<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-Q
       (X)    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                    For the Fiscal Quarter ended July 1, 2001
                                       OR
       (_)    TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
               For Transition Period from __________ to __________
                        Commission File Number 0001067447
                           THE DERBY CYCLE CORPORATION
             (Exact name of registrant as specified in its charter)

         DELAWARE                                               31-1038896
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                              Identification No.)

                           The Derby Cycle Corporation
                     300 First Stamford Place (5/th/ Floor)
                        Stamford, Connecticut 06902-6765
          (Address of principal executive offices, including zip code)
                            Telephone: (203) 961-1666
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None
                 Name of each exchange on which registered: N/A
        Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark whether the registrant (1) has filed all reports
   required to be filed by Section 13 or 15(d) of the Securities Exchange Act
   of 1934 during the preceding 12 months (or for such shorter period that the
   registrant was required to file such reports), and (2) has been subject to
         such filing requirements for the past 90 days, Yes (X) No ( ).

      There were 45,440 shares of Class A common stock and 23,060 shares of
    Class C common stock of The Derby Cycle Corporation, par value $0.01 per
                   share, outstanding as of October 17, 2001.

<PAGE>

                           THE DERBY CYCLE CORPORATION

                     JULY 1, 2001 FORM 10-Q QUARTERLY REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                      PAGE
<S>                                                                                                   <C>
                                               PART I
                                               ------

ITEM 1. FINANCIAL STATEMENTS .......................................................................    1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......   16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................................   25

                                               PART II
                                               -------

ITEM 1. LEGAL PROCEEDINGS ..........................................................................   28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ............................................................   29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...........................................................   29
</TABLE>



<PAGE>

ITEM 1. FINANCIAL STATEMENTS


              Index to Condensed Consolidated Financial Statements:
--------------------------------------------------------------------------------

<TABLE>
<S>                                                                                            <C>
Condensed Consolidated Balance Sheets as of December 31, 2000 and July 1, 2001 ...............  2

Unaudited Condensed Consolidated Statements of Operations for the quarters and six
     months ended July 2, 2000 and July 1, 2001 ..............................................  3

Unaudited Condensed Consolidated Statement of Shareholders' Deficit for the six months
     ended July 1, 2001 ......................................................................  4

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July
     2, 2000 and  July 1, 2001 ...............................................................  5

Notes to Condensed Consolidated Financial Statements .........................................  7
</TABLE>

                                       1

<PAGE>

                           The Derby Cycle Corporation
                      Condensed Consolidated Balance Sheets
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                    Assets                                                        Dec 31,        Jul 1,
                                                                                                     2000          2001
                                                                                                              unaudited
                                                                                              -----------   -----------
<S>                                                                                           <C>           <C>
Current assets:
     Cash and cash equivalents ........................................................       $    19,573   $     7,575
     Receivables, net of allowances ...................................................            81,900        79,409
     Inventories ......................................................................           114,649        97,079
     Other current assets .............................................................             6,935         7,198
                                                                                              -----------   -----------
          Total current assets ........................................................           223,057       191,261
                                                                                              -----------   -----------
Property, plant and equipment, net ....................................................            35,127        30,127
Intangibles, net ......................................................................            35,485        32,794
Other assets ..........................................................................                50            50
Prepaid pension assets ................................................................            62,107        60,940
                                                                                              -----------   -----------
          Total assets ................................................................       $   355,826   $   315,172
                                                                                              ===========   ===========

                      Liabilities and Shareholders' Deficit

Current liabilities:
     Accounts payable .................................................................       $    54,985   $    40,220
     Accrued liabilities ..............................................................            25,055        25,265
     Income taxes payable .............................................................             2,583         6,571
     Short term borrowings ............................................................            76,651        63,289
     Other current liabilities ........................................................            11,109        20,899
                                                                                              -----------   -----------
          Total current liabilities ...................................................           170,383       156,244
                                                                                              -----------   -----------
Other liabilities:
     Long term debt ...................................................................           172,884       168,035
     Excess of assets acquired over cost of acquisitions ..............................            12,562        11,618
     Deferred income taxes ............................................................            20,128        20,006
     Other liabilities ................................................................             4,975         4,362
                                                                                              -----------   -----------
          Total Liabilities ...........................................................           380,932       360,265

