and such adoption did not have an effect on the Company’s financial position or results of operations.

In November 2002, the FASB’s EITF reached consensus on EITF No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. EITF No. 00-21 addresses the accounting treatment for arrangements that provide the delivery or performance of multiple products or services where the delivery of a product, system or performance of services may occur at different points in time or over different periods of time. EITF No. 00-21 is applicable to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted this Statement in its fourth quarter of fiscal 2003, and such adoption did not have an effect on the Company’s financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN No. 45 clarifies the requirements of FASB Statement No. 5, Accounting for Contingencies relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. For guarantees that fall within the scope of FIN No. 45, the Interpretation requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual periods that end after December 15, 2002. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. The Company is not a party to any guarantees that fall within the scope of FIN No. 45.

In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities, to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN No. 46 changes that by requiring a variable interest entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN No. 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. In October 2003, the FASB issued Proposed Interpretation of FIN No. 46, which would require consolidation of variable interest entities created before February 1, 2003 for financial statements issued for the first reporting period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not currently believe that the implementation of FIN No. 46 will have a material effect on its future results of operations or its financial position.

Contingencies

The Company is involved in various litigation and environmental matters arising in the ordinary course of business. These are discussed in Note 16 to the Consolidated Financial Statements which are included herein under Item 8 “Financial Statements and Supplementary Data” of this document. The Company maintains insurance coverage against certain potential claims in amounts that the Company believes to be adequate. As a result of the bankruptcy proceedings described above, holders of claims that were asserted or could be asserted in any action commenced prior to March 13, 2002 retain all rights to proceed against the Company, but only to the extent and limit of applicable insurance coverage. Such claim holders have no direct claim against the Company post-confirmation of bankruptcy including any deductible under an insurance policy or any excess over the policy coverage limits. Although the final outcome of these legal and environmental matters cannot be determined, based on the facts presently known, it is management’s opinion that the final resolution of these matters will not have a material adverse effect on the Company’s financial position or future results of operations.

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Outlook

Readers should review the “Important Information Regarding this Form 10-K - Safe Harbor-Forward Looking Statements” at the beginning of this document.

The Company has undergone substantial changes over the last two years, exiting or downsizing its unprofitable lines of business, including Direct-to-Retail Home Fashions and Apparel, culminating in the financial reorganization in bankruptcy which resulted in a more viable capital structure.

Guilford is, and plans to continue to be, a company focused on serving its primary customer base, the automotive industry. While participation in the industrial and apparel markets is important to balance manufacturing capacity and to generate positive earnings, the Company plans to dedicate substantially all of its efforts and resources towards its Automotive segment.

A key component in the continued profitability of the Automotive segment will be the number of vehicles built by auto manufacturers in Guilford’s markets (North America and Europe). Many analysts project North American and Western Europe car build rates to increase slightly in 2004 and 2005 compared with 2003. The Company expects continued sales growth in headliner fabric in Europe based upon booked business with BMW and Volkswagen while sales of headliner fabric in North America are expected to increase based on higher value added products and slight increases in build rates. The Company expects that it will continue to experience pressure from its customers for reductions in selling prices. The Company has generally been successful in protecting its margins through cost reduction efforts and anticipates it will be able to do so in the foreseeable future.

The Company’s Automotive segment has historically not seen significant competitive threats from foreign textile manufacturers. Auto manufacturers and their suppliers have typically desired that their sources of supply be locally situated in order to have greater confidence in the supply chain and to avoid the complexities and issues associated with importing fabrics or components from foreign countries. However, during 2003, one major auto manufacturer chose to import fabric from Asia for one of its programs previously supplied by Guilford. There is indication that this manufacturer and others are evaluating Asian sourcing in an effort to reduce costs. The Company has maintained and protected its position on other fabric programs with these auto manufacturers, although at lower initial margins, and has not lost additional programs to Asian suppliers. The impact of the actions to date is not expected to have a material impact on the financial position or future results of operations. It is currently unclear whether the significant logistical problems associated with sourcing fabric in Asia can be economically resolved by the auto manufacturers. If, however, importation of fabric or components were to become a trend among auto manufacturers, such a trend could materially adversely impact the Company’s business, and the Company would need to determine how to respond to this new competitive threat.

Because the Company’s reorganization in bankruptcy was completed relatively quickly, Guilford believes it was generally able to preserve its strong customer and supplier relationships. Guilford is a well-established, key supplier to the automotive industry with substantial market share, and expects to continue to grow and improve its profitability in the future.

