EXHIBIT 13

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 27, 1998 were $894.5 million.  Net income was $30.2
million.

Current year sales levels were basically flat with the prior year as the
continued growth of certain niche fabrics and focus on diversification
especially into the home fashions market- were more than offset by weakness in
the women's apparel market and declines caused by the Asian financial crisis and
a harsh U.K. manufacturing environment.

Guilford produces fabrics for a variety of customers and markets. It competes
primarily in the apparel, automotive, home fashions and specialty sectors. It is
regarded as a single segment based upon technology.

The Company's apparel fabrics are used predominantly in women's shapewear,
swimwear, ready-to-wear and intimate apparel garments. Other uses include
sleepwear, team sportswear and linings. Guilford has continued to transition
sales from its traditional intimate apparel and ready-to-wear fabrics to
technically-advanced high-performance products.

Automotive fabrics are produced in the U.S., the U.K., Mexico and Brazil and are
sold to original equipment manufacturers (OEMs) and their suppliers. Guilford's
products are fabricated into the seats and headliners of passenger cars and
light trucks. The North American automotive production for the Company's 1998
fiscal year was 15.4 million units and the European automotive production for
the same period was 13.9 million units. The Company provides fabric for certain
vehicles which are sourced two to three years in advance of the car model year.
Both consumer demand for specific models and the overall car build can greatly
impact revenue. The Company's diverse fabric technology allows it to compete in
the majority of vehicle platforms.

The Company's sales of home fashions fabrics represent the largest increase in
market penetration for Guilford. This revenue increase of more than 60% from
fiscal 1996 to fiscal 1998 has resulted primarily from the acquisition of
Hofmann Laces and Affiliates in early 1996. Revenue is generated primarily from
sales to retailers of knit and/or lace comforters, window treatments, cotton
sheeting, shower curtains and tablecloths. Additionally, Guilford produces
upholstery fabrics for office and residential furniture and mattress ticking.

The remainder of Guilford's fabrics are sold for use in a broad range of
industrial/specialty products. For fiscal year 1998, sales of hook and loop
fabrics for closure systems comprised approximately 44% and sales of yarn were
22% of the total specialty revenue. The remaining 34% consisted of a multitude
of products. The sales mix within this market varies greatly from year to year
depending upon production capacity, internal yarn requirements, and market
conditions.

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 1998, the British pound
strengthened against the U.S. dollar and resulted in a translation gain on the
balance sheet of approximately $2.0 million. The Mexican peso continued to
decline in fiscal 1998. Effective January 1, 1997, the Mexican economy was
considered "highly inflationary" for financial reporting purposes because the
cumulative Mexican inflation rate for the immediately preceding three years
exceeded 100%. As a result, under Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation", the U.S. dollar was used as the
functional currency for translating the balance sheet and the results of
operations of the Company's Mexican operation - Grupo Ambar S.A. de C.V. ("Grupo
Ambar"). This treatment will continue 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. The
Mexican peso declined slightly against the U.S. dollar over the

<PAGE>

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)


remaining three quarters of fiscal 1997 and more significantly for the 1998
fiscal year. This decline had a $1.0 million negative impact on the 1998
operating results of the Mexican investment. The Company's Mexican subsidiary
contributed 5.8% to consolidated sales and was profitable in fiscal 1998.

Effective June 27, 1997, the Company acquired an additional 20% ownership
interest in Grupo Ambar. The acquisition increased the Company's ownership
interest in Grupo Ambar to 95%. Grupo Ambar is a leading manufacturer of knit
textiles in Mexico. 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 and home fashions markets
and stretch knit fabrics for the apparel market. Hofmann Laces also cuts and
sews home fashions products which are sold directly to retailers.

RESULTS OF OPERATIONS
1998 COMPARED TO 1997 - Consolidated sales for fiscal 1998 were $894.5 million,
down slightly from last year's record high of $894.7 million. Increases in sales
to the automotive and home fashions markets were offset by decreases in sales of
apparel and specialty fabrics. Sales were negatively impacted by the Asian
economic crisis, adverse conditions in the U.K. as the result of the
strengthening of the sterling and continued devaluation of the Mexican peso.

Apparel fabric sales for fiscal 1998 were $342.5 million and decreased 2.2% from
fiscal 1997 sales of $350.2 million. Sales to the apparel market, made
predominantly in the U.S. and Mexico, were 38.3% of consolidated sales. Intimate
apparel and shapewear compression fabrics, which contain spandex, continued to
grow at double-digit rates due substantially to strong relationships with key
retail customers and continued penetration of major branded manufacturers.
Swimwear fabric sales were down slightly in fiscal 1998 as the season's success
was thwarted early with extremely poor weather patterns in California and
Florida attributed to El Nino. Ready-to-wear sales decreased significantly
overall. The domestic demand for higher quality fashionable fabrics declined in
favor of garments imported from Asia. As a result of the financial crisis there,
yarns, fabrics and finished garments from foreign competitors were sold at
prices below domestic cost. Team sports sales increased, as these
high-performance ready-to-wear fabrics were not readily produced at low price
points. The impact of the Asian crisis was evident in the Company's linings
business as well. Other apparel fabric sales, such as sleepwear and robewear,
declined slightly from the prior year levels.

Sales of worldwide automotive fabrics increased 2.7% to $337.4 million in fiscal
1998 from $328.5 million last year. Significant growth in the U.S. and Mexican
markets was tempered by the current economics in the U.K. Sales to the
automotive market represented 37.7% of consolidated sales. North American car
build for the fiscal year increased 1.3% to 15.4 million units. Domestic fabric
sales increased by 10.8%. The Company's increased penetration resulted from
continued popularity of certain Ford models, growth with the New Domestic
manufacturers, and dominance of the warp knit fabric market. Additionally, the
Company sourced the largest woven velour program in North America. Fabric
content per vehicle has increased due to the demand for larger sport utility
vehicles and light trucks, but severe pricing pressure and more efficient
utilization by the fabricators offset the increase. In Europe, while the
calendar year car build is expected to be a record 14.7 million units, the
increases are being enjoyed by OEMs which dominate certain markets, such as
luxury vehicles and France. Guilford's key customers experienced reduced market
share. Additionally, the sterling's strength against other European currencies
caused U.K. manufacturers a disadvantage which resulted in reduced sales prices
to prevent resourcing to other parts of Europe. Consequently, sales of
automotive fabric from the Company's U.K.-based manufacturing facilities fell
8.1% in fiscal 1998. The Mexican automotive market was relatively flat with
local demand spurred by OEM incentives. The Company's Mexican sales increased
7.3% due to the popularity of its major customer's vehicles.

Home fashions product sales increased by 18.1% in fiscal 1998 and were $156.1
million

<PAGE>

versus $132.2 million for fiscal year 1997. This market accounted for 17.5% of
consolidated sales and was the largest growth sector. Direct to retail sales
increased by 38.6% with continued strong sales of Guilford's jersey knit cotton
sheeting and the introduction of top-of-the-bed products. Moderate increases in
window curtains and fabrics were slightly offset by declines in shower curtains,
mattress ticking and furniture fabrics.

Specialty/industrial sales declined by 30.2% to $58.5 million in fiscal year
1998 from 1997's $83.8 million. Sales of hook and loop closure system fabrics
decreased by nearly 45% due to the lower demand for premium diapers containing
this fastening system. The European business for these products was resourced to
a local supplier. Additionally, fiber sales were down substantially as a result
of Asian yarn competitive pricing on polyester.

The gross profit margin in fiscal year 1998 was $167.3 million or 18.7% of sales
compared to $181.6 million or 20.3% of sales for the prior year. Volume
increases, especially in retail home fashions and automotive fabrics, were more
than offset by significant sales price pressure. Automotive OEM sales price
reductions domestically and in the U.K., where the strength of the pound
sterling has caused a competitive disadvantage in Europe, totaled nearly $9
million. In the home fashions market, the Company's cotton sheeting sales were
up nearly 200% without corresponding profitability due to operating
inefficiencies and competitive pricing pressure with extremely low-cost imports.
The Company was able to maintain overall margins on apparel products, despite a
decline of $6 million in sales prices and lower volumes caused primarily by the
Asian financial crisis. Reductions were offset by increased volume on
higher-margin intimate apparel and shapewear business and lower polyester yarn
purchase prices. Volume and pricing declines on the hook and loop specialty
fabric impacted margins by more than $5 million. Also, the continued devaluation
of the Mexican peso and the impact of remeasurement under SFAS No. 52 impacted
gross margins by more than $1.0 million in fiscal year 1998.

Selling and administrative expenses increased to $97.7 million or 10.9% of sales
from last year's $95.0 million or 10.6% of sales. Continued design, marketing
and research and development efforts, along with expenses related to the direct
retail business, caused the increase. Research and development expenditures were
$19.6 million in fiscal 1998, an increase of $4.7 million over fiscal 1997.
Direct to retail selling expenses were up $3.7 million primarily due to volume
increases, promotional expenses and shelf space allowances. Salaries and
fringes, which were up as the result of normal wage progression and commissions,
declined substantially as incentive compensation expense was down $9.1 million.

A plant restructuring charge of $6.5 million was recorded for termination and
exit costs for two of the Company's facilities. The charge included $2.9 million
of severance pay, $3.5 million of equipment write-downs and $0.1 million of
other exit costs. Guilford has exited the nylon fiber business and closed a
fiber plant to more effectively utilize capacity. In addition, the Company will
no longer dedicate resources to certain high-end ready-to-wear products.

