Management's Discussion and Analysis of
Financial Condition and Results of Operations

General
Consolidated  sales for Guilford Mills,  Inc.  ("Guilford" or the "Company") for
the year ended September 29, 1996 were a record $830.3 million.  Net income also
reached a record $34.0 million.

This increase in current year sales results  primarily from the  acquisition and
consolidation  of Hofmann Laces and its affiliates.  In addition,  sales for the
Company's  majority-owned Mexican affiliate increased  significantly.  Worldwide
automotive  sales were down  slightly  while sales into  apparel  home  fashions
markets  decreased  due  to the  demand  decline  at  retail,  particularly  for
cotton-only and certain mature apparel products.

While Guilford  competes as a fabric producer in many different  markets,  it is
regarded as a single segment based upon technology.

Guilford's increased U.S. automotive sales of headliner and bodycloth are due to
increases  in  the   production  of  certain   vehicles  in  which  the  Company
participates and increased revenues from higher value-added technologies.  These
increases were achieved  despite the decrease in the North American car build to
14.3  million  cars and light trucks for fiscal 1996 from 14.6 million for 1995.
In Europe, declines resulted from a decreased car build of 12.5 million units in
1995 to 12.0 million units in 1996. Increased market share in both headliner and
bodycloth  were  offset  by a large  industry  inventory  correction.  Given the
softness in the apparel  industry,  especially  in the women's  apparel  product
lines in which Guilford predominantly competes,  there was an overall decline in
revenue for our apparel products. Guilford has partially offset this decrease in
apparel sales with improved competitive position and new value-added products in
the apparel,  home fashions and industrial markets.  Three years ago the Company
sold primarily to the lingerie,  robewear and sleepwear  portions of the apparel
industry. Today end uses are greatly expanded. With Lycra(r)-containing  fabric,
revenue growth has been generated from sales of swimwear, shapewear, velvet, and
shoelining  products which have provided the Company a competitive edge in niche
markets.  This  diversification  was  precipitated  by the foreseen  decrease in
demand in the mature, traditional markets. The planned evolution has resulted in
an increase  in demand for many of the  Company's  apparel,  home  fashions  and
industrial products.

As a portion of  Guilford's  operations  is conducted in the United  Kingdom and
Mexico,  fluctuations in foreign  exchange rates affect the Company's  operating
results and financial position due to translation gains and losses recognized in
converting  such activity to U.S.  dollars.  During fiscal 1996, the U.S. dollar
strengthened  slightly  against  the British  pound but this did not  materially
affect the operating results or translation of the Company's U.K.  investment on
the balance sheet.  In Mexico,  the peso  continued to decline  against the U.S.
dollar and resulted in a translation  loss on the balance sheet of $7.7 million.
However,  despite  the peso  devaluation  and slow  economic  recovery in Mexico
during 1996, the Company's Mexican  subsidiary  contributed 5.2% to consolidated
sales and was profitable.

On January 17, 1996 the Company  acquired 100% of the outstanding  capital stock
of Hofmann Laces,  Ltd. and its affiliates.  Hofmann Laces produces knitted lace
fabrics for the apparel,  intimate apparel and home fashions markets and stretch
knit fabric for the intimate apparel,  swimwear and activewear  markets. It also
cuts and sews lace fabric into finished home  fashions  products  which are sold
directly to retailers.

On August 18, 1994,  Guilford  purchased an additional 55% of the stock of Grupo
Ambar,  S.A. de C.V., the parent company of American  Textil,  S.A. de C.V. This
acquisition  increased  the  Company's  ownership to 75%.  American  Textil is a
leading  manufacturer  of knit textiles in Mexico.  This strategic  purchase has
enhanced  the  Company's  global  competitive  position  in both the apparel and
automotive industries.

Results of Operations
1996 Compared to 1995 - Consolidated sales for fiscal 1996 increased to a record
level and were up 6.1% to $830.3 million from last year's  previous  record high
of $782.5  million.  The Hofmann Laces  acquisition  provided the revenue growth
which more than offset  sales  declines in the Apparel  Home  Fashions  Business
Unit.


<PAGE>


The Apparel  Home  Fashions  Business  Unit sales  declined  nearly 5% to $397.0
million  with an overall  demand  decline for apparel at the retail  level,  but
especially for cotton-only  products and mature sleepwear and robewear garments.
Sales of fabrics to the Company's  traditional  women's apparel  markets,  which
include  lingerie,  sleepwear,  robewear  and  ready-to-wear  declined by 11.7%.
However,  certain  highly  technical  products which contain  Lycra(r),  such as
shapewear and stretch velvets continued to grow significantly as the marketplace
demanded these fashionable products.

Home  fashions and  industrial  fabric  sales  continued to grow with an overall
sales increase of 11.2%. Sales of core products,  such as lining,  team athletic
wear, mattress tickings, furniture upholstery and domestics increased.  However,
sales  were more  significantly  boosted  by  specialty  fabrics  used in diaper
closure systems and spacer lining for athletic shoes.

Since the date of acquisition on January 17, 1996,  Hofmann Laces,  Ltd. and its
affiliates  contributed  $61.6  million to fiscal 1996  sales.  While sales fell
short of internal  expectations,  due to softness at the retail level, there was
continual  quarterly  improvement with sales nearly at planned levels by the end
of the fiscal year. While Hofmann Laces' 1995 sales were not  consolidated  into
Guilford's  revenue,  sales of lace fabrics to the apparel and intimate  apparel
manufacturers have increased significantly over prior year levels.

Domestic Automotive Business Unit sales increased 3.0% to $196.0 million despite
a slightly  lower car build of 14.3  million  units for fiscal  year 1996 versus
14.6 million  units for fiscal year 1995.  Sales of headliner  and  bodycloth to
original equipment manufacturers ("OEMs") increased 2.1% and sales of van and RV
fabrics increased 11.7%. This improvement  resulted from increased market share,
the continued  popularity of the Ford Taurus, and increased revenues from higher
value-added technologies.

Guilford's  European  Automotive  Business  Unit sales  declined  6.9% to $122.4
million.  While the Company was  affected by the  decrease in the  European  car
build (from 12.5 million  units in fiscal 1995 to 12.0  million  units in fiscal
1996), and from price reductions  mandated by the automobile  manufacturers,  it
exited the year with increased market share of both headliner and bodycloth. The
market share  penetration  was  attributable to key placements with OEMs such as
Ford, Skoda and Audi.

Sales of  Guilford's  Mexican  subsidiary  increased  by 20.6% to $42.9  million
compared to last year's $35.6 million.  Despite the harsh economic conditions of
the country,  there was a renewed domestic demand for apparel fabrics. There was
also continued  strong demand for exported  garments  under NAFTA.  The trend in
consumer  demand toward soft goods resulted in a shift in sales from  automotive
to apparel and industrial fabrics,  which in fiscal year 1996 comprised over 55%
of the unit's aggregate sales.

Gross margins  increased to 18.6% from last year's 17.7% due to the contribution
of the Hofmann Laces acquisition. The results were negatively impacted by volume
declines of $6 million in the Apparel Home Fashions  Business Unit and nearly $3
million in the European  operation and by  manufacturing  inefficiencies  in the
domestic Automotive Business Unit of approximately $3 million. These were offset
by raw material  price  reductions of more than $6 million and by fixed overhead
cost reductions,  including incentive compensation, of approximately $7 million.
Additionally,  gross margins were impacted by product mix changes in the Mexican
operation  which offset the increase in revenue  there and also by selling price
reductions to automotive OEMs in both the U.S. and Europe.

Selling and administrative  expenses  ("S,G&A")  increased to $82.4 million from
the prior year's $70.4 million. The increases resulted from the consolidation of
Hofmann Laces expenses of approximately $7 million and Automotive  Business Unit
excess  freight  costs of  nearly  $3  million  in the  first  half of the year.
Research and  development  costs declined  slightly to $13.4 million  reflecting
reduced automotive printing trials.

Interest  expense  increased  in fiscal 1996 to $17.0  million  from last year's
$14.1  million  primarily  due  to  the  additional  borrowings  related  to the
acquisition and  consolidation  of Hofmann Laces which added $4.0 million.  This
increase was offset by a combined increase in capitalized interest and reduction
in the short-term borrowing rates of $1.1 million.

Other expense increased $0.1 million to $3.6 million. A reduction in expenses of
$1.5 million related to low income housing investments was substantially  offset
by additional goodwill  amortization of $0.5 million related to both the Hofmann
Laces and Mexican acquisitions and also by currency losses of $0.5 million.

<PAGE>

The  effective  income tax rate in fiscal  1996 was 33.3%  compared  to 33.0% in
fiscal 1995. The higher rate was due to the impact of the proportionate share of
Hofmann Laces pre-tax  income to the total  pre-tax  income at higher  statutory
state  rates.  This was  partially  offset  by the  impact  of the tax  credits'
relative proportion to total pre-tax income.

Net income in fiscal 1996 reached a record high of $34.0  million and  increased
1% over last year's $33.6 million. Primary earnings per share decreased to $2.38
per share  compared  to $2.41 per share in the prior year due to an  increase in
average  shares   outstanding  to  14,248,000   compared  to  the  prior  year's
13,983,000.

1995 Compared to 1994 - Consolidated sales for fiscal 1995 reached record levels
with an increase of 11.2% to $782.5 million from the previous year's record high
of $703.7 million.