Commitments and contingencies:
Preferred stock with redemption rights, $0.01 par value
25,000 shares authorized, issued & outstanding of Series A; 3,000 shares
     authorized, issued & outstanding of Series B; 100 shares authorized of
     Series C-1; 52,180 authorized shares of Series D, 12,000 shares issued &
     outstanding; 7,500 shares authorized of Series D-1, 7,410 issued &
     outstanding; 30,000 authorized shares of Class C common stock,
     23,525/23,060 issued and outstanding and 2,500 Class C common stock
     warrants issued and outstanding as of December 31, 2000 & July 1, 2001 ...........           111,026       120,477
Stock rights ..........................................................................            23,300        23,300
Shareholders' equity (deficit):
     Class A common stock, $0.01 par value, 200,000 shares authorized, 47,300/
          45,440 shares issued & outstanding as of December 31, 2000 & July 1,
          2001 ........................................................................                 1             1
     Class B common stock, $0.01 par value, 15,000 shares authorized, nil shares
          issued & outstanding as of December 31, 2000 & July 1, 2001 .................                 -             -
     Additional paid-in capital .......................................................            25,599        23,739
     Class A common stock warrants ....................................................                 -             -
     Receivable from shareholders .....................................................            (3,212)       (1,087)
     Accumulated deficit ..............................................................          (166,635)     (193,768)
     Accumulated other comprehensive income (loss) ....................................           (15,185)      (17,755)
                                                                                              -----------   -----------
          Total shareholders' deficit .................................................          (159,432)     (188,870)
                                                                                              -----------   -----------
          Total liabilities, preferred stock with redemption rights and
              shareholders' deficit ...................................................       $   355,826   $   315,172
                                                                                              ===========   ===========
</TABLE>

    The accompanying notes are an integral part ofthese financial statements.

                                        2

<PAGE>

                           The Derby Cycle Corporation
            Unaudited Condensed Consolidated Statements of Operations
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                              Quarter ended              Six months ended
                                                                        -------------------------    -------------------------
                                                                           Jul 2,       Jul 1,          Jul 2,        Jul 1,
                                                                            2000         2001            2000          2001
                                                                        -----------   -----------    -----------   -----------
<S>                                                                     <C>           <C>            <C>           <C>
Net revenues .......................................................    $  166,789    $  125,956     $  311,368    $  260,808
Cost of goods sold .................................................      (124,416)      (93,546)      (233,503)     (195,361)
                                                                        -----------   -----------    -----------   -----------
         Gross profit ..............................................        42,373        32,410         77,865        65,447
Selling, general and administrative expenses .......................       (31,414)      (27,957)       (61,719)      (56,547)
      Restructuring charge .........................................          (112)         (259)          (112)       (1,916)
      Non-recurring items ..........................................           (61)       (2,057)           (61)       (3,089)
      Impairment of property, plant and equipment ..................             -             -              -          (621)
      Gain (loss) on dispositions of property, plant and
           equipment ...............................................           (11)          512           (569)          517
                                                                        -----------   -----------    -----------   -----------
         Operating income ..........................................        10,775         2,649         15,404         3,791
Other income (expense):
      Interest expense .............................................        (7,247)       (7,688)       (15,082)      (15,636)
      Interest income ..............................................           140           223            333           342
      Other income (expense), net ..................................         1,190           (69)         1,242           177
                                                                        -----------   -----------    -----------   -----------
      Income (loss) from continuing operations before
              income taxes .........................................         4,858        (4,885)         1,897       (11,326)
Provision for income taxes .........................................        (2,760)       (3,053)        (4,540)       (5,891)
                                                                        -----------   -----------    -----------   -----------
      Income (loss) from continuing operations .....................         2,098        (7,938)        (2,643)      (17,217)
                                                                        -----------   -----------    -----------   -----------
Discontinued operations:
     Income from operations of discontinued operations .............           280             -            442             -
     Loss on sale of discontinued operations .......................        (8,648)            -         (8,648)            -
                                                                        -----------   -----------    -----------   -----------
     Loss from discontinued operations .............................        (8,368)            -         (8,206)            -
                                                                        -----------   -----------    -----------   -----------
         Net loss ..................................................        (6,270)       (7,938)       (10,849)      (17,217)
Dividends accrued on preferred stock ...............................        (1,319)       (5,130)        (2,668)       (9,916)
                                                                        -----------   -----------    -----------   -----------
         Net loss applicable to common shareholders ................    $   (7,589)   $  (13,068)    $  (13,517)   $  (27,133)
                                                                        ===========   ===========    ===========   ===========
</TABLE>