Interest expense decreased to $12.4 million from the prior year's $16.2 million.
The reduction in long-term debt for much of the year, due substantially to the
repayments and conversion of the 6% Subordinated Convertible Debentures late in
fiscal year 1997, resulted in a $4.2 million decline in interest expense.
Average short-term borrowings increased, but a flat interest rate resulted in
additional interest expense of only $0.2 million. Interest expense for fiscal
1998 was not impacted by the refinancing of long-term debt, which occurred on
September 25, 1998.

Other expense decreased to $1.6 million in fiscal year 1998, down from the prior
year's $4.6 million. Gains on the sale of fixed assets, a fire insurance
recovery, and a reduction in the low income housing investment caused the
decline.

The effective income tax rate for fiscal 1998 was 32.5% versus 34.3% for the
prior year. The decrease resulted from lower pre-tax book income, a U.K.
statutory rate reduction of 200 basis points, additional R&D tax credits and


<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)


higher Foreign Sales Corporation benefits. The reduction of certain credits
partially offset the decline.

An extraordinary charge, net of tax, of $2.9 million for the prepayment of the
debt was recorded in fiscal 1998. In conjunction with the prepayment of senior
unsecured notes outstanding, the Company recorded a prepayment penalty of $3.9
million and related amortization of loan costs of $0.4 million. The related
income tax benefit was $1.4 million.

Net income before the extraordinary charge in fiscal year 1998 was $33.1 million
or 3.7% of sales. Earnings per share before extraordinary item was $1.32 per
basic share and $1.30 per diluted share. Net income after the extraordinary
charge was $30.2 million or 3.4% of sales compared to $43.2 million or 4.8% of
sales in the prior year. Earnings per share was $1.20 per basic share and $1.19
per diluted share in fiscal 1998 compared to $1.92 per basic share and $1.78 per
diluted share in fiscal 1997. Average basic shares outstanding increased 11.9%
due primarily to the July, 1997 conversion of debentures to equity.

1997 COMPARED TO 1996 - Consolidated sales for fiscal 1997 increased to $894.7
million from the prior year's previous record high of $830.3 million. This
increase of 7.8% reflected improvements in sales of fabrics to apparel, home
fashions and specialty / industrial markets. The increase was offset slightly by
a decline in worldwide automotive sales. Sales in the apparel, home fashions and
specialty areas were boosted partially from the full year consolidation of
Hofmann Laces in fiscal year 1997 versus three quarters of fiscal 1996. In
addition, improvements in the Mexican economy and the demand for
Mexican-exported garments under NAFTA resulted in a 16.0% improvement in sales
of fabric produced in that country.

Apparel fabric sales for fiscal 1997 were $350.2 million and increased 2.7% from
fiscal 1996's $340.9 million. Sales of compression fabrics, which contain
spandex, such as swimwear and shapewear, continued to grow at double-digit
rates. Intimate apparel fashion fabrics and laces were up significantly while
traditional intimate apparel fabrics containing nylon continued to decline.
These trends have developed over the last three to four years and were driven by
consumer demand at the retail level. Ready-to-wear sales decreased primarily due
to a planned reallocation of capacity to shapewear and reduction of the
cotton-only business. There was also a decline in demand for high-end stretch
velvets.

Automotive fabric sales decreased worldwide by 2.6% and were $328.5 million for
fiscal year 1997 versus $337.2 million for the prior year. Increases in Europe
and Mexico were more than offset by a reduction in U.S. produced fabric.
Guilford's North American sales to OEMs decreased primarily as a result of the
decline in Ford placements due to their market share loss on certain models.
Although this decline in Ford placements also negatively impacted the Company's
European sales, penetration at other OEMs more than offset the decline. The
European car build increase of 11.7% for the Company's fiscal year and the
introduction of new wovens also contributed to revenue growth. Other factors
which contributed to the worldwide sales decline included price reductions
mandated by the automobile manufacturers and seating company fabric yield
improvement. Fabric sales within the Mexican automotive markets increased. The
Company's van and RV business decreased slightly due to a soft market caused by
competing sport utility vehicle popularity.

Sales of fabrics to the home fashions market increased 35.6% from $97.5 million
in fiscal year 1996 to $132.2 million in fiscal year 1997. The most significant
product growth resulted from the introduction of Guilford's jersey knit cotton
sheeting. Additionally, continued strong market demand at retail contributed to
significantly higher sales of other bed and bath products. Upholstery fabric
sales, principally exported from the U.S., were down and directly correlated
with unfavorable exchange rates. Mattress ticking fabric sales were up slightly.

Specialty/industrial revenue increased 53.2% to $83.8 million in 1997 from $54.7
million in 1996. Sales of hook and loop closure system fabrics grew
substantially as demand for diapers containing this fastening system increased.
Yarn sales were also up as the Company     


<PAGE>

pursued external channels for excess fiber-producing capacity.

Gross margin increased to 20.3% of sales from the prior year's 18.6% of sales
primarily due to the increased volume of fabric produced for intimate apparel
and home fashions sales through the Hofmann Laces acquisition. Nearly one half
of the $27.5 million increase in gross profit was generated by synergies and
opportunities triggered by this acquisition. Sales volume increases of other
fabrics contributed an additional $5 million. Raw material price and usage
declines and product mix resulted in additional margin improvement of
approximately $11 million.

Selling and administrative expenses increased to $95.0 million or 10.6% from
prior year's $82.4 million or 9.9% of sales. The increases resulted from the
consolidation of Hofmann Laces, increased incentive compensation, salary
increases and sales volume and promotion related increases. The Hofmann
consolidation for the full year combined with incentive compensation increases
totaling $8.5 million and sales related increases of $3.9 million to affect the
increase. Increases were partially offset by non-recurring premium freight costs
for automotive fabrics in 1996.

Interest expense decreased to $16.2 million from the prior year's $17.0 million.
This overall decrease was attributable to the reduction of long-term debt due to
repayments and the conversion of the 6% Subordinated Convertible Debentures, a
slight decrease in the average U.S. short-term borrowing rate to 5.3% from 5.7%,
and favorable negotiation of interest rate reductions in Mexico. These were
partially offset by increased interest expense on deferred compensation programs
and an increase in average short-term borrowings as a result of the full year
impact of the Hofmann Laces acquisition and consolidation.

Other expense increased $1.0 million to $4.6 million. The increase was
substantially attributable to investment write-offs. This increased expense was
partially offset by the sale of investments and a decrease in foreign currency
transaction losses from the prior year.

The effective income tax rate in fiscal 1997 was 34.3% compared to 33.3% in
fiscal 1996. The higher effective income tax rate was attributable to the
temporary elimination of the Research and Development tax credit and to the
increased results from Hofmann Laces, which is taxed at slightly higher
statutory rates.

Net income in fiscal 1997 reached a record high of $43.2 million or 4.8% of
sales and increased 27.1% from the prior year's $34.0 million or 4.1% of sales.
Basic earnings per share increased to $1.92 per share compared to $1.59 per
share in the prior year (as restated for the 3-for-2 stock split effected as a
stock dividend). Diluted earnings per share increased to $1.78 from $1.47 (as
restated for the 3-for-2 stock split effected as a stock dividend).

Liquidity and  Capital Requirements
At the end of fiscal 1998, cash and cash equivalents of $ 30.4 million were
available for future capital and other operational and business needs.

Cash provided by operations decreased to $81.4 million in fiscal 1998 compared
to $114.0 million in fiscal 1997. Income before non-cash charges for
restructuring and extraordinary items was down $6.4 million from the prior year.
The charge for depreciation and amortization increased in fiscal 1998 resulting
in an additional non-cash item of $4.4 million over the prior year. The decrease
in cash provided by operations was caused substantially by the reduction of
accrued liabilities related to incentive compensation accruals and income taxes
payable. Additionally, inventories increased.

Over the past three years, Guilford continued to modernize equipment and
increase capacity to support new, innovative products. Capital expenditures were
$84.0 million in 1998, $57.6 million in 1997 and $64.5 million in 1996.
Expenditure levels for the next two years are expected to be slightly above
depreciation expense.

As part of the original 1996 purchase agreement between Guilford Mills and
Hofmann Laces, the Company agreed to pay additional consideration in fiscal year
2001 in accordance with a formula based upon the Company's price-earnings'
multiple and Hofmann Laces' performance through the

<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)

end of calendar year 2000. The purchase agreement was amended in fiscal year
1998 and the payment of the contingent acquisition price was accelerated. Cash
of $17.0 million was paid during fiscal year 1998 and an additional liability of
$17.3 million was recorded. This final installment was paid in the first quarter
of fiscal year 1999.

Long-term debt increased $30.6 million and short-term debt increased $48.5
million from the prior year. The Company prepaid $73.6 million of senior,
unsecured notes issued to certain institutional investors which matured through
2003. Current year increases in working capital, excluding cash and borrowings,
the accelerated buyout of the Hofmann Laces earnout, stock repurchases and
capital expenditures in excess of depreciation resulted in additional borrowing
requirements. The Company temporarily funded these borrowings under its
revolving credit facility and existing bank lines of credit. The Company
anticipates closing a $145.0 million private placement of senior, unsecured
notes with three institutions in the first quarter of fiscal 1999. The notes
will be payable in 10 years with a fixed rate coupon of 7.06%. The proceeds will
be used to repay current borrowings on uncommitted bank lines with any remainder
to repay a portion of the revolving credit facility.