The Apparel Home Fashions  Business Unit sales  declined 1.0% to $407.9  million
reflecting  decreases  of 9.0%  in  intimate  apparel,  ready-to-wear  and  home
fashions/ linings.  These decreases were offset by a strong improvement of 15.6%
in lingerie and continued growth from the Company's Lycra(r)- containing fabrics
used in shapewear and swimwear.  The industrial  market  products such as diaper
closure systems and shoe linings continued to grow in 1995.

Domestic automotive sales increased 9.2% to $199.5 million from the prior year's
$182.7  million.   Sales  of  headliner  and  bodycloth  to  original  equipment
manufacturers  increased  15.5%  while sales of van,  RV and  furniture  fabrics
declined  18.4%.  Given the flat car build of 14.6 million units for fiscal 1994
and fiscal 1995, the increase in sales of headliner and bodycloth  resulted from
increased  market share and  continued  success with the  popularity of the Ford
Taurus.

Guilford's  European  Automotive  Business Unit sales  increased 44.3% to $131.5
million from the prior year's $91.1  million.  While the Company  benefited from
the overall  increase in the  European  car build  (from 11.8  million  units in
fiscal 1994 to 12.5 million units in fiscal 1995),  Guilford's  sales growth was
due primarily to increased  market share of both  headliner and  bodycloth.  The
increase was also  attributable  to placements in key automotive  models such as
the GM Astra, GM Omega and Ford Escort.

With the full year impact of consolidation,  the Mexican operations  contributed
$35.6  million  compared  to the  previous  year's  $8.7  million.  Despite  the
depressed economy in Mexico, the Company exceeded internal sales expectations.

Gross  margins  improved  to 17.7% from the prior  year's  16.8% due to Guilford
Europe's  increase in margin to 16.7% from 14.0 % in the prior  year,  increased
operating  efficiencies in the Company's  Apparel and Fibers operations of $12.2
million and the Mexican  operation's  contribution  for the full year. While the
Company  experienced  large  increases in raw material prices for yarn, chip and
foam,  substantially  all  of  these  were  passed  through  to  the  customers.
Incremental  sales volume  contribution  and  manufacturing  improvements in the
Apparel  and  Fibers  Business  Units of $12.2  million  were  offset in part by
one-time  automotive product launch costs of $1.1 million,  and $1.5 million due
to the start up of the new automotive print technology.

In fiscal 1995,  S,G&A  increased  to $70.4  million from the prior year's $66.6
million primarily as a result of the Mexican operations increase of $2.9 million
and additional  compensation  expense of $1.6 million.  Research and development
costs declined from $14.6 million to $13.8 million reflecting reduced efforts in
yarn  development  by the  Fibers  Business  Unit  offset by  increased  focused
spending in the Apparel Home Fashions  Business Unit where successes  equated to
higher returns.

Interest expense increased in fiscal 1995 to $14.1 million from the prior year's
$12.4 million due to the  consolidation  of the Mexican  operations  which added
$2.2 million. Higher average short-term borrowing rates were more than offset by
reduced borrowing amounts.

Other expense  increased to $3.5 million from the prior year's $0.6 million as a
result of increased  expense  relating to the low income  housing  investment of
$2.2  million  and the  consolidation  of the Mexican  operations  which was not
included in 1994.

The  effective  income tax rate in fiscal  1995 was 33.0%  compared  to 35.4% in
fiscal 1994. This decrease was due to the impact of research and development and
low income housing investment credits.


<PAGE>


Net income in fiscal 1995 reached a record high of $33.6  million and  increased
33.9% over the previous year's $25.1 million.  This was $4.8 million higher than
the  previous  record high of $28.9  million  recorded in fiscal  1993.  Primary
earnings per share  increased to $2.41 per share  compared to $1.82 per share in
1994 on 13,983,000  average shares  outstanding versus 13,776,000 average shares
for the prior year.

Liquidity and Capital Requirements
At the end of fiscal  1996,  cash and cash  equivalents  of $31.4  million  were
available for future capital and other needs.

Cash provided by operations decreased in fiscal 1996 compared to fiscal 1995 due
to working  capital  increases  which were partially  offset by adjustments  for
non-cash  items  such as the  depreciation  and  amortization  increase  of $8.7
million.  Trade receivables  increased $23.4 million,  inventory increased $32.0
million and accrued  liabilities  increased $4.5 million.  These  increases were
substantially the result of the consolidation of Hofmann Laces.

Net  property  increased  $65.4  million from fiscal 1995  primarily  due to the
consolidation of Hofmann Laces.  Capital  expenditures were $64.5 million during
1996, $57.5 million in 1995, and $47.7 million in 1994. In the past three years,
Guilford continued to modernize  equipment and increase capacity to support new,
innovative  products.  Fiscal 1996 included Hofmann Laces' capital  additions of
$6.3  million.  Expenditure  levels  for the  next two  years  are  expected  to
approximate depreciation expense.

Increases in short-term borrowings and long-term debt of $35.4 million and $43.1
million,  respectively,  at  September  29, 1996 as compared to October 1, 1995,
related  primarily to the acquisition and  consolidation  of Hofmann Laces.  The
purchase  price  consisted of cash and common  stock.  The cash purchase and the
repayment  of a  portion  of  Hofmann  Laces'  long-term  debt was  funded  with
borrowings of $58.8 million under the company's revolving credit facility.  This
was  refinanced  with bank lines of credit.  The increase in  long-term  debt is
partially  offset by the  reclassification  of a portion of  Guilford's  debt to
current  maturities of long-term debt, as current maturities in fiscal 1997 will
exceed  prior  year  levels.   The   additional   short-term   borrowings   were
substantially related to working capital requirements.

In conjunction with its acquisition of Hofmann Laces, the Company also agreed to
pay additional  consideration  in fiscal year 2001 in accordance  with a formula
based upon the Company's  price-earnings multiple and Hofmann Lace's performance
through the end of calendar year 2000.

Raw material costs declined in fiscal 1996.  Management expects flat or slightly
decreased raw material  costs in 1997 as suppliers  participate in selling price
reductions  granted to  customers  which are being driven by consumer and global
competition.

On September 26, 1995, the Company established a $150.0 million revolving credit
facility which replaced a previous $25.0 million  revolving line of credit.  The
Company  entered into this  facility in order to maintain  flexibility  with the
Company's seasonal working capital needs and for potential future  acquisitions.
To  further  supplement  its  working  capital  requirements,  the  Company  has
available, uncommitted short-term bank lines of credit approximating $85 million
and additionally can receive advances against its factored accounts  receivable.
Management  believes that the Company's strong financial  position and operating
performance  would  allow  access to  necessary  capital  from both the debt and
equity markets.

During the next five years,  management  believes that its cash requirements for
working capital, capital expenditures,  dividends,  interest and debt repayments
will continue to be met through internally  generated sources and utilization of
available borrowing sources. In line with management's desire to better position
itself to  consider  acquisition  opportunities  and to make  strategic  capital
investments,  management  intends  to  continue  examining  near  and  long-term
alternatives  to strengthen its balance  sheet.  Such  alternatives  may include
equity or debt financing.

Inflation
The Company  believes that the relatively  moderate  inflation rate of the 1990s
has not significantly impacted its operations.

Contingencies and Future Operations
Since January 1992, the Company has been involved in discussions with the United
States Environmental Protection Agency ("EPA") regarding remedial actions at its
Gold  Mills,  Inc.  ("Gold")  facility  in Pine  Grove,  Pennsylvania  which was
acquired in October  1986.  Between  1988 and 1990,  the Company  implemented  a
number  of  corrective   measures  at  the  facility  in  conjunction  with  the
Pennsylvania  Department of Environmental  Resources and incurred  approximately
$3.5 million in costs.

<PAGE>

Subsequently,  through  negotiations  with the EPA,  Gold  entered  into a Final
Administrative  Consent Order with the EPA, effective October 14, 1992. Pursuant
to such order,  Gold has performed (i) certain measures  designed to prevent any
potential  threats to the environment at the facility and (ii) an  investigation
to fully  determine  the nature of any release of  hazardous  substances  at the
facility.  In addition,  Gold will conduct a study to evaluate  alternatives for
any  corrective  action which may be necessary at the  facility.  The failure of
Gold to comply with the terms of the Consent Order may result in the  imposition
of monetary  penalties  against  Gold.  In the fourth  quarter of fiscal 1992, a
pre-tax charge of $8.0 million was provided for the estimated future cost of the
additional remediation.

During the fourth  quarter of fiscal 1992, the Company also received a Notice of
Violation  from  the  North  Carolina   Division  of  Environmental   Management
concerning  ground  water  contamination  on or near one of its  North  Carolina
facilities.  The  Company  voluntarily  agreed  to  allow  the  installation  of
monitoring wells at the site but denies that such  contaminants  originated from
the Company's  operations  or property.  An  additional  pre-tax  charge of $1.3
million  was  provided  in the  fourth  quarter of fiscal  1992 to  reflect  the
estimated  future  costs of this  monitoring  and other  environmental  matters,
including the removal of underground storage tanks at the Company's  facilities.
The Company has  removed  substantially  all  underground  storage  tanks at its
facilities.  At September  29,  1996,  environmental  accruals  amounted to $6.0
million of which $5.0 million is  non-current  and is included in other deferred
liabilities in the accompanying consolidated balance sheet.

The  Company  also is  involved in various  litigation  arising in the  ordinary
course of business.  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.

Outlook
Management  is  optimistic  for  Guilford's  future as it moves forward with new
innovative  products.  For the Apparel Home Fashions Business Unit, sales growth
is expected due to new products, heightened marketing of innovative concepts and
synergies as a result of the Hofmann Laces acquisition.