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

                                       3

<PAGE>

                           The Derby Cycle Corporation
       Unaudited Condensed Consolidated Statement of Shareholders' Deficit
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                        Additional                 Receivable
                                                                           Common         paid-In      Stock          from
                                                                            stock         capital     warrants    shareholders
                                                                         ------------   ----------  ------------  ------------
<S>                                                                      <C>            <C>         <C>           <C>
January 1, 2001 .....................................................    $         1    $   25,599  $         -   $    (3,212)
Comprehensive loss-
     Net loss .......................................................              -             -            -             -
     Translation adjustments ........................................              -             -            -             -
                                                                         -----------    ----------  -----------   -----------
Total comprehensive loss ............................................              -             -            -             -
                                                                         -----------    ----------  -----------   -----------
     Repurchase of Class A common stock .............................              -        (1,860)           -             -
     Repayment of secured promissory notes receivable from
          shareholders ..............................................              -             -            -         2,125
     Accrued dividend on preferred stock ............................              -             -            -             -
                                                                         -----------    ----------  -----------   -----------
July 1, 2001 ........................................................    $         1    $   23,739  $         -   $    (1,087)
                                                                         ===========    ==========  ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                      Accumulated
                                                                                                         other
                                                                                      Accumulated    comprehensive
                                                                                        deficit         income           Total
                                                                                      -----------    -------------    ----------
<S>                                                                                   <C>            <C>              <C>
January 1, 2001 ....................................................................  $ (166,635)    $    (15,185)    $(159,432)
Comprehensive loss-
     Net loss ......................................................................     (17,217)               -       (17,217)
     Translation adjustments .......................................................           -           (2,570)       (2,570)
                                                                                      ----------     ------------     ---------
Total comprehensive loss ...........................................................     (17,217)          (2,570)      (19,787)
                                                                                      ----------     ------------     ---------
     Repurchase of Class A common stock ............................................           -                -        (1,860)
     Repayment of secured promissory notes receivable from
          shareholders .............................................................           -                -         2,125
     Accrued dividend on preferred stock ...........................................      (9,916)               -        (9,916)
                                                                                      ----------     ------------     ---------
July 1, 2001 .......................................................................  $ (193,768)    $    (17,755)    $(188,870)
                                                                                      ==========     ============     =========
</TABLE>

                                       4

<PAGE>

                           The Derby Cycle Corporation
            Unaudited Condensed Consolidated Statements of Cash Flows

                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                 Six months ended
                                                                                             -------------------------
                                                                                                Jul 2,        Jul 1,
                                                                                                 2000          2001
                                                                                             -----------   -----------
<S>                                                                                          <C>           <C>
Cash flows from operating activities:
     Net loss ........................................................................       $  (10,849)   $  (17,217)
     Adjustments to reconcile net loss to net cash used by operating activities-
         Loss on sale of discontinued operations .....................................            8,648             -
         Depreciation ................................................................            4,042         3,643
         Premium on repurchase of stock ..............................................                -            48
         Amortization of intangibles, goodwill and investment grants .................              126           118
         Issue of Class C warrants classified as interest cost .......................              400             -
         Amortization of deferred financing costs ....................................              948         1,597
         Change in fair value of other currency instruments ..........................             (143)         (198)
         Net periodic pension income .................................................           (2,655)       (3,223)
         Contributions made to pension plans .........................................              (43)          (43)
         Impairment of property, plant and equipment .................................                -           621
         Loss (gain) on disposition of property, plant and equipment .................              580          (517)
     Net changes in operating assets and liabilities, net of acquisitions-
         (Increase) decrease in receivables ..........................................          (20,830)       (2,384)
         (Increase) decrease in inventories ..........................................           (2,887)       10,562
         (Increase) decrease in other current assets .................................           (1,242)         (733)
         Increase (decrease) in accounts payable .....................................            4,763       (10,674)
         Increase (decrease) in accrued liabilities ..................................            9,899           571
         Increase (decrease) in income taxes payable .................................            2,232         5,532
         Increase (decrease) in other current liabilities ............................            2,341         9,913
         Increase (decrease) in deferred income taxes ................................              997           186
         Increase (decrease) in other liabilities ....................................           (1,874)         (203)
                                                                                            -----------   -----------
               Net cash used by operating activities..................................      $    (5,547)  $    (2,401)
                                                                                            -----------   -----------
Cash flows from investing activities:
         Purchases of property, plant and equipment ..................................           (4,001)       (2,093)
         Proceeds from property, plant and equipment dispositions ....................                -           820
         Purchase of minority interest ...............................................           (1,043)            -
                                                                                            -----------   -----------
               Net cash used in investing activities .................................      $    (5,044)  $    (1,273)
                                                                                            -----------   -----------
</TABLE>