The Company is exposed to market risk from changes in interest rates. The
Company entered into two treasury lock agreements that hedge a portion of the
interest rate risk related to the anticipated private placement of senior,
unsecured notes. The treasury lock agreements effectively fix the 10-year U.S.
Treasury component of the interest rate on those notes. The treasury lock
agreements were terminated in November 1998, resulting in a payment of $4.4
million which will be amortized as additional interest expense over the 10-year
term of the notes. The treasury lock arrangements are discussed further in Note
9 to the consolidated financial statements which are included herein. The
Company does not hold or issue any financial instruments for trading purposes.

In fiscal 1997, long-term debt decreased substantially due to the redemption of
the Company's outstanding 6% Convertible Subordinated Debentures. Of the $66.2
million of Convertible Subordinated Debentures outstanding, $65.0 million or 98%
of the debt was converted into Common Stock. The remaining $1.2 million of the
Subordinated Convertible Debentures was redeemed at 100.6% of the principal
amount. The additional $15.0 million of long-term debt repayment, including
current maturities, was funded through cash provided by operations.
Additionally, the Company was able to repay $41.3 million of short-term
borrowings.

Net increases in short-term and long-term debt in fiscal year 1996 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 additional short-term borrowings were substantially
related to working capital requirements.

Raw material costs declined significantly in fiscal 1998. Record declines in
polyester yarn prices were caused by the Asian financial crisis. These decreases
were passed through to customers as the retail marketplace demanded lower-priced
garments competitive with foreign sources. While pricing has somewhat
stabilized, a return to prior levels is not expected in fiscal 1999. Management
expects flat or slightly decreased raw material costs in 1999 as suppliers
participate in selling price reductions granted to customers which are being
driven by consumer and global competition.

The Company maintains flexibility with respect to its seasonal working capital
needs as well as for future acquisitions through a revolving credit facility of
$150.0 million. It also has continued access to other traditional sources of
funds, including uncommitted bank lines of credit aggregating $260.0 million and
the ability to borrow against factored accounts receivables. At September 27,
1998, $50.0 million was outstanding against the revolving credit facility and
availability under its uncommitted short-term bank lines of credit was $82.1
million.

<PAGE>


Management believes that its cash requirements for operations, capital
expenditures, dividends, interest, debt repayments, strategic acquisitions, and
other financial needs will continue to be met through internally generated
sources and utilization of external borrowings.

The Company's sound financial position, with debt to total capital of 37.7%,
affords it many options. Management intends to continue to examine both
short-term and long-term opportunities to strengthen its balance sheet and add
shareholder value. These opportunities may require debt or equity financing.

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

CONTINGENCIES
The Company is involved in various litigation and environmental matters arising
in the ordinary course of business. Additionally, three class action lawsuits
have been commenced against the Company and certain of its officers and
directors alleging violations of the Federal Securities Law arising out of the
previously reported accounting irregularities. These are discussed in Note 13 to
the consolidated financial statements which are included herein. 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 and home fashions products, 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,
Mexico, and Brazil, and by diverse product offerings.

Many manufacturers who use Guilford's fabrics are seeking to reduce costs. In
addition, the markets are subject to competition from imported garments and
products. 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.

The city of Greensboro, North Carolina is currently experiencing a serious water
shortage due to the lack of rain for the past several months. The supply is down
to a three-month level. The City is purchasing water from adjacent
municipalities and intends to purchase additional quantities. Long-term, the
plans include a reservoir. Conservation measures have also been implemented.
However, it is remotely possible that this shortage could result in mandated
business interruption. The Company operates four significant facilities in this
city, two of which would be seriously affected by such water restrictions. The
Company would consider utilizing existing or additional wells if prolonged
mandatory restrictions were imminent.

Mexico is considered "highly inflationary" for financial reporting purposes and,
as a result, foreign currency translation gains and losses are recognized
currently in operations rather than as an adjustment to stockholders' equity.
While management believes that the Company's Mexican operations will continue to
grow, the Company is unable to determine or predict the negative impact due to
economic uncertainty.

The Company has significant operations in the United Kingdom (U.K.). Although
the U.K. does not plan to enter into the European Community until 2002, the
Company conducts business in various European countries that will adopt the Euro
as their common currency as of January 1, 1999. The Company has evaluated the
Euro conversion's impact on its business, both strategically and operationally.
The conversion of the Euro is not expected to have a material adverse effect on
the Company's financial condition or results of operation.

<PAGE>

MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)



YEAR 2000

The Year 2000 issue affecting most entities, including the Company, results
from the possible inability of internal and external computer systems and
applications to recognize and process data pertaining to years after 1999. Over
the last five years, the Company has committed significant resources to the
reengineering of its business processes and information systems. The education,
identification, evaluation, implementation and testing of changes to systems and
applications to achieve Year 2000 readiness within the Company's operational,
manufacturing and financial areas have been an integral part of this process.
Based upon recently completed Year 2000 compliance assessments of both internal
information technology and embedded systems for all of the Company's facilities,
equipment and infrastructure, the Company expects to successfully implement any
systems and programming changes necessary prior to the turn of the century in
all of its domestic and international operations. The planning, inventory and
impact analysis phases have been completed. The remediation phase of the project
is expected to be completed by March, 1999 and the final testing phase is
scheduled for July, 1999. The Company expects to finalize any necessary
contingency plans by the Spring of 1999. The Company has spent $0.2 million to
date for Year 2000 readiness. Management believes that the cost of the
remediation plan for completion of Year 2000 compliance tasks will be $1.2
million. The Company continues to work with its customers, suppliers, and other
third parties to identify external weaknesses and provide solutions. Year 2000
compliance questionnaires have been forwarded to material third parties. While
the Company continues to gather responses to such questionnaires, of the 65%
response rate received thus far, no material business interruption issues have
been identified. To the extent that suppliers are not compliant or do not
respond, the Company will include alternatives in its contingency plan. The
reasonably likely worst case scenario that could arise as a result of a service
supplier's Year 2000 problem would be an interruption of normal business
operations. There can be no assurance, however, that there will not be a delay
in, increased costs or a material disruption of business activities associated
with Year 2000 readiness.

SAFE HARBOR-FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements.

All statements other than statements of historical fact included in this Annual
Report, including, without limitation the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are,
or may be deemed to be, forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Exchange Act of 1934.
Important factors that could cause actual results to differ materially from
those discussed in such forward-looking statements include: 1. general economic
factors including, but not limited to, changes in interest rates, foreign
currency translation rates, consumer confidence, housing starts, trends in
disposable income, changes in consumer demand for goods produced, and cyclical
or other downturns; 2. the overall level of automotive production and the
production of specific car models; 3. fashion trends; 4. information and
technological advances including Year 2000 issues; 5. cost and availability of
raw materials, labor and natural and other resources; 6. domestic and foreign
competition; 7. domestic and foreign governmental regulations and trade
policies; 8. reliance on major customers; 9. success of marketing, advertising
and promotional campaigns; or 10. inability to achieve cost reductions through
consolidations and restructuring of acquired companies.

<PAGE>


CONSOLIDATED BALANCE SHEETS
September 27, 1998 and September 28, 1997

(IN THOUSANDS EXCEPT SHARE DATA)

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                                                                1998               1997
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ASSETS
<S>                                                          <C>               <C>
Cash and cash equivalents                                    $  30,447         $  24,349
Accounts receivable, net                                       164,555           167,347
Inventories                                                    153,006           141,898
Prepaid income taxes                                             6,258             7,102
Other current assets                                             7,643             7,921
--------------------------------------------------------------------------------------------
        Total current assets                                   361,909           348,617
Property, net                                                  326,941           308,523
Other assets                                                   100,607            72,656
--------------------------------------------------------------------------------------------
        Total assets                                          $789,457          $729,796
--------------------------------------------------------------------------------------------
LIABILITIES
Short-term borrowings                                        $  55,128         $   6,677
Current maturities of long-term debt                               811            12,542
Accounts payable                                                57,453            58,566
Accrued liabilities                                             37,239            56,858
--------------------------------------------------------------------------------------------
        Total current liabilities                              150,631           134,643
--------------------------------------------------------------------------------------------
Long-term debt                                                 176,872           134,560
Deferred income taxes                                           31,075            23,024
Other non-current liabilities                                   45,702            28,673
--------------------------------------------------------------------------------------------
        Total long-term liabilities                            253,649           186,257
--------------------------------------------------------------------------------------------


COMMITMENTS AND CONTINGENCIES (NOTES 2, 12 & 13)

STOCKHOLDERS' INVESTMENT
Preferred stock, $1 par; 1,000,000 shares authorized, none issued --                  --
Common stock, $.02 par; 40,000,000 shares authorized,
 32,750,222 shares issued,  23,226,322 shares outstanding at
 September 27,1998 and 25,756,905 shares outstanding at
 September 28,1997                                                 655               655
Capital in excess of par                                       119,648           117,110
Retained earnings                                              363,606           344,656
Foreign currency translation loss                               (7,577)           (9,604)
Unamortized stock compensation                                  (4,759)           (5,091)
Treasury stock, at cost (9,523,900 shares at September 27, 1998
 and 6,993,317 shares at September 28, 1997)                   (86,396)          (38,830)
--------------------------------------------------------------------------------------------
        Total stockholders' investment                         385,177           408,896
--------------------------------------------------------------------------------------------
        Total liabilities and stockholders' investment        $789,457          $729,796
--------------------------------------------------------------------------------------------

</TABLE>

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE BALANCE SHEETS.
<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 28, 1997 AND SEPTEMBER 29,
1996

(In thousands except per share data)
<TABLE>
<CAPTION>
                                            ----              ----               ----
                                            1998              1997               1996
                                            ----              ----               ----