In the automotive  industry,  with a flat car build,  the Company  expects sales
growth  through  worldwide  sourcing  opportunities  enhanced  by the  Company's
presence in Europe and Mexico,  increased placements of woven velour fabrics and
diverse product offerings  including the new printing  technology.  In addition,
continued  emphasis on cost reduction  should  translate to better economics for
the Company's customers.

Many manufacturers who use Guilford's fabrics in both the apparel and automotive
sectors are seeking to reduce  costs.  In  addition,  the markets are subject to
competition  from  imported  garments.  Consequently,  Guilford is  experiencing
continual  pricing  pressures.   However,  through  diversity,   innovation  and
technology,  the Company will  continue to focus its efforts on  providing  high
quality, innovative products, with excellent customer service at the lowest cost
and expects to maintain  its  competitive  position  in its  markets.  Growth is
expected to come gradually  from internal  product  transition  efforts and more
quickly with strategic acquisitions.

The results of operations for fiscal 1996 were not  significantly  impacted on a
consolidated  basis by the  continued  devaluation  of the Mexican  peso. In the
balance  sheet,   the  result  of  this  translation  loss  is  a  reduction  in
stockholders'  investment,  as required by  Statement  of  Financial  Accounting
Standards  No.  52 (SFAS  No.  52),  and  accordingly  is not  reflected  in the
Company's  results  of  operations.  In  management's  view,  a risk  of loss of
earnings exists in the future related to net U.S. dollar transactions. Effective
January 1, 1997,  it is expected  that the Mexican  economy  will be  considered
"highly  inflationary" for financial  reporting  purposes because the cumulative
Mexican inflation rate for the immediately  preceding three years is expected to
exceed 100%. As a result, under SFAS No. 52, the U.S. dollar will be used as the
functional  currency for translating the balance sheet and results of operations
of the  Company's  Mexican  operation,  until the  Mexican  economy is no longer
considered  highly  inflationary.  Under  this  method  of  accounting,  foreign
currency translation gains and losses are recognized currently in the results of
operations,  rather than as a direct change in stockholders'  investment.  While
management  expects that the peso will  devalue even further in fiscal 1997,  it
believes  that  economic  growth,  spurred by a return of domestic  demand and a
reduction in inflation, will result in continued growth for its operations.  The
Company  cannot  determine  to what  extent  this  growth  may be  offset by the
negative impact of economic uncertainty

<PAGE>

Guilford Mills, Inc.

Selected Financial Data

<TABLE>
<CAPTION>

                                                                       Transition
(In thousands except per share data)                                      Quarter
                                 1996         1995          1994       1993 (2)        1993        1992          1991         1990
--------------------------   ------------ ------------ ------------- ------------ ------------------------- ------------ -----------
<S>                          <C>            <C>         <C>            <C>           <C>        <C>           <C>         <C>     
Results of Operations
   Net sales                  $830,320      $782,518     $703,700      $141,450      $654,435   $614,905       $528,778   $544,059
   Income (loss) before
     extraordinary item         33,978        33,636       25,124        (1,087)       28,852     24,858         13,557     (8,041)
   Income (loss) before
     cumulative effect of
     change in accounting
     principle                  33,978        33,636       25,124        (1,087)       28,852     24,858         15,917     (8,041)
   Net income (loss)            33,978        33,636       25,124         2,013        28,852     24,858         15,917     (8,041)

Per Share Data (1)
   Primary:
     Income (loss) before
      extraordinary item          2.38          2.41         1.82         (.08)          2.11       1.85          1.02        (.56)

     Income (loss) before
      cumulative effect of
      change in accounting
      principle                   2.38          2.41         1.82         (.08)          2.11       1.85          1.19        (.56)
     Net income (loss)            2.38          2.41         1.82          .15           2.11       1.85          1.19        (.56)
     Average common and
      common equivalent
      shares outstanding        14,248        13,983       13,776        13,646        13,674     13,465         13,322     14,250
   Fully diluted:
     Income (loss) before
      extraordinary item          2.19          2.21         1.71         (.08)          1.96       1.73          1.01        (.56)
     Income (loss) before
      cumulative effect of
      change in accounting
      principle                   2.19          2.21         1.71         (.08)          1.96       1.73          1.17        (.56)
     Net income (loss)            2.19          2.21         1.71          .15           1.96       1.73          1.17        (.56)
     Average common and
      common equivalent
      shares outstanding        16,562        16,309       16,059        13,650        15,933     15,783         15,665     14,250
   Cash dividends                  .60           .60          .60          .15            .60        .57           .53         .53
Balance Sheet Data
   Working capital             177,658       178,233      153,165       126,766       151,994    139,897        124,078    137,893
   Total assets                728,830       586,371      565,338       500,306       506,742    414,335        379,874    395,425
   Long-term debt              209,435       166,368      164,611       146,736       147,430     76,855         80,316     92,072
   Stockholders' investment    298,059       267,549      244,060       221,954       219,739    206,170        178,058    175,500

</TABLE>


(1) All share data has been  restated to reflect  the effect of a  three-for-two
stock split  effected in January 1992 in the form of a 50% stock  dividend.
(2) Due to the change in year end, the transition quarter from June 28, 1993 to
September 26, 1993 is presented.



<PAGE>

Guilford Mills, Inc.
CONSOLIDATED BALANCE SHEETS
September 29, 1996 and October 1, 1995


<TABLE>
<CAPTION>

(In thousands except  share data)
---------------------------------------------------------------------------- --------------------------- -------------------------

                                                                                        1996                        1995
---------------------------------------------------------------------------- --------------------------- -------------------------
<S>                                                                                  <C>                          <C> 
Assets
Cash and cash equivalents                                                            $  31,448                    $  17,964
Accounts receivable, net                                                               172,033                      148,656
Inventories  (Note 3)                                                                  137,993                      106,008
Prepaid income taxes (Note 7)                                                            2,437                        5,530
Other current assets                                                                     7,977                        7,769
---------------------------------------------------------------------------- --------------------------- -------------------------
           Total current assets                                                        351,888                      285,927
Property, net (Note 4)                                                                 309,964                      244,592
Cash surrender value of life insurance, net of policy loans (Note 8)                    41,715                       37,676
Other                                                                                   25,263                       18,176
---------------------------------------------------------------------------- --------------------------- -------------------------
           Total assets                                                               $728,830                     $586,371
---------------------------------------------------------------------------- --------------------------- -------------------------
Liabilities
Short-term borrowings (Note 6)                                                       $  47,979                   $    9,587
Current maturities of long-term debt (Note 6)                                           18,837                        4,078
Accounts payable                                                                        63,551                       54,677
Accrued liabilities (Note 5)                                                            43,863                       39,352
---------------------------------------------------------------------------- --------------------------- -------------------------
---------------------------------------------------------------------------- --------------------------- -------------------------
           Total current liabilities                                                   174,230                      107,694
Long-term debt (Note 6)                                                                209,435                      166,368
Deferred income taxes (Note 7)                                                          19,969                       17,518
Other deferred liabilities (Note 8)                                                     24,970                       25,011
Minority interest (Note 2)                                                               2,167                        2,231
---------------------------------------------------------------------------- --------------------------- -------------------------
           Total liabilities                                                           430,771                      318,822
---------------------------------------------------------------------------- --------------------------- -------------------------


Commitments and Contingencies (Notes 2, 9 & 11)

Stockholders' Investment (Notes 6 & 9)
Preferred stock, $1 par; 1,000,000 shares authorized, none issued                           --                           --
Common stock, $.02 par; 40,000,000 shares authorized,
   19,629,199 shares issued, 14,455,711 shares outstanding at
   September 29,1996 and 14,108,721 shares outstanding at
   October 1, 1995                                                                         393                          393
Capital in excess of par                                                                41,089                       37,467
Retained earnings                                                                      311,217                      285,880
Foreign currency translation loss                                                      (11,988)                     (10,110)
Unamortized stock compensation                                                            (287)                      (1,260)
Treasury stock, at cost (5,173,488 shares at September 29, 1996
   and 5,520,478 shares at October 1, 1995)                                            (42,365)                     (44,821)
---------------------------------------------------------------------------- --------------------------- -------------------------
           Total stockholders' investment                                              298,059                      267,549
---------------------------------------------------------------------------- --------------------------- -------------------------
           Total liabilities and stockholders' investment                             $728,830                     $586,371
---------------------------------------------------------------------------- --------------------------- -------------------------

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


</TABLE>

<PAGE>


   Guilford Mills, Inc.
   CONSOLIDATED STATEMENTS OF INCOME
   For the Years Ended September 29, 1996, October 1, 1995 and October 2, 1994

<TABLE>
<CAPTION>



(In thousands except per share data)
 --------------------------------------------- ----------------------- ----------------------- ------------------
                                                        1996                    1995                 1994
                                                     (52 Weeks)              (52 Weeks)           (53 Weeks)
 --------------------------------------------- ----------------------- ----------------------- ------------------
<S>                                                    <C>                    <C>                   <C>     
 Net Sales                                             $830,320               $782,518              $703,700
 --------------------------------------------- ----------------------- ----------------------- ------------------

 Costs and Expenses:
      Cost of goods sold                                676,264                644,344               585,244
      Selling and administrative                         82,430                 70,358                66,566
 --------------------------------------------- ----------------------- ----------------------- ------------------
                                                        758,694                714,702               651,810
 --------------------------------------------- ----------------------- ----------------------- ------------------