                                       5

<PAGE>

                           The Derby Cycle Corporation
      Unaudited Condensed Consolidated Statements of Cash Flows (continued)
                             (Dollars in thousands)


<TABLE>
<CAPTION>
                                                                               Six months ended
                                                                             ---------------------
                                                                               Jul 2,       Jul 1,
                                                                                2000         2001
                                                                             --------    ---------
<S>                                                                          <C>         <C>
Cash flows from financing activities:
         Proceeds from stock issue.......................................    $    750    $      -
         Secured promissory notes receivable from shareholders...........        (637)          -
         Class A and Class C common stock repurchased from management....           -        (248)
         Short term borrowings, net......................................     (14,107)    (13,367)
         Deferred financing costs........................................           -        (100)
         Consideration payable to minority interest......................       1,043           -
                                                                             --------    --------
               Net cash provided by financing activities.................     (12,951)    (13,715)
                                                                             --------    --------
Effect of exchange rate changes on cash and cash equivalents.............         825       5,391
                                                                             --------    --------
Net increase (decrease) in cash and cash equivalents.....................     (22,717)    (11,998)
Cash and cash equivalents, beginning of period...........................      28,938      19,573
                                                                             --------    --------
Cash and cash equivalents, end of period.................................    $  6,221    $  7,575
                                                                             ========    ========

Supplemental cash flow information:
         Interest paid...................................................    $ 11,311    $  3,784
         Income taxes paid...............................................    $  3,209    $  2,593
         Income taxes received...........................................    $  1,719    $  2,420
                                                                             ========    ========
</TABLE>



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


                                        6

<PAGE>
                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

1.  Nature of the Business and Basis of Presentation:

The condensed consolidated financial statements for the quarters and six months
ended July 2, 2000 and July 1, 2001 together with the balance sheet as of July
1, 2001 included herein have not been audited by independent public accountants:
the Company's independent auditor was not engaged to and did not review the
condensed consolidated financial statements included herein, as required by Rule
10-01 of Regulation S-X promulgated under the Securities Exchange Act of 1934.
In the opinion of The Derby Cycle Corporation (the "Company"), all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the financial position at July 1, 2001 and the results of operations and the
cash flows for the periods presented herein have been made. The results of
operations for the quarter and six months ended July 1, 2001 are not indicative
of the operating results for the full fiscal year due to the seasonal nature of
the business and the disposal of Koninklijke Gazelle B.V. ("Gazelle").

The condensed consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Although the Company believes that the disclosures made are adequate
to make the information not misleading, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.

On August 20, 2001, the Company filed a voluntary petition for relief under
Chapter 11 (the "Chapter 11 Filing") of the United States Bankruptcy Code (the
"Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The Company is operating as debtor-in-possession under the
Code, which protects it from its creditors pending reorganization under the
jurisdiction of the Bankruptcy Court. As debtor-in-possession, the Company is
authorized to operate its business but may not engage in transactions outside
the ordinary course of business without approval of the Bankruptcy Court. A
statutory creditors committee has been appointed in the Chapter 11 case. As part
of the Chapter 11 reorganization process, the Company has attempted to notify
all known or potential creditors of the Chapter 11 Filing for the purpose of
identifying all prepetition claims against the Company. Only the Company has
filed for relief under Chapter 11 of the Code. None of the Company's
subsidiaries have filed, and they continue to operate in the ordinary course of
business.