<S>                                        <C>                <C>                <C>
NET SALES                                 $894,534           $894,709           $830,320
------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
     Cost of goods sold                    727,218            713,143            676,264
     Selling and administrative             97,734             94,957             82,430
     Plant restructuring costs               6,470                 --                 --
------------------------------------------------------------------------------------------
                                           831,422            808,100            758,694
------------------------------------------------------------------------------------------

OPERATING INCOME                            63,112             86,609             71,626
------------------------------------------------------------------------------------------


OTHER EXPENSES:
     Interest expense                       12,414             16,190             17,017
     Other expense, net                      1,592              4,609              3,640
------------------------------------------------------------------------------------------
                                            14,006             20,799             20,657
------------------------------------------------------------------------------------------

INCOME BEFORE INCOME TAX PROVISION          49,106             65,810             50,969
INCOME TAX PROVISION                        15,960             22,572             16,991
------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM            33,146             43,238             33,978
EXTRAORDINARY ITEM, NET OF INCOME TAXES
  (NOTE 8)                                  (2,940)                --                 --
------------------------------------------------------------------------------------------
NET INCOME                               $  30,206          $  43,238          $  33,978
------------------------------------------------------------------------------------------

INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
     Basic                              $     1.32        $      1.92         $     1.59
     Diluted                                  1.30               1.78               1.47
------------------------------------------------------------------------------------------

NET INCOME PER SHARE:
     Basic                              $     1.20        $      1.92        $      1.59
     Diluted                                  1.19               1.78               1.47
------------------------------------------------------------------------------------------

</TABLE>

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
For the Years Ended September 27, 1998, September 28, 1997 and September 29,
1996
<TABLE>
<CAPTION>

(IN THOUSANDS EXCEPT SHARE DATA)
                                                                                                    FOREIGN
                                                                         CAPITAL IN                 CURRENCY    UNAMORTIZED
                                                                 COMMON  EXCESS OF     RETAINED     TRANSLATION    STOCK    TREASURY
                                                                  STOCK     PAR        EARNINGS     GAIN (LOSS) COMPENSATION  STOCK
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>         <C>         <C>         <C>         <C>
BALANCE, OCTOBER 1, 1995 ..................................   $     393   $  37,467   $ 285,880   $ (10,110)  $  (1,260)  $ (44,821)
   Issuance of 300,000 shares of treasury stock
    in connection with the purchase of a business .........        --         2,401        --          --          --         1,624
   Issuance of 30,000 shares of treasury stock
    and vesting of 146,901 shares under the
    restricted stock plan, less forfeitures of
    29,400 shares and less return of 33,654
    shares to treasury stock to satisfy
    recipients' individual income tax obligations .........        --           275        --          --          (275)       (670)
   Compensation under restricted stock plan ...............        --          --          --          --         1,248        --
   Issuance of 199,428 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 63,026 shares of treasury stock
    for options exercised .................................        --           247        --          --          --           483
   Other transactions including return of
    8,915 shares to treasury stock received
    as payment for options exercised ......................        --           (79)       --          --          --           (61)
   Foreign currency translation loss ......................        --          --          --        (1,878)       --          --
   Cash dividends ($.40 per share) ........................        --          --        (8,641)       --          --          --
   Net income .............................................        --          --        33,978        --          --          --
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 29, 1996 ...............................         393      41,089     311,217     (11,988)       (287)    (42,365)
   Three-for-two stock split effected as a
    stock dividend ........................................         196        --          (196)       --          --          --
   Conversion of 3,306,423 shares of common stock
    for subordinated convertible debentures ...............          66      66,431        --          --          --          --
   Grant of 322,750 shares under the restricted
    stock plan ............................................        --         4,816        --          --        (6,587)      1,771
   Return of 38,270 shares to treasury stock to satisfy
    recipients individual tax obligations under
    the restricted stock plan .............................        --          --          --          --          --          (707)
   Compensation under restricted stock plan ...............        --          --          --          --         1,783        --
   Issuance of 129,761 shares of treasury stock
    under the employee stock ownership plan ...............        --          (710)       --          --          --           710
   Shares to be issued in fiscal 1998 under the
    employee stock ownership plan .........................        --         2,032        --          --          --          --
   Issuance of 367,577 shares of treasury stock
     for options exercised ................................        --         3,292        --          --          --         2,028
   Other transactions of 14,903 shares including
    return of 11,723 shares to treasury stock
    received as payment for options exercised .............        --           160        --          --          --          (267)
   Foreign currency translation gain ......................        --          --          --         2,384        --          --
   Cash dividends ($.42 per share) ........................        --          --        (9,603)       --          --          --
   Net income .............................................        --          --        43,238        --          --          --
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28,1997 ................................         655     117,110     344,656      (9,604)     (5,091)    (38,830)
   Grant of 58,000 shares under the restricted
    stock plan ............................................        --           765        --          --        (1,136)        371
   Vesting of 29,000 shares under the restricted
    stock plan, less return of 11,253 shares to
    treasury stock to satisfy recipients'
    individual tax obligations ............................        --          --          --          --          --          (256)
   Compensation under restricted stock plan ...............        --          --          --          --         1,468        --
   Issuance of 105,422 shares of treasury stock
    under the employee stock ownership plan ...............        --            64        --          --          --           619
   Issuance of 113,257 shares of treasury stock
    for options exercised for cash ........................        --           947        --          --          --           684
   Issuance of 5,625 shares of treasury stock for
        options exercised for stock .......................        --            52        --          --          --            30
   Other transactions including return of 4,809 shares
    treasury stock received as payment for
    options exercised .....................................        --           710        --          --          --           176
   Foreign currency translation gain ......................        --          --          --         2,027        --          --
   Purchases of 2,796,825 shares of treasury stock ........        --          --          --          --          --
   Cash dividends  ($.44 per share) .......................        --          --       (11,256)       --          --          --
   Net Income .............................................        --          --        30,206        --          --          --
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 1998 ...............................         $655   $119,648   $ 363,606   $  (7,577)  $  (4,759)  $ (86,396)
====================================================================================================================================
</TABLE>

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 27, 1998, SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996

(IN THOUSANDS)
                                                                                       1998                1997              1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income ...............................................................         $  30,206          $  43,238          $  33,978
 Non-cash items included in net income:
   Depreciation and amortization ..........................................            63,951             59,561             55,389
   Unexpended Restructuring Costs .........................................             6,184               --                 --
   Extraordinary loss on debt extinguishment ..............................             4,356               --                 --
   Gain on disposition of property ........................................            (2,382)            (1,079)              (180)
   Loss on equity method investment .......................................              (371)              --                 --
   Minority interest in net income ........................................                97                467                206
   Deferred income taxes ..................................................             9,032             (1,728)             5,835
   Increase in cash surrender value of life insurance,
     net of policy loans ..................................................            (2,630)            (1,718)            (3,852)
   Compensation earned under restricted stock plan ........................             1,468              1,783              1,248
   Shares to be issued under employee
     stock ownership plan .................................................              --                2,032              1,858
 Changes in assets and liabilities:
   Receivables ............................................................             3,415              5,548            (13,277)
   Inventories ............................................................           (10,708)            (3,444)            (3,688)
   Other current assets ...................................................               278                211               (184)
   Accounts payable .......................................................            (1,345)            (5,283)            11,640
   Accrued liabilities ....................................................           (21,744)            12,138             (9,999)
 Other ....................................................................             1,640              2,244               (400)
------------------------------------------------------------------------------------------------------------------------------------
     Net cash provided by operating activities                                         81,447            113,970             78,574
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Additions to property ..................................................           (84,015)           (57,629)           (64,532)
   Proceeds from dispositions of property .................................             4,331              2,603              1,220
   Proceeds from sale of other assets .....................................            12,763              2,060               --
   (Increase) decrease in other assets ....................................            (4,009)                 5               (655)
   Purchases of businesses, net of cash acquired                                      (34,778)            (6,991)           (26,519)
   Investment in equity investee ..........................................            (3,500)              --                 --
------------------------------------------------------------------------------------------------------------------------------------
         Net cash used in investing activities                                       (109,208)           (59,952)           (90,486)
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Short-term borrowings (repayments), net ................................            48,804            (41,244)            42,667
   Payments of long-term debt .............................................           (88,010)           (16,108)           (68,138)
   Proceeds from issuance of long-term debt ...............................           135,235               --               58,777
   Payments arising from early extinguishment of debt                                  (3,896)              --                 --
   Cash dividends .........................................................           (11,256)            (9,603)            (8,641)
   Proceeds from exercise of common stock options                                       1,631              5,320                730
   Purchases of treasury stock ............................................           (49,190)              --                 --
------------------------------------------------------------------------------------------------------------------------------------
 Net cash provided by (used in) financing activities ......................            33,318            (61,635)            25,395
------------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
   CASH EQUIVALENTS .......................................................               541                518                  1

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................             6,098             (7,099)            13,484
------------------------------------------------------------------------------------------------------------------------------------
BEGINNING CASH AND CASH EQUIVALENTS .......................................            24,349             31,448             17,964

ENDING CASH AND CASH EQUIVALENTS ..........................................         $  30,447          $  24,349          $  31,448
------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Cash paid for interest .................................................         $  13,862          $  14,945          $  17,245
   Cash paid for income taxes .............................................            16,406             13,112              9,006

NONCASH INVESTING AND FINANCING ACTIVITIES:
   Conversion of 6% Subordinated Convertible
      Debentures to equity (including
      accrued interest)
                                                                                    $    --            $  66,497                 --
   Issuance of common stock:
      Under restricted stock plan .........................................             1,136              6,587                176
      For purchase of a business ..........................................              --                 --                4,025
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)

1. DESCRIPTION OF BUSINESS AND SUMMARY OF
   SIGNIFICANT ACCOUNTING POLICIES:

DESCRIPTION OF BUSINESS - Guilford Mills, Inc. (the "Company") is a fabric
producer, which 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, specialty and home fashions
products. The Company also cuts and sews lace fabrics into finished home
fashions products which are sold directly to retailers. During 1998, 1997, and
1996 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 1997 and
1996 financial statements have been reclassified to conform with the 1998
presentation.