 Operating Income                                        71,626                 67,816                51,890
 --------------------------------------------- ----------------------- ----------------------- ------------------

 Other Expense:
      Interest expense                                   17,017                 14,122                12,428
      Other expense, net                                  3,640                  3,506                   551
 --------------------------------------------- ----------------------- ----------------------- ------------------
                                                         20,657                 17,628                12,979
 --------------------------------------------- ----------------------- ----------------------- ------------------

 Income Before Income Taxes                              50,969                 50,188                38,911
 Income Tax Provision (Note 7)                           16,991                 16,552                13,787
 --------------------------------------------- ----------------------- ----------------------- ------------------
 Net Income                                            $ 33,978              $  33,636             $  25,124
 --------------------------------------------- ----------------------- ----------------------- ------------------
 Net Income Per Share:
      Primary                                             $2.38                  $2.41                 $1.82
      Fully Diluted                                        2.19                   2.21                  1.71
 --------------------------------------------- ----------------------- ----------------------- ------------------


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


</TABLE>

<PAGE>

Consolidated Statements of Stockholders' Investment

For the Years Ended September 29, 1996, October 1, 1995 and October 2, 1994

<TABLE>
<CAPTION>

                                                                                             Foreign
                                                               Capital in                    Currency      Unamortized
                                                    Common      Excess of     Retained     Translation        Stock       Treasury
(In thousands except share data)                    Stock          Par        Earnings     Gain (Loss)    Compensation     Stock
------------------------------------------------ ------------- ------------- ------------ -------------- ---------------- ----------
<S>                <C> <C>                           <C>         <C>          <C>           <C>            <C>            <C>      
Balance, September 26, 1993                          $393        $33,581      $244,006      $ (5,536)      $(5,137)       $(45,353)
   Vesting of 92,000 shares under the
    restricted stock plan, less forfeitures of
    76,422 shares                                      --             --            --            --         1,351          (1,351)
   Compensation under restricted stock plan            --             --            --            --           984              --
   Issuance of 160,537 shares of treasury stock
    under the employee stock ownership plan            --         (1,260)           --            --            --           1,260
   Shares to be issued in fiscal 1995 under the
    employee stock ownership plan                      --          2,033            --            --            --              --
   Issuance of 54,000 shares of treasury stock
    for options exercised                              --            101            --            --            --             414
   Foreign currency translation gain                   --             --            --         1,875            --              --
   Cash dividends ($.60 per share)                     --             --        (8,425)           --            --              --
   Net income                                          --             --        25,124            --            --              --
------------------------------------------------ ------------- ------------- ------------ -------------- ---------------- ----------
Balance, October 2, 1994                              393         34,455       260,705        (3,661)       (2,802)        (45,030)
   Vesting of 135,533 shares under the
    restricted stock plan, less return of
    53,415 shares to treasury stock to satisfy 
    recipient's individual income tax obligations      --             --            --            --            --          (1,162)
   Compensation under restricted stock plan            --             --            --            --         1,542              --
   Issuance of 84,701 shares of treasury stock
    under the employee stock ownership plan            --           (676)           --            --            --             676
   Shares to be issued in fiscal 1996 under the
    employee stock ownership plan                      --          3,385            --            --            --              --
   Issuance of 93,398 shares of treasury stock
    for options exercised                              --            303            --            --            --             695
   Foreign currency translation loss                   --             --            --        (6,449)           --              --
   Cash dividends ($.60 per share)                     --             --        (8,461)           --            --              --
   Net income                                          --             --        33,636            --            --              --
------------------------------------------------ ------------- ------------- ------------ -------------- ---------------- ----------
Balance, October 1, 1995                              393         37,467       285,880       (10,110)       (1,260)        (44,821)
   Issuance of 200,000 shares of treasury
    stock in connection with the purchase of a
    business                                           --          2,401            --            --            --           1,624
   Issuance  of 20,000  shares of treasury  stock
    and  vesting of 97,934  shares
    under the  restricted  stock plan,  less  
    forfeitures  of 19,600 shares and less
    return of 22,436 shares to treasury stock to
    satisfy reciindividual income tax obligations      --            275            --            --          (275)           (670)
   Compensation under restricted stock plan            --             --            --            --         1,248              --
   Issuance of 132,952 shares of treasury stock
    under the employee stock ownership plan            --         (1,080)           --            --            --           1,080
   Shares to be issued in fiscal 1997 under the
    employee stock ownership plan                      --          1,858            --            --            --              --
   Issuance of 42,017 shares of treasury stock
    for options exercised                              --            247            --            --            --             483
   Return of 5,943 shares to treasury stock
     received as payment for options exercised         --            (79)           --            --            --             (61)
   Foreign currency translation loss                   --             --            --        (1,878)           --              --
   Cash dividends ($.60 per share)                     --             --        (8,641)           --            --              --
   Net income                                          --             --        33,978            --            --              --
------------------------------------------------ ------------- ------------- ------------ -------------- ---------------- ----------
Balance, September 29, 1996                          $393        $41,089      $311,217      $(11,988)     $    (287)       $(42,365)
------------------------------------------------ ------------- ------------- ------------ -------------- ---------------- ----------

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

</TABLE>

<PAGE>
<PAGE>

Guilford Mills, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended September 29, 1996, October 1, 1995 and October 2, 1994


<TABLE>
<CAPTION>

 (In thousands)
    -------------------------------------------------------------------- --------------------- ------------------ -----------------

                                                                                1996                 1995              1994
                                                                              (52 Weeks)          (52 Weeks)         (53 Weeks)
    -------------------------------------------------------------------- --------------------- ------------------ -----------------
    <S>                                                                         <C>                <C>                <C>   
    Cash Flows From Operating Activities:
       Net income                                                               $ 33,978           $ 33,636           $ 25,124
       Non-cash items included in net income --
         Depreciation and amortization                                            55,389             46,710             40,282
         (Gain) loss on disposition of property                                     (180)              (156)               605
         Minority interest in net income                                             206                253                195
         Deferred income taxes                                                     5,835              1,295              5,715
         Increase in cash surrender value of life insurance,
           net of policy loans                                                    (3,852)              (961)            (2,087)
         Compensation earned under restricted stock plan                           1,248              1,542                984
         Shares to be issued under employee stock ownership plan                   1,858              3,385              2,033
       Changes in assets and liabilities --
         Receivables                                                             (13,277)            (9,400)           (22,474)
         Inventories                                                              (3,688)            (3,596)               (85)
         Other current assets                                                       (184)            (3,750)               854
         Accounts payable                                                         11,640              5,662              5,950
         Accrued liabilities                                                      (9,999)             7,062              4,999
       Other                                                                        (400)               339                555
    -------------------------------------------------------------------- --------------------- ------------------ -----------------
            Net cash provided by operating activities                             78,574             82,021             62,650
    -------------------------------------------------------------------- --------------------- ------------------ -----------------
    Cash Flows From Investing Activities:
       Additions to property                                                     (64,532)           (57,544)           (47,711)
       Proceeds from dispositions of property                                      1,220                612              2,303
       Proceeds from sale of other assets                                            ---              2,600                ---
       (Increase) decrease  in other assets                                         (655)               606             (4,515)
       Purchases of businesses, net of cash acquired (Note 2)                    (26,519)               ---             (9,868)
    -------------------------------------------------------------------- --------------------- ------------------ -----------------
          Net cash used in investing activities                                  (90,486)           (53,726)           (59,791)
    -------------------------------------------------------------------- --------------------- ------------------ -----------------
    Cash Flows From Financing Activities:
       Short-term borrowings (repayments), net                                    42,667             (9,087)           (11,300)
       Payments of long-term debt                                                (68,138)            (2,439)            (2,801)
       Proceeds from issuance of long-term debt                                   58,777              6,374             20,000
       Cash dividends                                                             (8,641)            (8,461)            (8,425)
       Common stock options exercised                                                730                998                515
    -------------------------------------------------------------------- --------------------- ------------------ -----------------
            Net cash provided by (used in) financing activities                   25,395            (12,615)            (2,011)

    Effect of Exchange Rate Changes on Cash and
       Cash Equivalents                                                                1             (3,826)               350
    -------------------------------------------------------------------- --------------------- ------------------ -----------------

    Net Increase In Cash and Cash  Equivalents                                    13,484             11,854              1,198
    -------------------------------------------------------------------- --------------------- ------------------ -----------------

    Beginning Cash and Cash Equivalents                                           17,964              6,110              4,912

    Ending Cash and Cash Equivalents                                            $ 31,448           $ 17,964           $  6,110
    -------------------------------------------------------------------- --------------------- ------------------ -----------------

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

</TABLE>


<PAGE>

Notes to Consolidated Financial Statements
(In thousands except share data)


1.   Description of Business and Summary of
     Significant  Accounting Policies:
Description of Business - The Company  produces,  processes and sells warp knit,
circular  knit and woven velour  fabric as well as lace.  The Company  sells its
finished  fabrics  to  customers  who  manufacture  a broad  range  of  apparel,
automotive,  industrial and home furnishings products. The company also cuts and
sews lace fabrics into finished home fashions  products  which are sold directly
to retailers.  During 1996, 1995, and 1994 no single customer  accounted for 10%
or more of net sales.

Principles of Consolidation - The consolidated  financial statements include the
accounts  of  Guilford  Mills,  Inc.  and  its   majority-owned  and  controlled
subsidiaries.  All significant  intercompany accounts and transactions have been
eliminated in consolidation.