Substantially all of the Company's liabilities as of August 20, 2001
("prepetition liabilities") are subject to settlement under a plan of
reorganization. Generally, legal actions to enforce or otherwise effect
repayment of all prepetition liabilities as well as all pending litigation
against the Company are stayed while the Company continues to operate its
business as debtor-in-possession. The Company can only pay prepetition
obligations with the approval of the Bankruptcy Court. The Bankruptcy Court has
approved payment of most prepetition liabilities to trade suppliers. The
Bankruptcy Court also has approved payment of prepetition employee wages and
benefits. Schedules will be filed by the Company with the Bankruptcy Court
setting forth its assets and liabilities as of the filing date as reflected in
the Company's accounting records. Differences between amounts reflected in such
schedules and claims filed by creditors will be investigated and either mutually
resolved or subsequently adjudicated before the Bankruptcy Court. The ultimate
amount and settlement terms for such liabilities are subject to a plan of
reorganization. There can be no assurance that any reorganization plan that is
effected will be successful.

Under the Code, the Company may elect to assume or reject real property leases,
employment contracts, personal property leases, service contracts and other
executory prepetition contracts, subject to the review of the Bankruptcy Court.
Parties affected by any such rejections may file prepetition claims with the
Bankruptcy Court in accordance with bankruptcy procedures. At this time, because
of material uncertainties, any prepetition liabilities which arose on or before
July 1, 2001 are generally carried at par value in the accompanying balance
sheet as at July 1, 2001. The Company cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting leases or from
filing of claims for any rejected contracts, and no provisions have been made
for the majority of these items. The net expense resulting from the Chapter 11
Filing by the Company will be segregated and reported as reorganization costs in
the condensed consolidated statements of operations for the quarter ending
September 30, 2001, and accordingly have not been included in these financial
statements.

                                       7

<PAGE>
                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

These condensed consolidated financial statements have been prepared using
accounting principles applicable to a going concern, which contemplate the
realization of assets and the payment of liabilities in the ordinary course of
business. The conditions leading to the Chapter 11 Filing raise substantial
doubt about the Company's ability to continue as a going concern. The condensed
consolidated financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern. Nevertheless, the Company considers it appropriate
to prepare the accompanying condensed consolidated financial statements on the
going concern basis of accounting.

On May 14, 1998, the Company issued $100,000,000 of 10% Senior Notes due 2008,
and DM110,000,000 of 9.38% Senior Notes due 2008 (collectively, the "Senior
Notes"). As co-issuers, Lyon Investments B.V. ("Lyon") and the Company
(collectively, the "Issuers") are jointly and severally liable with respect to
the Senior Notes, which mature in 2008. The Senior Notes are governed by
indentures (as amended, the "Senior Note Indentures").

On July 19, 2001, Derby Nederland B.V., an indirect subsidiary of the Company,
sold all of the issued and outstanding shares of its subsidiary, Gazelle, to
Gazelle Holding B.V., a company controlled by Gilde Investment Management B.V.
and located in The Netherlands (the "Gazelle Sale"). The purchase price was
(euro)142,500,000 ($125,400,000 at the July 19, 2001 exchange rate) in cash,
less (euro)11,970,000 ($10,534,000 at the July 19, 2001 exchange rate) of debt
and taxes outstanding of Gazelle as of, June 1, 2001, and subject to certain
adjustments based on Gazelle's balance sheet as of June 1, 2001.
(euro)10,000,000 ($8,800,000 at the July 19, 2001 exchange rate) of the purchase
price was placed in escrow, to be released to the Company upon the determination
of certain contingencies. The Company estimates that the book gain on disposal
of Gazelle will be approximately $66,000,000, net of tax, although only
$2,500,000 of the proceeds has been retained by the Issuers (see below for
utilization of proceeds). Gazelle constituted a substantial portion of the
consolidated assets and operating profits of the Company.