CASH EQUIVALENTS - All highly liquid investments with an original maturity of
three 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 -The Company maintains
credit insurance and uses factors as a means to reduce credit risk. Credit
insurance is maintained covering $37,000 of certain outstanding accounts
receivable. As of September 27, 1998 and September 28, 1997, approximately 11%,
and 15%, respectively, of the Company's trade accounts receivable were factored
on a non-recourse basis. The Company performs on-going credit evaluations of its
non-factored customer's financial condition and generally does not require
collateral from those customers. The Company competes primarily in the apparel,
automotive, home fashions and specialty fabric markets and sells its products to
a multitude of customers in numerous geographical locations throughout the
world. There is no disproportionate concentration of risk.

Allowances for doubtful accounts were $9,450 and $9,488 at September 27, 1998
and September 28, 1997, respectively.

MINORITY INTEREST - Minority interest represents the minority stockholders'
proportionate share of the equity of Grupo Ambar, S.A. de C.V. At September 27,
1998, the Company owned 95% of the capital stock of Grupo Ambar, S.A. de C.V.
Minority interest is included in other non-current liabilities in the
accompanying consolidated balance sheet.

INVENTORIES - Inventories are carried at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for approximately 53% of
inventories in 1998 and approximately 55% of inventories in 1997. Cost for all
other inventories has been determined principally by the first-in, first-out
(FIFO) method.

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 purposes. Depreciation rates are reviewed
annually and revised, if necessary, to reflect estimated remaining useful lives
which range from three to thirty-five years.

GOODWILL AND INTANGIBLE ASSETS - Goodwill is amortized using the straight-line
method over periods ranging from twenty to forty years. Goodwill amortization
was $1,998 in fiscal 1998, $1,536 in fiscal 1997 and $1,251 in fiscal 1996. The
Company reviews the carrying value of goodwill for impairment whenever events or
changes in circumstances 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 income tax and financial
reporting in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes". United States income taxes are not
provided on the earnings of foreign operations as those are intended to be
permanently reinvested, or in the event earnings are repatriated, credits
received in the United States for foreign income taxes previously paid will be
available to substantially reduce the United States tax liability. Undistributed
earnings of foreign operations were $30,574 at September 27, 1998 and $22,952 at
September 28, 1997.

FOREIGN CURRENCY TRANSLATION - The financial statements of certain
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
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

account in the stockholders' investment section of the accompanying balance
sheets and do not affect the results of operations. Financial results of certain
majority-owned foreign subsidiaries in highly inflationary economies are
translated using a combination of current and historical exchange rates. Any
translation adjustments are included in the results of operations along with
transaction gains and losses for the period.

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

PER SHARE INFORMATION - The Company adopted SFAS No. 128, "Earnings Per Share",
in fiscal 1998 and has restated prior period earnings per share data to conform
to this Statement. Basic income per share information has been determined by
dividing the respective net income amounts by the weighted average number of
shares of common stock outstanding during the periods. 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 at that time and (ii) an
additional dilutive effect for stock options and shares issued under the
restricted stock plan.

FINANCIAL INSTRUMENTS AND DERIVATIVES - The Company periodically uses derivative
financial instruments for purposes other than trading and does so to reduce its
exposure to fluctuations in interest rates and foreign currency exchange rates.
Gains and losses on hedges of existing assets and liabilities are included in
the carrying amounts of those assets or liabilities and are ultimately
recognized in income. Gains and losses related to qualifying hedges of firm
commitments or anticipated transactions are deferred and are recognized in
income or as adjustments of carrying amounts when the hedged transaction occurs.

STOCK-BASED COMPENSATION - In accordance with SFAS No. 123, "Stock-Based
Compensation," the Company has continued to measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees". Pro forma disclosures of net income and earnings
per share are presented as if the fair value-based method prescribed by SFAS No.
123 had been applied in measuring compensation expense for the periods required
by the Statement.

RECENT ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial Accounting
Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes standards for the prominent reporting of the components of
comprehensive income, which is the total of net income and other changes in
equity that bypass net income. The Statement is effective for fiscal
years beginning after December 15, 1997.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. This Statement is effective for financial
statements for periods beginning after December 15, 1997.

In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits". This
Statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The Statement is effective for fiscal years beginning after December 15, 1997.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This Statement
establishes accounting and reporting stan dards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999.

The Company plans to adopt the provisions of these Statements in fiscal 1999,
except for SFAS No. 133 which will be adopted in fiscal 2000. Management does
not expect the impact of the adoption of these statements on the Company's
financial position and results of operations to be material.

2. ACQUISITIONS:
GRUPO AMBAR - Effective June 27, 1997, the Company acquired an additional 20%
ownership interest in Grupo Ambar, S.A. de C.V. ("Grupo Ambar") for
approximately
<PAGE>

$7,100. The acquisition increased the Company's ownership interest in Grupo
Ambar from 75% to 95%. The purchase price was allocated to the fair market value
of assets and liabilities acquired and excess purchase price over fair market
value of underlying assets was allocated to goodwill. Grupo Ambar is a leading
manufacturer of knit textile fabrics in Mexico.

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 and other fabrics into finished home fashions products which are sold
directly to retailers. The initial purchase price was comprised of cash of
$45,480 and the issuance of 300,000 shares of the Company's common stock. The
acquisition was accounted for using the purchase method of accounting. The
excess of the initial purchase price over fair market value of the underlying
assets of $7,575 was allocated to goodwill. In addition to the initial purchase
price paid at the closing of the acquisition, the Company also agreed to pay
additional consideration in accordance with a formula based on the Company's
price-earnings' multiple and Hofmann Laces' performance through the end of
calendar year 2000 (the "Contingent Payment"). During the 1998 fiscal year, the
Company entered into an amendment to the Hofmann Purchase Agreement, pursuant to
which the Company agreed to pay a fixed amount in lieu of a Contingent Payment.
The Company paid the amount of $17,000 in February 1998 with the remaining
$17,283 paid in October 1998. The $17,283 has been included in other non-current
liabilities in the accompanying 1998 balance sheet as it will be funded through
long-term debt.

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

------------------------------------
                            1996
------------------------------------
Net Sales                 $848,985
Operating Income            73,682
Net Income                  34,386
-----------------------------------
Net Income per share:
   Basic                      1.61
   Diluted                    1.49
==================================

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

3. RESTRUCTURING CHARGES:
In September 1998, the Company commenced restructuring of two of its operations
and recorded restructuring and impaired asset charges of $6,470. The
restructuring plan provides for the closing of a yarn manufacturing facility,
the downsizing of a product line-focused operation within the apparel market
sector and the severance of approximately 300 associates. A reserve for
severance costs of $2,849 and lease exit costs and other obligations of $113 was
recorded as an accrued liability in fiscal 1998. Additionally, a charge of
$3,508 was taken to reduce property to net realizable value at September 27,
1998. Severance costs of $286 were charged against the reserve in fiscal 1998.
The Company intends to complete the restructuring plan during fiscal 1999.

4. INVENTORIES:
Inventories at September 27, 1998 and September 28, 1997 consist of the
following:
<TABLE>
<CAPTION>


--------------------------------------------------------------------------------
                                                            1998         1997
--------------------------------------------------------------------------------

<S>                                                      <C>            <C>
Finished goods                                           $ 48,776       $ 53,404
Raw materials and work
     in process                                           112,275         98,499
Manufacturing supplies                                      8,811          8,758
--------------------------------------------------------------------------------
Total inventories valued at the lower
     of FIFO cost or market value                         169,862        160,661
Adjustments to reduce
     FIFO cost to LIFO cost, net                           16,856         18,763
--------------------------------------------------------------------------------
     Total inventories                                   $153,006       $141,898
================================================================================
</TABLE>

5. PROPERTY:
Property at September 27,1998 and September 28, 1997 consists of the following:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                                            1998         1997
--------------------------------------------------------------------------------
<S>                                                      <C>            <C>
Land                                                     $ 12,804       $ 11,541
Buildings                                                 115,144        107,357
Machinery and equipment                                   637,113        580,048
Construction in progress                                   19,112         19,231
--------------------------------------------------------------------------------
                                                          784,173        718,177
Less - Accumulated
     depreciation                                         457,232        409,654
--------------------------------------------------------------------------------
     Property, net                                       $326,941       $308,523
================================================================================
</TABLE>

6. OTHER ASSETS:
Other assets at September 27, 1998 and September 28, 1997 consist of
the following:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                                            1998           1997
--------------------------------------------------------------------------------
<S>                                                      <C>            <C>
Goodwill                                                 $ 52,448       $ 19,336
Cash surrender value of life insurance                     34,549         43,433
Other                                                      13,610          9,887
--------------------------------------------------------------------------------
     Total  other assets                                 $100,607       $ 72,656
================================================================================
</TABLE>

<PAGE>

7. ACCRUED LIABILITIES:
Accrued liabilities at September 27, 1998 and September 28, 1997 consist of the
following:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                                            1998          1997
--------------------------------------------------------------------------------
<S>                                                      <C>            <C>
Payroll and related benefits                             $ 14,808       $ 22,596
Income taxes                                                  915         15,211
Property taxes                                              2,985          3,126
Plant restructuring                                         2,676           --
Other                                                      15,855         15,925
--------------------------------------------------------------------------------
   Total accrued liabilities                             $ 37,239       $ 56,858
================================================================================
</TABLE>

8. 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
1998, 1997, and 1996 were $82,918, $49,904, and $68,355 respectively; the
average borrowings were $30,230, $37,363 and $25,586 respectively; and the
weighted average interest rates were 7%, 7% and 9% (6%, 6% and 6% for U.S.
borrowings), respectively. The Company has no compensating balance requirements.