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
the reported  amounts of revenues and expenses.  Actual  results may differ from
those estimates.

Reclassifications  - For comparative  purposes,  certain amounts in the 1995 and
1994  financial  statements  have been  reclassified  to  conform  with the 1996
presentation.

Minority  Interest - Minority  interest  represents  the minority  stockholders'
proportionate  share of the  equity of Grupo  Ambar,  S.A.  de C.V.,  the parent
company of American Textil, S.A. de C.V (collectively,  "American  Textil").  At
September  29, 1996,  the Company owned 75% of the capital stock of Grupo Ambar,
S.A. de C.V.

Cash Equivalents - All highly liquid  investments  with an original  maturity of
six months or less are considered to be cash equivalents. The carrying amount of
cash equivalents approximates fair value.

Accounts  Receivable and Concentration of Credit Risk - As of September 29, 1996
and October 1, 1995, approximately 15%, and 24%, respectively,  of the Company's
accounts  receivable were factored on a non-recourse basis. The Company performs
on-going credit evaluations of its non-factored  customers'  financial condition
and generally does not require collateral from those customers. Credit insurance
is maintained covering $13,000 of certain outstanding accounts  receivable.  The
Company  competes  primarily in the apparel and automotive  industries and sells
its  products to a multitude of  customers  in numerous  geographical  locations
throughout the world.  There is not a  disproportionate  concentration  of risk.
Allowances  for doubtful  accounts  were $9,487 and $8,867 at September 29, 1996
and October 1, 1995, respectively.

Inventories  - Inventories  are carried at the lower of cost or market.  Cost is
determined using the last-in,  first-out (LIFO) method for  approximately 73% of
inventories  in 1996.  Cost  for all  other  inventories  have  been  determined
principally by the first-in,  first-out (FIFO) method. Cost was determined using
the LIFO method for substantially all inventories in 1995.

Property  - Property  is  carried at cost,  and  depreciation  is  provided  for
financial reporting primarily on the straight-line  method.  Accelerated methods
are used for income tax reporting.  Depreciation rates are reviewed annually and
revised, if necessary, to reflect estimated remaining useful lives.

Goodwill and Intangible  Assets - Goodwill is amortized using the  straight-line
method over periods  ranging from twenty to forty years.  Intangible  assets are
amortized using the straight-line  method over their estimated economic lives of
five years.  The Company  reviews the carrying  value of goodwill and intangible
assets for impairment  whenever events or changes in circumstance  indicate that
the carrying value may not be recoverable.  Measurement of any impairment  would
include a comparison of estimated future operating cash flows  anticipated to be
generated during the remaining life to the net carrying value of the asset.

Income Taxes - Deferred or prepaid income taxes are provided for  differences in
timing of expense and income recognition  between tax and financial reporting in
accordance with SFAS No. 109 "Accounting for Income Taxes". United States income
taxes are not  provided on the income of foreign  operations,  since such income
has  been  reinvested  and  is not  expected  to be  repatriated.  Undistributed
earnings of foreign  operations  were $29,316 at September 29, 1996,  $25,796 at
October 1, 1995, and $14,873 at October 2, 1994.

Foreign  Currency  Translation  - The  financial  statements  of  majority-owned
foreign  subsidiaries  are  translated  into  dollars  at the  year-end  rate of
exchange for asset and  liability  accounts and the average rate of exchange for
income statement accounts.  Resulting  translation gains or losses are reflected
in the foreign  currency  translation  account in the  stockholders'  investment
section of the  accompanying  balance  sheets  and do not affect the  results of
operations.

<PAGE>

Revenue  Recognition  - The Company  recognizes a sale when goods are shipped or
when ownership is assumed by the customer.

Per Share Information - Primary income per share information has been determined
by dividing the respective net income amounts by the weighted  average number of
shares of common  stock and  common  stock  equivalents  outstanding  during the
periods (14,248,000 in 1996,  13,983,000 in 1995, and 13,776,000 in 1994). Fully
diluted  income per share  information  also  considers  as  applicable  (i) the
dilutive  effect  assuming  that  the  Company's  convertible   debentures  were
converted at the  beginning of the year,  with earnings  being  increased by the
interest expense, net of taxes, that would not have been incurred had conversion
taken place and (ii) an additional  dilutive effect for stock options and shares
issued under the  restricted  stock plan.  The weighted  average number of fully
diluted  shares  of  common  stock  and  equivalents  was  16,562,000  in  1996,
16,309,000 in 1995, and 16,059,000 in 1994.

Supplemental Cash Flow Information - The Company paid interest of $17,245 during
1996,  $14,526  during 1995,  and $12,217  during 1994.  The Company paid income
taxes of $9,006  during  1996,  $15,599  during  1995,  and $7,391  during 1994.
Non-cash  activities consist of $176 in 1996, $0 in 1995, and $1,351 in 1994 for
the issuance of treasury  shares under the restricted  stock plan, net of shares
forfeited under the restricted stock plan.

Recent  Accounting  Pronouncements  - The Financial  Accounting  Standards Board
recently issued SFAS No. 123,  "Accounting for Stock-Based  Compensation."  This
statement  introduces a fair-value  based method of accounting  for  stock-based
compensation.  It  encourages,  but does not  require,  companies  to  recognize
compensation  expense  for  grants of stock,  stock  options,  and other  equity
instruments  to  employees  based on the new fair value  accounting  rules.  The
Company has elected not to recognize  compensation expense as encouraged by this
statement.  As a result of this election, SFAS No. 123 requires that the Company
provide pro forma  disclosures for the two most recent fiscal years presented as
if compensation expense had been recorded. The Company will adopt the disclosure
provisions of this statement in fiscal 1997.



2.   Acquisitions:
Hofmann Laces,  Ltd. and Affiliates - On January 17, 1996, the Company  acquired
100% of the outstanding  capital stock of Hofmann Laces,  Ltd., Raschel Fashions
Interknitting,  Ltd.,  and  Curtains and Fabrics,  Inc.  (collectively  "Hofmann
Laces").  Hofmann  Laces  designs and  produces  lace  fabrics for the  intimate
apparel, apparel and home fashions markets. It produces stretch knit fabrics for
the apparel  swimwear and intimate apparel  markets.  Additionally,  it cuts and
sews lace fabrics into finished home fashions  products  which are sold directly
to  retailers.  The  purchase  price was  comprised  of cash of $45,480  and the
issuance of 200,000 shares of the company's  common stock.  The  acquisition was
accounted for using the purchase  method of  accounting.  Excess  purchase price
over fair  market  value of the  underlying  assets of $7,575 was  allocated  to
goodwill,  other intangible assets and property based upon preliminary estimates
of fair  values.  The Company  does not believe  that the final  purchase  price
allocation  will  differ  significantly  from  the  preliminary  purchase  price
allocation recorded at September 29, 1996. Additional purchase price may be paid
based on Hofmann Laces' earnings for the five year period ending on December 31,
2000.

The operating  results of Hofmann  Laces have been included in the  consolidated
statement  of  income  from the date of  acquisition.  The  unaudited  pro forma
results  below assume the  acquisition  occurred at the  beginning of the fiscal
years ending September 29, 1996 and October 1, 1995:

--------------------- --------------------- --------------------
                              1996                 1995
--------------------- --------------------- --------------------
Net Sales                  $848,985               $859,717
Operating Income             73,682                 82,661
Net Income                   34,386                 40,017
--------------------- --------------------- --------------------
Net Income per share:
      Primary                  2.40                   2.82
      Fully Diluted            2.21                   2.42
--------------------- --------------------- --------------------

In management's  opinion, the unaudited pro forma combined results of operations
are not  indicative  of the actual  results  that would  have  occurred  had the
acquisition been consummated at the beginning of fiscal 1996 or at the beginning
of fiscal  1995 or of  future  perations  of the  combined  companies  under the
ownership and management of the Company.

American  Textil - On August 18, 1994,  the Company  acquired an additional  55%
ownership  interest in American  Textil.  In 1996,  additional  consideration of
$3,667 was paid based on American  Textil's  earnings through December 31, 1995.
The acquisition  increased the Company's ownership interst in American Textil to
75%.  American  Textil is a leading  manufacturer  of knit  textile  fabrics  in
Mexico.

The Company  recorded  its equity in the  earnings of  American  Textil  through
August 18,  1994,  and the  consolidated  statement  of income  for fiscal  1994
includes the operating results of American Textil thereafter.  Accordingly,  for
comparison  purposes,  the consolidated  financial  statements for 1994 included
approximately six weeks of operations  (August 19, 1994
<PAGE>

through October 2, 1994) while the  consolidated  financial  statements for 1996
and 1995 include  fifty-two weeks. The minority  stockholders' 25% proportionate
interest in American  Textil's  net income  after August 18, 1994 is included in
other expense in the 1996, 1995 and 1994 statements of income.