All results include Gazelle, as it is not classified as a separate segment which
would be shown as a discontinued operation within the meaning given in Opinion
No. 30 of the Accounting Principles Board.

On July 19, 2001, the Company and Lyon, pursuant to the terms of the Senior Note
Indentures, used portions of the proceeds of the Gazelle Sale to repay or
collateralize all the outstanding amounts under the Company's Revolving Credit
Facility, which was terminated as a result of such repayment. Additionally,
pursuant to the Senior Note Indentures, the Issuers have retained the equivalent
of $2,500,000 for working capital and other corporate purposes. Expenses of the
Gazelle Sale, amounting to the equivalent of $4,041,000, were paid. The
remaining net Gazelle Sale proceeds of $21,903,000 were delivered to the
trustees under the Senior Note Indentures on July 19, 2001. The trustees applied
$7,445,000 of the net Gazelle Sale proceeds to make the interest payments on the
Senior Notes that the Issuers had failed to make when due on May 15, 2001. Since
completion of the Gazelle Sale, $3,638,000 of the proceeds used to collateralize
outstanding amounts under the Company's Revolving Credit Facility have been
released and $4,071,000 due from Gazelle to Derby Nederland B.V. has been paid
to the trustees under the Senior Note Indentures.

The Company operates via a number of operating companies worldwide that
predominantly operate as stand-alone entities. Each of the companies
manufactures, assembles and/or distributes bicycles and parts and accessories.
These operating companies have significant operations in The Netherlands
("Gazelle"), see Gazelle Sale above, the U.K. ("Raleigh U.K."), Canada ("Raleigh
Canada"), Germany ("Derby Germany"), South Africa ("Probike") and the U.S.A.
(the "Derby U.S.A." division of the Company). The Company owns many of the most
recognized brands in the bicycle industry, including leading global brands such
as Raleigh, Diamond Back and Univega, and leading national brands such as
Gazelle in The Netherlands and Kalkhoff, Musing, Winora and Staiger in Germany.
The bicycle component and other engineering component manufacturing business,
trading as Sturmey Archer, was disposed of on June 30, 2000 (See note 9). The
operating results of Sturmey Archer for 2000 have been excluded from operating
income and included as income from discontinued operations.

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill will no longer be amortized on a straight
line basis over its estimated useful life, but will be tested for impairment

                                        8

<PAGE>

                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

on an annual basis and whenever indicators of impairment arise. Under SFAS No.
142, intangible assets with indefinite lives will not be amortized. Instead they
will be carried at the lower of cost or market value and tested for impairment
at least annually. All other recognized intangible assets will continue to be
amortized over their estimated useful lives.

SFAS No. 142 is effective for fiscal years beginning after December 15, 2001
although goodwill on business combinations consummated after July 1, 2001 will
not be amortized. On adoption the Company will record a cumulative effect
adjustment to eliminate the previously recognized liability relating to the
excess of assets acquired over cost of acquisitions (carrying value of
$11,618,000 as of July 1, 2001) as well as any required impairment of previously
recognized intangible assets. In addition, goodwill on prior business
combinations will cease to be amortized. Had the Company adopted SFAS No. 142 at
January 1, 2000 the Company would not have recorded amortization on the excess
of assets acquired over cost of acquisitions of $238,000 or $255,000 on the
amortization of intangibles for the year ended December 31, 2000. The Company
has not determined the impact that SFAS No. 142 will have on intangible assets
or whether a cumulative effect adjustment will be required upon adoption.

2.  Restructuring charge:

On February 13, 2001 the Company decided to cease manufacturing bicycles at its
U.S.A. plant in Kent, Washington in April 2001. In future all bicycles for sale
in the U.S.A. will be imported. Closure costs of $1,417,000 include $728,000 in
respect of the compulsory terminations of 108 employees, all of whom had left by
July 1, 2001. $236,000 of termination benefits remained to be paid at July 1,
2001.

On February 13, 2001 the Company decided to close its U.S. internet operation,
Bikeshop.com, with effect from March 2001. Closure costs of $499,000 include
$65,000 for the compulsory termination of 8 employees, all of whom had left by
July 1, 2001.