Long-term debt at September 27, 1998 and September 28, 1997 consists of the
following:
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
                                                            1998           1997
--------------------------------------------------------------------------------
<S>                                                      <C>            <C>
Senior, unsecured notes, repaid
   during 1998                                           $   --         $ 84,286
Uncommitted lines of credit, various
   maturities and interest rates                          125,000         58,777
Revolving line of credit, due in 2000,
   interest at 5.8%                                        50,000           --
Term loan with a Mexican
   bank at various due dates
   and a variable interest rate
   (47.6% at September 27, 1998)                            1,482          1,617
Other                                                       1,201          2,422
--------------------------------------------------------------------------------
                                                          177,683        147,102
Less -  Current maturities                                    811         12,542
--------------------------------------------------------------------------------
   Total                                                 $176,872       $134,560
================================================================================
</TABLE>

During September 1998, the Company repaid all of the senior unsecured notes
outstanding with $50,000 of borrowings under its $150,000 revolving line of
credit facility and additional borrowings under uncommitted lines of credit. In
connection with the repayment, the Company recorded $3,994 of pretax prepayment
penalties and $362 of pretax accelerated amortization of loan costs as an
extraordinary item. The income tax effect related to those charges was $1,416,
with the net effect of the prepayment expenses ($2,940) reflected as an
extraordinary item in the accompanying 1998 statement of income.

The total borrowings on the uncommitted lines of credit as of September 27, 1998
and September 28, 1997 were $125,000 and $58,777, respectively. Interest rates
at September 27, 1998 ranged from 5.65% to 5.88% with a weighted average
interest rate of 5.84%. Interest rates at September 28, 1997 ranged from 5.64%
to 5.75% with a weighted average of 5.72%. These borrowings have been classified
as long-term debt in the accompanying consolidated balance sheets as management
has the ability and intent to refinance them through available long-term debt
sources. As of September 27, 1998, the Company has additional availability under
uncommitted bank lines of credit of $82,100 and has additional availability
under its revolving line of credit of $100,000.

The Company anticipates closing a $145,000 private placement of senior,
unsecured notes with three institutions in the first quarter of fiscal 1999. The
notes will be payable in 10 years with a fixed rate coupon of 7.06%. The
proceeds will be used to repay current borrowings on uncommitted bank lines with
any remainder to repay a portion of the revolving credit facility.

The carrying value of the remaining short-term borrowings and long-term debt of
the Company approximate the fair value for loans with similar terms.

Annual maturities of long-term debt for the next five years are, $811 in 1999,
$31,131 in 2000, $494 in 2001, $247 in 2002 and $0 in 2003.

Under the terms of the Company's debt agreements, certain requirements and
restrictions apply to future indebtedness, stockholders' investment, and
tangible net worth. As of September 27, 1998, the Company was in compliance with
all covenants under its debt agreements.

9. FINANCIAL INSTRUMENTS:
During August 1998, the Company entered into two treasury lock agreements, which
terminate on January 8, 1999, with two financial institutions to provide
interest rate protection related to the anticipated debt transaction described
in Note 8. The transaction is expected to close during the first quarter of
fiscal 1999. At September 27, 1998, the Company had treasury lock agreements in
place that effectively fix the 10 year U.S. Treasury component of the interest
rate at 5.437% on a notional amount of $57,500 and at 5.435% on a notional
amount of $30,000. As of September 27, 1998, the treasury lock agreements had an
inherent loss of $6,181, which has been deferred until the completion of the
anticipated transaction. These treasury lock agreements were terminated in
November 1998, resulting in a payment of $4,366, which will be amortized as
additional interest expense over the period of the related debt.

<PAGE>


10. INCOME TAXES:

The net deferred income tax liability at September 27, 1998 and September 28,
1997 is comprised of the following:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                           1998          1997
-------------------------------------------------------------------------------
<S>                                                      <C>            <C>
Assets                                                   $ 25,286      $ 27,575
Liabilities                                               (50,103)      (43,497)
--------------------------------------------------------------------------------
     Total                                               $(24,817)     $(15,922)
================================================================================
</TABLE>

No valuation allowances against deferred income tax assets were recorded at
September 27, 1998 or September 28, 1997.

Temporary differences and carryforwards which gave rise to significant deferred
income tax assets (liabilities) as of September 27, 1998 and September 28, 1997
were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                             1998          1997
-------------------------------------------------------------------------------

<S>                                                      <C>           <C>
Current prepaid (deferred) income taxes:
Income tax credit carry-forwards
   (expire 2005-2010)                                    $  3,222     $   4,750
Inventory valuation differences                            (3,302)       (2,481)
Allowances for doubtful accounts                            2,056         2,721
Prepaid healthcare costs                                     (446)         (764)
Accrued expenses not currently
   deductible for tax                                       2,795         2,228
Restructuring accruals                                      1,058          --
Accrued environmental expenses                                396           396
Other, net                                                    479           252
-------------------------------------------------------------------------------
Total current prepaid
   income taxes                                          $  6,258      $  7,102
===============================================================================
Long-term prepaid (deferred) income taxes:
Property                                                 $(39,175)     $(36,654)
Accrued pension and other
   employee benefits                                        7,619         8,327
Alternative minimum and other
   tax credit carryforwards
   (no expiration)                                          3,843         5,811
Accrued environmental expenses                              1,460         1,469
Investments in limited partnerships                        (2,644)       (2,299)
Goodwill amortization                                      (2,284)         (297)
Other, net                                                    106           619
-------------------------------------------------------------------------------
Total long-term deferred
   income taxes                                          $(31,075)     $(23,024)
===============================================================================

</TABLE>

The income tax provision consists of the following elements:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                           1998           1997             1996
--------------------------------------------------------------------------------
<S>                                    <C>              <C>              <C>
Currently payable:
   U.S. Federal                        $  4,499         $15,803          $ 5,932
   State                                    823           2,338            1,539
   Foreign                                1,606           6,159            3,685
Deferred payable:
   U.S. Federal                           6,115          (1,826)           4,860
   State                                    795             434              722
   Foreign                                2,122            (336)             253
--------------------------------------------------------------------------------
         Total                         $ 15,960        $ 22,572         $ 16,991
================================================================================

</TABLE>





The income tax provision as a percentage of pre-tax income differs from the
statutory U.S. Federal rate for the following reasons:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                    1998        1997        1996
-------------------------------------------------------------------------------

<S>                                                 <C>         <C>        <C>
Statutory U.S. Federal
   income tax rate                                  35.0%       35.0%      35.0%
State income taxes, net of
   Federal Income tax reduction                      2.1         2.9        2.7


Tax credits                                         (3.0)       (2.9)      (3.8)
Other                                               (1.6)       (0.7)      (0.6)
-------------------------------------------------------------------------------
Effective income tax rate                           32.5%       34.3%      33.3%
================================================================================
</TABLE>


11. 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 27, 1998, and September 28, 1997 is as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                           1998          1997
-------------------------------------------------------------------------------
<S>                                                      <C>           <C>
Fair value of plan assets, primarily
   marketable securities, short-term
   investment funds and
   insurance company contracts                           $ 26,361      $ 22,605
-------------------------------------------------------------------------------
Accumulated benefit
   obligation, including vested
   benefits of $28,163 and $24,330                         26,432        24,939
Additional benefits based on
   estimated future salary levels                           1,937         2,188
-------------------------------------------------------------------------------
Projected benefit obligation                               28,369        27,127
-------------------------------------------------------------------------------
Projected benefit obligation
   in excess of plan assets                                (2,008)
Unrecognized net loss                                       3,821         4,824
Unrecognized net transitional
   asset                                                   (2,058)       (2,184)
Adjustment to recognize minimum
   liability                                                 (140)         (658)
-------------------------------------------------------------------------------
Accrued pension liability                                $   (385)     $ (2,540)
===============================================================================

</TABLE>

The projected benefit obligation has been determined for 1998 and 1997 using an
assumed discount rate of 7.0% and 7.25%, respectively, 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 a projected benefit obligation of $18,563 and net assets
available for plan benefits of $19,070 as of December 31, 1997. The present
value of plan benefits for Guilford Europe Limited was determined using an
assumed discount rate of 6.5% and an assumed long-term rate of salary
progression of 4.5%. The assumed long-term rate of return on plan assets was
9.5%.


<PAGE>

<TABLE>
<CAPTION>

Pension expense includes the following components:

                          -------------------------------
                             1998       1997       1996
                          -------------------------------
<S>                        <C>        <C>        <C>
Domestic defined
   benefit plans:
   Service cost --
     benefits earned
     during the period     $ 1,342    $ 1,254    $ 1,170
   Interest on projected
     benefit obligation      1,915      1,781      1,618
   Actual return on
     plan assets              (843)    (1,903)    (1,760)
   Net amortization
     and deferral           (1,512)        56        106
---------------------------------------------------------
                               902      1,188      1,134


Domestic multi-
   employer plan               270        264        257
Foreign defined
   benefit plan                582        567        478
---------------------------------------------------------
     Total                 $ 1,754    $ 2,019    $ 1,869
===============================================================================
</TABLE>

The Company maintains defined contribution plans for certain officers and
salaried employees. Contributions under these plans are determined by the Board
of Directors. During 1998, 1997 and 1996, the provisions under the defined
contribution plans were $2,733, $2,381, and $2,626, respectively.