3.   Inventories:
Inventories at September 29, 1996 and October 1, 1995 consist of the following:

---------------------------- ----------------- -----------------
                                   1996              1995
---------------------------- ----------------- -----------------
Finished goods                  $  45,515        $  45,745
Raw materials and work
     in process                    95,439           69,786
Manufacturing supplies             13,892           11,968
---------------------------- ----------------- -----------------
Total inventories valued at
  first-in, first-out 
  (FIFO) cost                     154,846          127,499

Less - Adjustments to
  reduce FIFO cost to
  LIFO cost, net                   16,853           21,491
---------------------------- ----------------- -----------------
Total inventories                $137,993         $106,008
---------------------------- ----------------- -----------------


4.   Property:
Property at September 29, 1996 and October 1, 1995 consists of the following:

-------------------------- ------------------- -----------------
                                   1996              1995
-------------------------- ------------------- -----------------
Land                             $  11,850       $  10,618
Buildings                          100,412          84,478
Machinery and equipment            538,834         445,425
Construction in progress            12,232           6,647
-------------------------- ------------------- -----------------
                                   663,328         547,168
Less - Accumulated
    depreciation                   353,364         302,576
-------------------------- ------------------- -----------------
       Property, net              $309,964        $244,592
-------------------------- ------------------- -----------------


5.   Accrued Liabilities:
Accrued  liabilities  at  September  29, 1996 and October 1, 1995 consist of the
following:

-------------------------- ------------------- -----------------
                                   1996              1995
-------------------------- ------------------- -----------------
Payroll and related benefits       $14,041         $16,352
Income taxes                         7,027           5,178
Property taxes                       3,150           3,282
Other                               19,645          14,540
-------------------------- ------------------- -----------------
  Total accrued liabilities        $43,863         $39,352
-------------------------- ------------------- -----------------


6.   Short-Term Borrowings and Long-Term Debt:
The Company uses  short-term bank borrowings with terms of six months or less to
meet seasonal working capital needs. The maximum  short-term  borrowings  during
1996,  1995,  and 1994 were $68,355,  $32,059,  and $42,510,  respectively;  the
average  borrowings were $25,586,  $9,960,  and $26,279,  respectively;  and the
weighted  average  interest  rates were 9%, 12% and 7% (6%,  6%, and 7% for U.S.
borrowings), respectively. The Company has no compensating balance requirements.

Long-term  debt at  September  29,  1996 and  October  1, 1995  consists  of the
following:

---------------------------------- --------------- -------------
                                         1996             1995
---------------------------------- --------------- -------------
Senior, unsecured notes, due in
   annual payments of
   $10,714 from 1997 to 2003,
   interest at 7.569%               $  75,000        $  75,000
Convertible subordinated
   debentures,  due in various
   payments from 1999 through
   2012, convertible into common
   stock at $29.50 per share,
   interest at 6%                      66,180           66,180
Lines of Credit                        58,777               --
Term loan, due in quarterly
   payments of $695 until 1996,
   interest at 8.38%                       --            3,472
Senior, unsecured notes, due in
   1999, interest at 7.49%             20,000           20,000
Term loans with a Mexican
   bank at various due dates
   and various interest rates           2,780            4,494
Industrial revenue bonds at
   various  due dates and various
   interest  rates                        845               --
Other                                   4,690            1,300
---------------------------------- --------------- -------------
                                      228,272          170,446
Less -  Current maturities             18,837            4,078
---------------------------------- --------------- -------------
   Total                             $209,435         $166,368
---------------------------------- --------------- -------------

The Company financed the Hofmann Laces  acquisition  discussed in Note 2 as well
as the  refinancing  of a portion of the assumed debt with $58,777 of borrowings
under its $150,000  revolving line of credit.  The borrowings were  subsequently
repaid with borrowings under line of credit  agreements with maturities  ranging
from 1 to 180  days and  interest  rates  ranging  from  5.18%  to 6.38%  with a
weighted  average  interest  rate of 5.48% at  September  29,  1996.  The  total
borrowings  outstanding as of September 29, 1996 of $58,777 have been classified
as long-term debt in the accompanying  consolidated  balance sheet as management
intends to refinance the borrowings  through  available  long-term debt sources.
The Company has additional  availability  under uncommitted bank lines of credit
of approximately $86,000.

During 1995, the Company established a $150,000 revolving credit facility with a
group of banks which replaced a previous $25,000 revolving line of credit.  This
credit facility expires September 25, 2000. No borrowings were outstanding under
this facility at September 29, 1996 or October 1, 1995.

The Company's Mexican subsidiary has various term loans with a local bank. These
loans have due dates  ranging  from fiscal  year 1997 to fiscal  year 2000.  The
loans also have various  variable  interest  rates.  At September 29, 1996 these
interest rates ranged from 8.24% to 37.61%.

<PAGE>

On May 20, 1994, the Company issued $20,000 of senior, unsecured long-term notes
to certain institutional  investors.  The notes bear interest at a rate of 7.49%
per annum and will mature on May 20, 1999.  The  proceeds  were used to fund the
acquisition of American Textil, to repay certain other debt obligations, and for
general corporate purposes.

The  fair  value  of  the  Company's  publicly-traded  convertible  subordinated
debentures at September 29, 1996, and October 1, 1995  approximated  $63,533 and
$65,022,  respectively,  based upon the quoted  market  price of the issue.  The
carrying value of the remaining short-term  borrowings and long-term debt of the
Company approximates the fair value for loans with similar terms.

Annual maturities of long-term debt for the next five years are $18,837 in 1997,
$16,905 in 1998, $37,033 in 1999, $20,959 in 2000, and $15,027 in 2001.

Under the terms of the  Company's  debt  agreements,  certain  requirements  and
restrictions  apply  to  future  indebtedness,   stockholders'  investment,  and
tangible net worth.  The Company is in compliance  with all covenants  under its
debt agreements.


7.    Income Taxes:
The net deferred  income tax liability at September 29, 1996 and October 1, 1995
is comprised of the following:

------------------------------ ------------------ ---------------
                                      1996             1995
------------------------------ ------------------ ---------------
Assets                             $ 28,775         $  23,915
Liabilities                         (46,307)          (35,903)
------------------------------ ------------------ ---------------
   Total                           $(17,532)        $ (11,988)
------------------------------ ------------------ ---------------

No valuation  allowances  against  deferred  income tax assets were  recorded at
September 29, 1996 or October 1, 1995.

Temporary  differences and carryforwards which gave rise to significant deferred
income tax assets  (liabilities)  as of  September  29, 1996 and October 1, 1995
were as follows:

------------------------------ ------------------ ---------------
                                     1996              1995
------------------------------ ------------------ ---------------
Current prepaid (deferred) income
  taxes:
General business credit
  carry-forwards (expire  
  2005-2010)                      $   1,558         $   4,098
Allowances for doubtful               3,071             2,910
  accounts
Inventory valuation 
  differences                        (2,475)           (2,142)
Prepaid healthcare costs             (1,096)             (543)
Accrued expenses not
  currently deductible for tax        1,437               925
Accrued environmental
  expenses                              396               396
Other, net                             (454)             (114)
------------------------------ ------------------ ---------------
Total current prepaid
   income taxes                   $   2,437         $   5,530
------------------------------ ------------------ ---------------
Long-term prepaid (deferred) income taxes:
Property                           $(31,612)         $(30,393)
Accrued pension and other
   employee benefits                  7,503             6,927
Alternative minimum and other
   tax credit carryforwards
   (no expiration)                    5,304             4,997
Accrued environmental expenses        1,785             1,842
Investments  in limited
   partnerships                      (2,078)           (1,230)
Other, net                             (871)              339
------------------------------ ------------------ ---------------
Total long-term deferred
   income taxes                    $(19,969)         $(17,518)
------------------------------ ------------------ ---------------

The income tax provision consists of the following elements:

-------------------- ----------------- ------------ -----------
                           1996           1995         1994
-------------------- ----------------- ------------ -----------
Currently payable
   (refundable):
   U.S. Federal            $5,932         $ 8,589    $ 4,718
   State                    1,539           1,798        803
   Foreign                  3,685           4,870      2,196
Deferred payable
   (prepaid):
   U.S. Federal             4,860             400      5,632
   State                      722              56        747
   Foreign                    253             839       (309)
-------------------- ----------------- ------------ -----------
                          $16,991         $16,552    $13,787
-------------------- ----------------- ------------ -----------

The income tax  provision as a  percentage  of pre-tax  income  differs from the
statutory U.S. Federal rate for the following reasons:

---------------------------- ------------- ---------- ----------
                                 1996        1995       1994
---------------------------- ------------- ---------- ----------
Statutory U.S. Federal
   income tax rate               35.0%        35.0%      35.0%
State income taxes, net of
  Federal Income tax reduction    2.7          3.1        3.5
Tax credits                      (3.8)        (6.8)      (2.9)
Other                            (0.6)         1.7       (0.2)
---------------------------- ------------- ---------- ----------
Effective income tax rate        33.3%        33.0%      35.4%
---------------------------- ------------- ---------- ----------

<PAGE>


8.   Benefit Plans:
Guilford Mills, Inc. has a noncontributory defined benefit plan for the majority
of its hourly employees. Gold Mills, Inc., a wholly-owned subsidiary, also has a
non-contributory defined benefit plan and a multi-employer pension plan covering
the majority of its  employees.  The  financial  status of the domestic  defined
benefit plans at September 29, 1996, and October 1, 1995 is as follows:

------------------------------ --------------- ----------------
                                    1996            1995
------------------------------ --------------- ----------------
Fair value of plan assets,
   primarily marketable
   securities, short-term
     investment funds and
   insurance company contracts     $21,515        $19,656
------------------------------ --------------- ----------------
Accumulated benefit
   obligation, including
   vested benefits of $22,171 and
   $19,064                           22,721         19,510
Additional benefits based on
   estimated future salary
   levels                             2,037          2,949
------------------------------ --------------- ----------------
Projected benefit obligation         24,758         22,459
------------------------------ --------------- ----------------
Projected benefit obligation
   in excess of plan assets          (3,243)        (2,803)
Unrecognized net loss                 4,955          5,061
Unrecognized net
   transitional asset                (2,443)        (2,635)

Adjustment to recognize
   minimum liability                   (476)            --
------------------------------ --------------- ----------------
Accrued pension liability           $(1,207)      $   (377)
------------------------------ --------------- ----------------


The projected benefit  obligation has been determined for 1996 and 1995 using an
assumed  discount  rate  of  7.25%  and an  assumed  long-term  rate  of  salary
progression of 4%. The assumed long-term rate of return on plan assets is 9%.