In October 2003, the Company announced that it retained Goldman, Sachs & Co. as its financial advisor to assist with the exploration of, among other things, a possible sale of Guilford. As of December 22, 2003, the Company has received preliminary indications of interest from several third parties who are currently conducting due diligence reviews of the Company. There is no assurance as to whether this process will result in a sale of the Company or as to the timing of any sale.

The Company is exposed to market risk for changes in interest rates and foreign currency exchange rates and has exposure to commodity price risk, including prices of primary raw materials, fiber and foam. The Company does not hold or issue any financial instruments for trading or other speculative purposes.

Interest Rate Risk: The Company’s obligations under the Revolving Credit Facility bear interest at floating rates and therefore, the Company is impacted by changes in prevailing interest rates. However, the senior notes bear fixed interest coupons and therefore are not subject to the risk of interest rate fluctuations. A 10% change in market interest rates that affect the Company’s financial instruments would impact earnings during fiscal 2004 by less than $0.1 million before taxes.

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Foreign Currency Risk: The Company is subject to foreign currency risk primarily related to sales and expenditures and other transactions denominated in foreign currencies and investments in non-U.S. subsidiaries. The Company manages the exposure related to certain of these risks through forward foreign exchange contracts with durations generally less than 12 months. The changes in the market value of such contracts have a high correlation to the price changes in the currency of the related hedged transactions. The Company enters into forward foreign currency exchange contracts in the normal course of business to manage exposure related to anticipated sales denominated in foreign currencies and against fluctuations in the purchase price of capital equipment and other transactions having firm commitments. On September 28, 2003, the Company held foreign currency forward contracts with a fair value of $45.9 million and a notional value of $45.4 million that expire in less than one year. The Company did not enter into any forward exchange contracts in fiscal 2001 and 2002.

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GUILFORD MILLS, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
As of September 28, 2003 and September 29, 2002 and for the fiscal years ended
September 28, 2003, September 29, 2002 and September 30, 2001.

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STATEMENT OF MANAGEMENT’S RESPONSIBILITY

The management of Guilford Mills, Inc. has the responsibility for the preparation and integrity of all information contained in the Annual Report. The accompanying financial statements, including footnotes, have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s best estimates and judgments.

The Company maintains an internal accounting control system designed to provide reasonable assurance of the safeguarding and accountability of Company assets, and to ensure that its financial records provide a reliable basis for the preparation of financial statements and other data. The system includes an appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. In addition, the achievement of effective operations is promoted by this system. There are limits inherent in all systems of internal control based on the recognition that the cost of such systems should not exceed the benefits derived and the likelihood of achievement of objectives can be affected by human judgment, failure or circumvention. Management believes the Company’s system of internal controls provides an appropriate balance.

The control environment is complemented by an internal auditing program, comprised of internal and external business advisors who independently assess the effectiveness of the internal controls and report findings to management throughout the year. The group delivers increased value by aligning with the business objectives to reduce risk and create cost efficiencies. The Company’s accompanying financial statements have been audited by independent public accountants who have expressed their opinion with respect to the fairness of the presentation of these statements in conformity with accounting principles generally accepted in the United States of America. They objectively and independently review the performance of management in carrying out its responsibility for reporting operating results and financial condition. Their opinion is based on procedures which they believe to be sufficient to provide reasonable assurances that the financial statements contain no material errors. Management has made available to the independent public accountants all of the Company’s financial records and related data, as well as the minutes of the stockholders’ and directors’ meetings. Recommendations by both internal and external auditors concerning internal control deficiencies are considered and are implemented with an appropriate urgency by management.

The Audit Committee of the Board of Directors, which is formally chartered, is comprised solely of non-employee directors who meet periodically with the independent auditors, management and the Company’s internal auditors to review the work of each and to evaluate the accounting, auditing, internal controls and financial reporting matters. The independent auditors and the Company’s internal auditors have free access to the Audit Committee, without the presence of management.

/s/ David H. Taylor

David H. Taylor
Chief Financial Officer

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Stockholders and Board of Directors
Guilford Mills, Inc.:

We have audited the accompanying consolidated balance sheets of Guilford Mills, Inc. (a Delaware corporation) and subsidiaries as of September 28, 2003 (Successor Company) and September 29, 2002 (Successor Company) and the related consolidated statements of operations, stockholders’ investment and cash flows for the years ended September 28, 2003 (Successor Company) and September 29, 2002 (Predecessor Company). These financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated financial statements of Guilford Mills, Inc. and subsidiaries for the year ended September 30, 2001 (Predecessor Company) were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those Predecessor Company financial statements in their report dated January 14, 2002. Their report also included an explanatory paragraph that the Predecessor Company’s substantial losses from operations in fiscal 2001 and debt covenant violations raised substantial doubt about the Predecessor Company’s ability to continue as a going concern.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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.