The Company also maintains deferred compensation plans for certain officers and
salaried employees. These plans are being provided for currently. During 1998,
1997 and 1996, the provisions under these plans were $2,310, $2,167, and $1,828,
respectively. The liability for deferred compensation was $17,899 at September
27, 1998 and $17,448 at September 28, 1997 and is included in other non-current
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.

12. CAPITAL STOCK AND STOCK COMPENSATION:
The Company has authorized the issuance of 2,500,000 shares of common stock
under a stock option plan for key employees and directors of which 393,807 are
available for grant. 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 the fair market
value at the date of grant. Outstanding incentive options are exercisable over
either a three or eight year period commencing two years after the date of
grant. Outstanding non-qualified options are exercisable over either a five to
ten year period commencing on the date of grant or two years after the date of
grant. Option activity under the plans is as follows:



<TABLE>
<CAPTION>
-------------------------------------------------------------------------------

                                     NUMBER OF                          AVERAGE
                                      SHARES       EXERCISE PRICE       EXERCISE
                                   UNDER OPTION      PER SHARE       PRICE PER SHARE
-------------------------------------------------------------------------------
<S>                                   <C>          <C>      <C>       <C>
Balance, October 1, 1995              939,026      $6.22 to 16.33     $   14.68
Granted                                73,125               14.87         14.87
Exercised                             (63,026)      6.22 to 15.50         14.60
Forfeited                             (76,749)      6.22 to 16.25         13.99
--------------------------------------------------------------------------------
Balance, September 29, 1996           872,376      12.44 to 16.33         14.76
Granted                               909,350      17.21 to 23.70         20.22
Exercised                            (367,577)     12.44 to 16.33         14.74
Forfeited                             (39,246)     13.87 to 15.50         14.55
--------------------------------------------------------------------------------
Balance, September 28, 1997         1,374,903      13.46 to 23.70         18.11
Granted                               372,625      19.53 to 27.59         20.84
Exercised                            (118,882)     13.46 to 18.37         14.24
Forfeited                             (62,155)     13.87 to 19.75         16.88
--------------------------------------------------------------------------------
Balance, September 27, 1998         1,566,491     $13.46 to 27.59     $   19.00
================================================================================
</TABLE>

These options expire at various dates through fiscal 2008. The weighted average
remaining contractual life of the options outstanding at September 27, 1998 was
7 years. Incentive options exercisable at September 27, 1998 and September 28,
1997 were 33,161 and 23,171, respectively. Non-qualified options exercisable at
September 27, 1998 and September 28, 1997 were 200,625 and 186,500,
respectively.The average exercise price on the incentive options exercisable is
$13.87 and on the non-qualified options exercisable is $15.91. The weighted
average fair market value of the Company's common stock at the date of grant was
$20.84, $19.62 and $14.87 for grants made in fiscal 1998, 1997 and 1996,
respectively.

The Company has elected to continue to account for stock option grants under APB
Opinion No. 25 and is required to provide pro forma disclosures of what net
income and earnings per share ("EPS") would have been had the Company adopted
the new fair value method for recognition purposes under SFAS No. 123. The
following information is presented as if the Company had adopted SFAS No. 123
and restated its results (in thousands, except per share data):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                1998          1997         1996
-------------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>
Income Before Extraordinary Item:
     As reported                            $   33,146   $   43,238   $   33,978
     Pro Forma                              $   32,272   $   42,902   $   33,924
--------------------------------------------------------------------------------
Net Income:
     As reported                            $   30,206   $   43,239   $   33,978
     Pro Forma                              $   29,332   $   42,902   $   33,924
--------------------------------------------------------------------------------
Basic EPS Before Extraordinary Item:
     As reported                            $     1.32   $     1.92   $     1.59
     Pro Forma                              $     1.28   $     1.91   $     1.59
--------------------------------------------------------------------------------
Diluted EPS Before Extraordinary Item:
     As reported                            $     1.30   $     1.78   $     1.47
     Pro Forma                              $     1.27   $     1.77   $     1.47
--------------------------------------------------------------------------------
Basic EPS:
     As reported                            $     1.20   $     1.92   $     1.59
     Pro Forma                              $     1.17   $     1.91   $     1.59
--------------------------------------------------------------------------------
Diluted EPS:
    As reported                             $     1.19   $     1.78   $     1.47
    Pro Forma                               $     1.15   $     1.77   $     1.47
--------------------------------------------------------------------------------
</TABLE>
<PAGE>
For the above information, the fair value of each option grant was estimated on
the date of grant using the Black-Scholes option pricing model with the
following assumptions used for grants in fiscal 1998, 1997 and 1996: (i)
expected volatility ranging from 20 to 25%, (ii) expected lives ranging from 4
to 7 years, (iii) risk free interest rates ranging from 5.5% to 6.7% and (iv) an
expected dividend yield of 1.8% to 2.2%. The weighted average calculated value
in excess of the grant value of an option granted during fiscal 1998, 1997, and
1996 under the Black-Scholes model was $6.36, $5.00, and $3.02, respectively.
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to October 2, 1995, the above pro forma amounts may not be
representative of the estimated compensation costs to be expected in future
years.


The Company has authorized 2,250,000 shares of common stock for the 1989
Restricted Stock Plan, which covers certain key salaried employees, of which
1,188,850 are available for grant at September 27, 1998. A total of 334,200
shares were outstanding (held in trust) under the plan at September 27, 1998.
These shares carry voting and dividend rights; however, sale of the shares is
restricted prior to vesting. Of the 58,000 shares granted in fiscal year 1998,
40,000 vest evenly over a three year period commencing September 30, 1998 and
18,000 vest evenly over a four year period commencing May 27, 2001, subject
generally to continued employment. Of the 322,750 shares granted in fiscal year
1997, 20% vested on the date of grant. The remaining 80% of the grant vests over
a four year period (20% annually) commencing on the fourth anniversary of the
grant date, subject to continued employment. Shares granted prior to fiscal 1997
vest evenly over three years, subject to continued employment. Dividend payments
are made to an escrow account. The accrual for shares issued under the plan is
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 $1,468,
$1,783 and $1,248 during 1998, 1997, and 1996, respectively.


The Company has an employee stock ownership plan which covers the majority of
U.S. full-time employees who have completed one year of service. Annual awards
are based upon the approval of the Board of Directors and are tied to targeted
earnings levels achieved during the year. Prior to fiscal 1997, 100% of the
awards were made to the plan in the form of the Company's common stock or in
cash which was used to purchase shares of the Company's common stock. Employee
rights to the stock vested over a seven-year period. Effective October 1, 1996,
for the 1997 fiscal year, employees were immediately vested in 50% of the annual
award and could elect to receive the 50% vested portion in cash or as a common
stock contribution to the plan. The remaining 50% of the award is made to the
plan in the form of the Company's common stock or in cash which is used to
purchase the Company's common stock. Employee rights to this portion of the
award vest over a seven year period. 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 1998, 1997 and 1996 was $0, $4,063, and $1,858, respectively. The related
obligation at September 28, 1997 was included in capital in excess of par and
current liabilities for the estimated amount to be awarded.


In June and September 1998, the Company's Board of Directors authorized the
repurchase of up to an aggregate of 3,500,000 shares of the Company's stock. As
of September 27, 1998, the Company had repurchased 2,535,200 shares at an
average price of $16.40. The Company's repurchases of shares were recorded as
treasury stock and resulted in a reduction in stockholders' equity. The Company
has an agreement with three of its directors whereby the Company may exercise a
first right of refusal on the disposition of shares. Pursuant to these
agreements, the Company repurchased an additional 261,625 shares in fiscal 1998,
at an average price of $27.75, which equaled the fair market value at the dates
of the transactions.

On April 21, 1997, the Company's Board of Directors approved a
three-for-two-stock split of the Company's common stock. The split was effected
in the form of a stock dividend paid on May 6, 1997 to stockholders of record on
May 1, 1997. The stock dividend increased the Company's issued common stock by
approximately 9.8 million shares. All share and per share data have been
restated for all periods presented to reflect the stock split effected as a
stock dividend.


On June 25, 1997, the Company issued a call for the redemption of the Company's
outstanding 6.0% Convertible Subordinated Debentures. Holders had the right to
convert debentures into shares of common stock through July 29, 1997 at $19.67
per share. Of the $66,180 debentures outstanding, $65,039 or 98.3% were
converted to common stock. This conversion resulted in the issuance of 3,306,423
shares of common stock that had been previously reserved for such issuance.

<PAGE>

The Company has an agreement with two of its directors whereby the Company will,
in the event of their death prior to June 22, 1999, purchase common stock of the
Company owned by the two directors in the amounts of $5,000 and $4,000
respectively. 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. 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 September 27,
1998, 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.

13.  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 27
years. Rent expense under these leases was $6,337 in 1998, $5,055 in 1997, and
$5,404 in 1996. At September 27, 1998, future minimum rental payments applicable
to these leases are $6,276 in 1999, $4,767 in 2000, $3,050 in 2001, $1,903 in
2002, $986 in 2003 and $20,038 thereafter.