Guilford  Europe  Limited,  a  wholly-owned  subsidiary,  has a defined  benefit
pension plan with an actuarial  present  value of  accumulated  plan benefits of
$11,798 and net assets available for plan benefits of $14,928 as of December 31,
1995.  The  present  value of plan  benefits  for  Guilford  Europe  Limited was
determined using an assumed discount rate of 8.5% and an assumed  long-term rate
of salary progression of 7%. The assumed long-term rate of return on plan assets
was 8.5%.

Pension expense includes the following components:

    ------------------- -------------- ----------- -----------
                            1996          1995        1994
    ------------------- -------------- ----------- -----------
    Domestic defined
       benefit plans:
       Service cost --
         benefits earned  
         during the period $1,170        $1,130      $1,036
       Interest on
         projected benefit
         obligation         1,618         1,493       1,293
       Actual return
         on plan assets    (1,760)       (2,361)     (1,358)
       Net amortization
         and deferral        106         1,004         165
    ------------------- -------------- ----------- -----------
                            1,134         1,266       1,136
    Domestic multi-
         employer plan        257           252         238
    Foreign defined
         benefit plan         478           432         306
    ------------------- -------------- ----------- -----------
         Total             $1,869        $1,950      $1,680
    ------------------- -------------- ----------- -----------

The  Company  maintains  defined  contribution  plans for certain  officers  and
salaried employees.  Contributions under these plans are determined by the Board
of  Directors.  During 1996,  1995 and 1994,  the  provisions  under the defined
contribution plans were $2,626, $1,631, and $2,543, respectively.

The Company also maintains deferred  compensation plans for certain officers and
salaried employees.  These plans are being provided for currently.  During 1996,
1995 and 1994, the provisions under these plans were $1,828, $1,964, and $1,882,
respectively.  The liability for deferred  compensation was $17,201 at September
29,  1996 and  $17,226  at  October 1, 1995 and is  included  in other  deferred
liabilities in the accompanying balance sheets.

Insurance  policies are maintained to fund the deferred  compensation  plans and
other benefits to senior  management  such as life insurance and defined benefit
plans, and for keyman coverage.


9.   Capital Stock and Stock Compensation:
The Company has stock  option plans for key  employees  and  directors  covering
1,313,835 shares of common stock.  Options granted may be either incentive stock
options or  non-qualified  options.  Under the terms of the plan,  the  purchase
price of shares subject to each  incentive  option granted will not be less than
fair  market  value at the date of  grant.  Outstanding  incentive  options  are
exercisable  over a  three-year  period  commencing  two years after the date of
grant.

<PAGE>

Outstanding  non-qualified  options  are  exercisable  over a  five-year  period
commencing  in the year of the  grant.  Option  activity  under  the plans is as
follows:

------------------------------ ----------------- ----------------
                                  Number of
                                    Shares       Exercise Price
                                 Under Option       Per Share
------------------------------ ----------------- ----------------
Balance, September 26, 1993        523,250       9.33 to 24.50
Granted                             30,000               20.19
Exercised                         ( 54,000)      9.33 to 13.67
Forfeited                          (58,250)      9.33 to 24.50
------------------------------ ----------------- ----------------
Balance, October 2, 1994           441,000       9.33 to 24.50
Granted                            303,250      20.75 to 20.81
Exercised                          (93,398)      9.33 to 23.25
Forfeited                          (24,835)     20.81 to 23.25
------------------------------ ----------------- ----------------
Balance, October 1, 1995           626,017       9.33 to 24.50
Granted                             48,750               22.31
Exercised                          (42,017)      9.33 to 23.25
Forfeited                          (51,166)      9.33 to 24.38
------------------------------ ----------------- ----------------
Balance, September 29, 1996        581,584      18.67 to 24.50
------------------------------ ----------------- ----------------

These options  expire at various dates through  fiscal 2001.  Incentive  options
exercisable  at September 29, 1996 and October 1, 1995 were 159,500 and 139,017,
respectively.  Non-qualified  options  exercisable  at  September  29,  1996 and
October 1, 1995 were 132,500 and 112,500, respectively.

The Company authorized  1,500,000 shares of common stock for the 1989 Restricted
Stock Plan which covers certain key salaried employees. A total of 91,933 shares
were issued and outstanding  under the plan at September 29, 1996.  These shares
carry  voting and dividend  rights;  however,  sale of the shares is  restricted
prior to vesting.  Subject to continued  employment,  vesting  generally  occurs
three  years from the date of grant for 20% of the shares and ten years from the
date of grant for the remaining 80% of the shares.  The vesting date for the 20%
portion occurred on October 2, 1994.  Vesting of the 80% portion was accelerated
to vest  evenly over a three year  period  beginning  January 2, 1995 given that
defined earnings levels were achieved.  Dividend  payments are made to an escrow
account.  Shares  issued under the plan are recorded at fair market value on the
date  of  grant  with  a  corresponding   charge  to  stockholders'   investment
representing the unearned portion of the award.

The  unearned   portion  is  being  amortized  as  compensation   expense  on  a
straight-line  basis  over the  related  vesting  period.  Compensation  expense
totaled $1,248, $1,542, and $984 during 1996, 1995, and 1994, respectively.

Effective  July 1, 1990, the Company  adopted an employee  stock  ownership plan
covering all U.S.  full-time  employees who have  completed one year of service.
Awards  are made to the plan each year,  in the form of shares of the  Company's
common stock or in cash which is used to purchase shares of the Company's common
stock, based on the approval of the Board of Directors and are generally tied to
targeted earnings levels achieved during the year. Rights to the stock vest over
a  seven-year  period and  vested  shares are  payable at  retirement,  death or
disability,  or termination  of  employment.  Shares of common stock in the plan
carry normal voting and dividend rights.  Compensation  expense for the plan for
1996, 1995 and 1994 was $1,858, $3,385, and $2,033, respectively and the related
obligation  at September 29, 1996 and October 1, 1995 for shares to be issued is
included in capital in excess of par.

At  September  29,  1996  2,243,390  shares of common  stock were  reserved  for
conversion of convertible subordinated debentures.

The Company has an agreement with two of its directors whereby the Company will,
in the event of their death prior to June 22, 1997, purchase common stock of the
Company  owned by the two  directors  in the amounts of $5,000 and  $4,000.  The
number of shares  purchased  will be based on the  average  market  value of the
stock for a 20-day period preceding the date of death.

In 1990,  the Board of  Directors  declared a dividend  of one  preferred  stock
purchase  right on each  outstanding  share  of the  Company's  common  stock to
holders of record on  September  7,  1990.  If the  rights  become  exercisable,
separate  certificates  evidencing the rights will be distributed and each right
will  entitle the holder to purchase  from the Company a new series of preferred
stock at a  pre-defined  price.  The rights  also  contain an option to purchase
shares in a change of control  situation.  The preferred stock, in addition to a
preferred  dividend and liquidation  right, will entitle the holder to vote on a
pro rata basis with the Company's  common stock.  The rights are not exercisable
until  either  certain   changes  in  ownership  of  the  Company  occur  or  an
announcement of a tender offer for at least 30% of the Company's common stock is
made.  The rights are  redeemable by the Company at a fixed price until 10 days,
or longer as determined by the Board,  after the  occurrence of certain  defined
events or at any time prior to the  expiration  of the rights on August 23, 2000
if such events do not occur.  As of October 1, 1995,  the  Company had  reserved
300,000  preferred shares as issuable  pursuant to these rights.  At the present
time, the rights have no dilutive effect on the earnings per share calculation.

<PAGE>

10.  Financial Instruments:
The  Company   periodically   purchases   foreign  exchange  forward   contracts
("forwards")  to hedge  sales  transactions  for the  succeeding  year which are
denominated in non-functional currency.

At September 29, 1996 and October 1, 1995, the Company had the following amounts
of forward contracts:

------------------ ---------- ------------------ ---------------
                   Contract    Market Value at   Net unrealized
                    Amount      September 29,    Gains (Losses)
                                    1996
------------------ ---------- ------------------ ---------------
Purchases          $  1,981      $  1,916              $ (65)
Sales              $  4,846      $  4,610               $236
------------------ ---------- ------------------ ---------------
                   Contract    Market Value at   Net unrealized
                    Amount     October 1, 1995   Gains (Losses)
------------------ ---------- ------------------ ---------------
Purchases          $  7,070      $  7,111              $  41
Sales              $28,149        $27,825               $324
------------------ ---------- ------------------ ---------------

11.  Commitments and Contingencies:
The  Company  leases  certain of its  manufacturing  and office  facilities  and
equipment under non-cancelable operating leases with remaining terms of up to 19
years.  Rent expense under these leases was $5,404 in 1996,  $3,982 in 1995, and
$4,034 in 1994. At September 29, 1996, future minimum rental payments applicable
to these leases are $4,470 in 1997,  $3,985 in 1998,  $3,302 in 1999,  $2,871 in
2000, $1,540 in 2001, and $13,199 thereafter.