As discussed in Notes 1 and 3 to the Consolidated Financial Statements, on March 13, 2002, Guilford Mills, Inc. and its domestic subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in New York. On September 20, 2002, the Bankruptcy Court entered an order confirming the plan of reorganization, which became effective on October 4, 2002. The plan was deemed to be effective as of September 29, 2002 for financial reporting purposes. Accordingly, the Company changed its basis of financial statement presentation to reflect the adoption of fresh start reporting in accordance with American Institute of Certified Public Accountants Statement of Position 90-7, “Financial Reporting for Entities in Reorganization Under the Bankruptcy Code”. As a result, the consolidated financial statements for periods subsequent to the reorganization (Successor Company financial statements) are not comparable to the consolidated financial statements for the prior periods (Predecessor Company financial statements).

In our opinion, the consolidated balance sheets present fairly, in all material respects, the financial position of Guilford Mills, Inc. and subsidiaries as of September 28, 2003 (Successor Company) and September 29, 2002 (Successor Company) in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the consolidated financial statements for the years ended September 28, 2003 (Successor Company) and September 29, 2002 (Predecessor Company) present fairly, in all material respects, the results of the Successor Company’s operations and its cash flows for the year ended September 29, 2003 and Predecessor Company’s operations and its cash flows for the year ended September 29, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed above, the consolidated financial statements of Guilford Mills, Inc. and subsidiaries for the year ended September 30, 2001 were audited by other auditors who have ceased operations. As described in Note 2, the loss from debt restructuring originally presented as an Extraordinary Item has been presented as a component of Other Expense in the fiscal 2001 Predecessor Company consolidated financial statements in connection with the Company’s adoption of Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. Also, as described in Note 2, the Company changed the composition of its reportable segments in fiscal 2002, and the amounts in the fiscal 2001 (Predecessor Company) consolidated financial statements relating to reportable segments have been restated to conform to the fiscal 2003 and 2002 composition of reportable segments. We audited the adjustments described in Note 2 that were applied to reclassify the loss from debt restructuring in the fiscal 2001 Predecessor Company consolidated financial statements, and we audited the adjustments described in Note 2 that were applied to restate the disclosures for reportable segments reflected in the fiscal 2001 Predecessor Company consolidated financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the fiscal 2001 Predecessor Company consolidated financial statements of the Company other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the fiscal 2001 Predecessor Company consolidated financial statements taken as a whole.

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Our audit was made for the purpose of forming an opinion on the fiscal 2003 and fiscal 2002 consolidated financial statements taken as a whole. The schedule listed in Item 15(a)(2) of this form 10-K is the responsibility of the Company’s management and is presented for the purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. The information included in this schedule for the years ended September 28, 2003 and September 29, 2002 has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. The financial statement schedule for the year ended September 30, 2001 was audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on the financial statement schedule in their report dated January 14, 2002.

/s/ GRANT THORNTON LLP

Greensboro, North Carolina
December 5, 2003

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THE FOLLOWING IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. See Exhibit 23(b) for further discussion.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of Guilford Mills, Inc.:

We have audited the accompanying consolidated balance sheets of Guilford Mills, Inc. (a Delaware corporation) and subsidiaries as of September 30, 2001 and October 1, 2000, and the related consolidated statements of operations, stockholders’ investment and cash flows for each of the three years in the period ended September 30, 2001. These financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the 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 financial statements referred to above present fairly, in all material respects, the financial position of Guilford Mills, Inc. and subsidiaries as of September 30, 2001 and October 1, 2000 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered substantial losses from operations, its lenders have waived covenant violations only through January 18, 2002 and it is uncertain if they will continue to waive their right to accelerate the due date of the debt or enter into a new long-term debt agreement. These facts raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule titled “Schedule II - Analysis of Valuation and Qualifying Accounts” in Item 8 is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Arthur Andersen LLP
Greensboro, North Carolina
January 14, 2002

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GUILFORD MILLS, INC.
CONSOLIDATED BALANCE SHEETS
September 29, 2002 and September 28, 2003
(In thousands)

The accompanying notes to consolidated financial statements are an integral part of these balance sheets.

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GUILFORD MILLS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Fiscal Years ended September 30, 2001, September 29, 2002 and September 28, 2003
(In thousands except per share data)

The accompanying notes to consolidated financial statements are an integral part of these statements

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GUILFORD MILLS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ INVESTMENT

For the Fiscal Years ended September 30, 2001, September 29, 2002 and September 28, 2003
(in thousands)