Three purported class action lawsuits have been filed on behalf of purchasers of
the Company's common stock against the Company and certain of its officers and
directors. These lawsuits purport to allege claims under Section 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, in
connection with the Company's public disclosure of accounting irregularities at
the Hofmann Laces unit in fiscal year 1998. Specifically, the actions allege
that, during the class period (January 20, 1998 through October 26, 1998),
defendants materially misrepresented the Company's financial condition and
overstated the Company's reported earnings. No specific amount of damages is
sought in these complaints. The Company intends to vigorously defend the
lawsuits. It is management's opinion, based upon the facts presently known, 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.

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 27, 1998, environmental accruals amounted to $5,043 of which $4,043 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.
<PAGE>

14. GEOGRAPHIC INFORMATION:
The accompanying financial statements include the following amounts related to
the operations of the Company's subsidiaries in Europe and Mexico:

<TABLE>
<CAPTION>


----------------------------------------------------------------------------------------------------------------
                                                                  1998                1997                1996
----------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                 <C>                 <C>
Net sales to unaffiliated customers:
     United States                                             $ 716,687           $ 707,991           $ 665,727
     United Kingdom                                              126,067             136,962             122,300
     Mexico                                                       51,780              49,756              42,293
----------------------------------------------------------------------------------------------------------------
       Total net sales                                         $ 894,534           $ 894,709           $ 830,320
----------------------------------------------------------------------------------------------------------------
Transfers between geographic areas
  (eliminated in consolidation):
     United States                                             $   3,227           $   3,232           $   4,257
     United Kingdom                                                   26                  52                 137
     Mexico                                                          221                 256                 582
----------------------------------------------------------------------------------------------------------------
       Total transfers                                         $   3,474           $   3,540           $   4,976
----------------------------------------------------------------------------------------------------------------
Operating income:
     United States                                             $  52,124           $  68,004           $  57,750
     United Kingdom                                                7,332              13,453               9,752
     Mexico                                                        3,656               5,152               4,124
Other expenses                                                    14,006              20,799              20,657
----------------------------------------------------------------------------------------------------------------
     Income before
     income taxes                                              $  49,106           $  65,810           $  50,969
----------------------------------------------------------------------------------------------------------------
Identifiable assets:
     United States                                             $ 740,167           $ 674,651           $ 695,294
     United Kingdom                                               92,511              87,911              89,019
     Mexico                                                       36,999              32,920              26,237
     Eliminations                                                (80,220)            (65,686)            (81,720)
----------------------------------------------------------------------------------------------------------------
       Total assets                                            $ 789,457           $ 729,796           $ 728,830
----------------------------------------------------------------------------------------------------------------
</TABLE>

15. EARNINGS PER SHARE:
The following table reconciles basic and diluted earnings per share:

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
                                                                   Income Before        EPS Before                         Earnings
                                                      Shares       Extraordinary      Extraordinary          Net              per
                                                                        Item                Item           Income            Share
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>              <C>               <C>              <C>
1998:
Basic EPS                                           25,134,000       $   33,146       $         1.32    $   30,206       $      1.20
                                                                                       =============                      ==========

Add  effect of dilutive securities:
Options and Restricted Stock                           343,000             --                                  --
6% Convertible Debt                                       --               --                                  --
                                                    ---------------------------                          ---------

Diluted EPS                                         25,477,000       $   33,146       $         1.30    $   30,206       $      1.19
------------------------------------------------------------------------------------------------------------------------------------
1997:
Basic EPS                                           22,470,000       $   43,238       $         1.92    $   43,238       $      1.92
                                                                                       =============                      ==========
Add  effect of dilutive securities:
Options and Restricted  Stock                          176,000             --                                  --


6% Convertible Debt                                  2,801,000            2,170                              2,170
                                                    ---------------------------                          ---------
Diluted EPS                                         25,447,000       $   45,408       $         1.78    $   45,408       $      1.78
------------------------------------------------------------------------------------------------------------------------------------
1996:
Basic EPS                                           21,320,000       $   33,978       $         1.59    $   33,978       $      1.59
                                                                                       =============                      ==========
Add  effect of dilutive securities:
Options and Restricted Stock                            52,000             --                                                    --
6% Convertible Debt                                  3,365,000            2,376                              2,376
                                                    ---------------------------                          ---------
Diluted EPS                                         24,737,000       $   36,354       $         1.47    $   36,354       $      1.47
====================================================================================================================================
</TABLE>


16. SUMMARY OF QUARTERLY EARNINGS (UNAUDITED):
The following table reflects restated quarterly earnings amounts for fiscal
1998. As publicly announced on October 26, 1998, the Company uncovered potential
accounting irregularities related to inappropriate reductions of certain
material costs and a corresponding understatement of accounts payable amounts at
its Hofmann Laces unit. As a result, the Audit Committee of the Company's Board
of Directors ("Audit Committee") engaged Weil, Gotshal & Manges LLP ("Weil
Gotshal") as special legal counsel and Weil Gotshal engaged Arthur Andersen LLP
("Andersen") to perform an independent investigation into these potential
accounting irregularities. On November 24, 1998, the Company announced that the
Audit Committee, assisted by Weil Gotshal and Andersen, had completed an
investigation of the financial impact of the accounting irregularities at the
Hofmann Laces unit. As a result of the findings of this investigation, the
Company has restated its previously reported financial results for the first
three quarters of the fiscal year ended September 27, 1998. These restatements
are explained in detail in the Company's 10-Q/A's filed with the Securities and
Exchange Commission on December 7, 1998 for the quarters ended December 28,
1997, March 29, 1998 and June 28, 1998.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                    FIRST              SECOND              THIRD            FOURTH
------------------------------------------------------------------------------------------------------------------------------------
1998 QUARTER:
<S>                                                                <C>                <C>                <C>                <C>
Net sales                                                          $213,377           $228,448           $232,768           $219,941
Gross profit                                                         38,001             41,657             46,462             41,196
Income Before
   Extraordinary Item                                                 6,491              9,253             12,846              4,556
Net Income                                                            6,491              9,253             12,846              1,616
------------------------------------------------------------------------------------------------------------------------------------
Income per share
  Before Extraordinary Item:
  Basic                                                                 .26                .36                .50                .19
  Diluted                                                               .25                .36                .49                .19
------------------------------------------------------------------------------------------------------------------------------------
Net Income per share:
  Basic                                                                 .26                .36                .50                .07
  Diluted                                                               .25                .36                .49                .07
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------

1997 QUARTER:
Net sales                                                          $210,863           $219,144           $238,358           $226,344
Gross profit                                                         37,849             41,047             51,110             51,560
Net Income                                                            5,409              7,475             14,543             15,811
------------------------------------------------------------------------------------------------------------------------------------
Net Income per share:
 Basic                                                                  .25                .34                .67                .65
 Diluted                                                                .24                .32                .59                .62
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------

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:
 Basic                                                                  .13                .28                .58                .59
 Diluted                                                                .13                .26                .53                .53
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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 27, 1998 and
September 28, 1997, and the related consolidated statements of income,
stockholders' investment and cash flows for each of the three years in the
period ended September 27, 1998. 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 27, 1998 and September 28, 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended September 27, 1998, in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP

Arthur Andersen LLP
Greensboro, North Carolina,
November 24, 1998.

--------------------------------------------------------------------------------
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 account ing 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,
comprised of internal and external business advisors who independently assess
the effectiveness of the internal controls and report findings to management
throughout the year. The group delivers increased value by aligning with the
business objectives to reduce risk and create cost efficiencies. The Company's
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.

/s/ Terrence E. Geremski

Terrence E. Geremski
Executive Vice President/Chief Financial Officer
<PAGE>

COMMON STOCK MARKET PRICES AND DIVIDENDS
<TABLE>
<CAPTION>

FISCAL 1998
--------------------------------------------------------------------------------
 QUARTER                   HIGH                 LOW             DIVIDENDS
--------------------------------------------------------------------------------
<S>                      <C>   <C>           <C>   <C>                  <C>
 First                   $ 28  1/4           $  23 1/ 8                 $ .11
 Second                    29  1/4              25                        .11
 Third                     29  5/8              18 1/2                    .11
 Fourth                    21  5/8              13 3/4                    .11
                                                                          ---

              Year       $ 29  5/8           $  13 3/4                  $ .44
                                                                          ---


FISCAL 1997
--------------------------------------------------------------------------------
 QUARTER                    HIGH                  LOW                 DIVIDENDS
--------------------------------------------------------------------------------
 First                   $ 18 5 /32          $  14 27/32                $ .10
 Second                    20 21/32             17 1/4                    .10
 Third                     20  1/2              18 1/8                    .11
 Fourth                    25  3/4              20 3/8                    .11
                                                                          ---

                   Year  $ 25  3/4           $  14 27/32                $ .42
                                                                          ---


 FISCAL 1996
--------------------------------------------------------------------------------
 QUARTER                    HIGH                  LOW            DIVIDENDS
--------------------------------------------------------------------------------
 First                   $ 16  5/32          $  13 11/32          $ .10
 Second                    16 11/32             13                  .10
 Third                     16  3/4              14  3/32            .10
 Fourth                    17  3/32             14 3/4              .10
                                                                  -----

                   Year  $ 17 3/32           $  13                $ .40
                                                                  -----
</TABLE>




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 DECEMBER 4, 1998 THERE WERE 435 STOCKHOLDERS OF
RECORD.

BASED ON CONTINUED FAVORABLE FUTURE OPERATIONS AND THE PRESENT LEVEL OF
AVAILABLE RETAINED EARNINGS, MANAGEMENT ANTICIPATES CONTINUING ITS CURRENT
DIVIDEND POLICIES.