Since January 1992, the Company has been involved in discussions with the United
States Environmental Protection Agency ("EPA") regarding remedial actions at its
Gold  Mills,  Inc.  ("Gold")  facility  in Pine  Grove,  Pennsylvania  which was
acquired in October  1986.  Between  1988 and 1990,  the Company  implemented  a
number  of  corrective   measures  at  the  facility  in  conjunction  with  the
Pennsylvania  Department of Environmental  Resources and incurred  approximately
$3,500 in costs.  Subsequently,  through negotiations with the EPA, Gold entered
into a Final  Administrative  Consent Order with the EPA,  effective October 14,
1992.  Pursuant to such order,  Gold has performed (i) certain measures designed
to prevent any potential  threats to the environment at the facility and (ii) an
investigation  to  fully  determine  the  nature  of any  release  of  hazardous
substances at the facility.  In addition,  Gold will conduct a study to evaluate
alternatives  for any corrective  action which may be necessary at the facility.
The failure of Gold to comply with the terms of the Consent  Order may result in
the  imposition of monetary  penalties  against  Gold. In the fourth  quarter of
fiscal 1992, a pre-tax  charge of $8,000 was provided for the  estimated  future
cost of the additional remediation.

During  the  fourth  quarter  of 1992,  the  Company  also  received a Notice of
Violation  from  the  North  Carolina   Division  of  Environmental   Management
concerning  ground  water  contamination  on or near one of its  North  Carolina
facilities.  The  Company  voluntarily  agreed  to  allow  the  installation  of
monitoring wells at the site, but denies that such contaminants  originated from
the Company's operations or property. An additional pre-tax charge of $1,250 was
provided in the fourth  quarter of fiscal 1992 to reflect the  estimated  future
costs of this monitoring and other  environmental  matters including the removal
of  underground  storage  tanks at the  Company's  facilities.  The  Company has
removed  substantially  all  underground  storage  tanks at its  facilities.  At
September 29, 1996, environmental accruals amounted to $6,020 of which $5,025 is
non-current  and is included in other deferred  liabilities in the  accompanying
balance sheet.

The  Company is also  involved  in various  litigation  arising in the  ordinary
course of business.  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.


12. Geographic Information:
The accompanying  financial  statements include the following amounts related to
the operations of the Company's subsidiaries in Europe and Mexico:

------------------------ -------------- ----------- -------------
                             1996          1995         1994
------------------------ -------------- ----------- -------------
Net sales to
unaffiliated customers:
      United States         $665,727     $616,833    $603,880
      United Kingdom         122,300      130,760      91,069
      Mexico                  42,293       34,925       8,751
------------------------ -------------- ----------- -------------
        Total net sales     $830,320     $782,518    $703,700
------------------------ -------------- ----------- -------------
Transfers between
geographic areas
(eliminated
 in consolidation):
      United States       $    4,257    $   5,756   $      515
      United Kingdom             137          699        1,942
      Mexico                     582          641          ---
------------------------ -------------- ----------- -------------
         Total transfers  $    4,976    $   7,096   $    2,457
------------------------ -------------- ----------- -------------
Operating income:
      United States        $  58,488    $  53,919   $  45,345
      United Kingdom           8,644        9,727       5,652
      Mexico                   4,494        4,170         893
Interest and other
   expense, net               20,657       17,628      12,979
------------------------ -------------- ----------- -------------
      Income before
         income taxes      $  50,969    $  50,188   $  38,911
------------------------ -------------- ----------- -------------
Identifiable assets:
      United States         $695,294     $550,911    $522,328
      United Kingdom          89,019       79,313      65,751
      Mexico                  26,237       25,604      39,129
      Eliminations            81,720       69,457      61,870
------------------------ -------------- ----------- -------------
         Total assets       $728,830     $586,371    $565,338
------------------------ -------------- ----------- -------------

<PAGE>

13. Summary of Quarterly Earnings (Unaudited):


--------------------- ---------- --------- ---------- ---------
                        First     Second      Third     Fourth
--------------------- ---------- --------- ---------- ---------
1996 Quarter:
Net sales             $174,185   $207,097  $232,202   $216,836
Gross profit           27,599     33,376     45,068    48,013
Net Income              2,748      5,882     12,640    12,708
--------------------- ---------- --------- ---------- ---------
Net Income per share:
  Primary                  .20        .41       .87        .90
  Fully diluted            .20        .39       .79        .81
--------------------- ---------- --------- ---------- ---------
--------------------- ---------- --------- ---------- ---------
1995 Quarter:
Net sales             $182,494   $201,885  $210,762   $187,377
Gross profit           33,011     38,480     37,302    29,381
Net Income              6,103      9,376     11,247     6,910
--------------------- ---------- --------- ---------- ---------
Net Income per share:
  Primary                  .44        .67       .80        .50
  Fully diluted            .41        .61       .73        .46
--------------------- ---------- --------- ---------- ---------
--------------------- --------- ---------- --------- ----------
1994 Quarter:
Net sales             $157,576  $155,586   $183,235  $207,303
Gross profit           26,424     23,392     33,002    35,638
Net Income              3,849      3,929      8,934     8,412
--------------------- --------- ---------- --------- ----------
Net Income per share:
  Primary                  .28        .28       .65       .61
  Fully diluted            .28        .28       .59       .56
--------------------- --------- ---------- --------- ----------

<PAGE>

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 29, 1996
and  October  1,  1995,  and the  related  consolidated  statements  of  income,
stockholders'  investment  and cash  flows  for each of the  three  years in the
period  ended   September  29,  1996.   These   financial   statements  are  the
responsibility of the Company's management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  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  29,  1996 and October 1, 1995 and the results of
their  operations and their cash flows for each of the three years in the period
ended  September 29, 1996,  in conformity  with  generally  accepted  accounting
principles.



Arthur Andersen LLP
Greensboro, North Carolina,
November 14, 1996


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

Statement of Management's Responsibility



     The  management  of Guilford  Mills,  Inc. has the  responsibility  for the
preparation of all  information  contained in the Annual  Report.  The financial
statements, including footnotes, have been prepared in accordance with generally
accepted  accounting  principles  appropriate in the  circumstances  and include
amounts based on the best judgment of management.


     In meeting its responsibilities for the accuracy, integrity and objectivity
of data in the financial  statements,  management maintains a system of internal
accounting controls designed to provide reasonable  assurance of the reliability
of financial  records and the  safeguarding  of assets.  This 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.  There are limits inherent
in all systems of internal  control  based on the  recognition  that the cost of
such  systems  should be  related  to the  benefits  to be  derived.  Management
believes the Company's systems provide an appropriate balance.

     The control  environment is  complemented by an internal  auditing  program
that  independently  assesses the  effectiveness  of the  internal  controls and
reports  its  findings  to  management   throughout   the  year.  The  Company's
independent  public  accountants  are  engaged  to  express  an  opinion  on the
Company's financial  statements.  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.

     The Audit Committee of the Board of Directors, which is comprised solely of
directors who are not employees of the Company,  is  responsible  for monitoring
the Company's management control and reporting system. The Audit Committee meets
with  management  and  the  internal  auditors   periodically  to  review  their
activities and  responsibilities.  The Audit Committee also meets as needed with
the  independent  auditors along with the internal  auditors,  both of whom have
free access to the Audit Committee without management's presence.



Terrence E. Geremski
Senior Vice President/Chief Financial
Officer and Treasurer

<PAGE>


Guilford Mills, Inc.

COMMON STOCK MARKET PRICES AND DIVIDENDS

                                             Fiscal 1996
      -------------------  --------------- -- ---------------- -- -------------
      Quarter                   High                Low           Dividends
      -------------------  --------------- -- ---------------- -- -------------
      First                   $ 24 1/4           $ 20                $ .15
      Second                    24 1/2              19 1/2             .15
      Third                     25 1/8             22                  .15
      Fourth                    25 5/8              22 1/8             .15
                                                                      ----
                    Year      $ 25 5/8            $ 19 1/2           $ .60
                                                                     -----
                                               Fiscal 1995
      -------------------  ----------------------------------------------------
      Quarter                   High                Low           Dividends
      -------------------  --------------- -- ---------------- -- -------------
      First                   $ 22 1/4            $ 19 1/2           $ .15
      Second                    22 3/8              20 1/4             .15
      Third                     27 1/4              21 1/4             .15
      Fourth                    28 3/8              23 7/8             .15
                                                                      ----

                    Year      $ 28 3/8            $ 19 1/2           $ .60
                                                                     -----

                                               Fiscal 1994
      -------------------  ----------------------------------------------------
      Quarter                   High                Low           Dividends
      -------------------  --------------- -- ---------------- -- -------------
      First                   $ 23 7/8            $ 18 7/8           $ .15
      Second                    24 1/8              21 1/4             .15
      Third                     23 5/8              20 3/8             .15
      Fourth                    21 5/8              18 1/2             .15
                                                                      ----

                    Year      $ 24 1/8            $ 18 1/2           $ .60
                                                                  -----

         The high and low stock market  prices are as reported  under the ticker
symbol "GFD" on the New York Stock  Exchange  which is the principal  market for
the Company's  common stock. On November 22, 1996 there were 503 stockholders of
record.

Based  on  continued  favorable  future  operations  and the  present  level  of
available  retained  earnings,  management  anticipates  continuing  its current
dividend policies.

Annual Stockholders' Meeting

     The Company's  1996 annual  meeting of  stockholders  will be held at 10:00
a.m. on Thursday,  February 6, 1997 at Joseph S. Koury Convention  Center,  3121
High Point Road, Greensboro, North Carolina.