3.  Non-recurring items:

In December 2000 the Company resolved to close the corporate headquarters in
Stamford, Connecticut and transfer all control and administrative activities to
Nottingham, U.K 4 employees were terminated involuntarily in 2000 and $1,107,000
of accrued termination benefits was paid during the first six months. The
remaining 4 corporate headquarters employees based in Stamford, Connecticut have
been terminated since the year-end. Costs of $3,012,000 were incurred during the
first six months for financial advisory services and related professional fees
as the Company reviewed its business and explored alternatives available in
order to repay the outstanding amount under the Revolving Credit Facility.

4.  Impairment of long-lived assets:

The manufacturing equipment at the Company's U.S.A. plant in Kent, Washington
was written down by $621,000 in the first quarter, to its estimated recoverable
amount, in recognition of the cessation of manufacturing in April 2001 (see note
2).

5.  Derivative Financial Instruments:

Adoption of SFAS 133
The Company elected to adopt SFAS 133 as of October 1, 1998.

                                       9

<PAGE>

                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

For the six months ended July 2, 2000 and July 1, 2001 the Company had no
derivatives designated as hedges. Income and expense related to the fair value
accounting of the Company's derivative instruments are included in the statement
of operations as follows (in thousands):

<TABLE>
<CAPTION>
                                                                    Quarter ended             Six months ended
                                                              ------------------------   -------------------------
                                                              Jul 2, 2000  Jul 1, 2001   Jul 2, 2000   Jul 1, 2001
                                                                unaudited    unaudited     unaudited     unaudited
                                                              -----------  -----------   -----------   -----------
<S>                                                          <C>          <C>           <C>           <C>
Changes in fair value of unexpired forward foreign exchange
   contracts ..............................................   $       912  $       (99)  $      813    $       (21)
Changes in fair value of the unexpired currency option and
   unexpired interest rate cap ............................   $       912  $       (99)  $      813    $       (21)
Realized on maturity of part of currency option ...........           211          352          211            352
                                                              -----------  ------------  ------------  -----------
   Total other income (expense) ...........................   $     1,190  $       (69)  $    1,167    $       177
                                                              ===========  ============  ============  ===========
</TABLE>

The change in fair value of unexpired forward foreign exchange contracts
includes $75,000 relating to Sturmey Archer for the six months ended July 2,
2000, which is included in Loss from discontinued operations in the Statement of
Operations.

6.  Short Term Borrowings:

Short term borrowings consist of the following (in thousands):

                                                  Dec 31,        Jul 1,
                                                     2000          2001
                                                              unaudited
                                               ----------    ----------
Short term bank borrowings ..................  $   70,807    $   61,069
Bank overdraft ..............................       5,844         2,220
                                               ----------    ----------
    Total short term borrowings .............  $   76,651    $   63,289
                                               ==========    ==========

As at December 31, 2000 and July 1, 2001, the Company was in breach of the
financial covenants under the agreement which provided for the Revolving Credit
Facility to be made available to the Company's operating and finance
subsidiaries (as amended, the "Revolving Credit Agreement"). All amounts
outstanding under the Revolving Credit Facility were repaid in full on July 19,
2001 and the facility was terminated.

7.  Long Term Debt:

On May 14, 1998, the Company issued $100,000,000 of 10% Senior Notes due 2008,
and DM110,000,000 of 9.38% Senior Notes due 2008. The Issuers are jointly and
severally liable with respect to the Senior Notes, which mature in 2008. The
Senior Notes are governed by the Senior Note Indentures. Interest on the Senior
Notes is payable semi-annually on May 15 and November 15. The interest payment
of $7,445,000 due for payment on May 15, 2001 was not paid within the 30-day
grace period under the terms of the Senior Note Indentures, but was paid
together with defaulted interest on July 20, 2001. As the Company is no longer
in default under the Senior Note Indentures, the Senior Notes continue to be
classified as long term debt.

On February 4, 1999, the Company issued a $20,000,000 19% subordinated note to
Vencap Holdings (1992) Pte Limited, a Singapore corporation affiliated with GIC
Special Investments Pte Limited (the "Subordinated Note"). The Subordinated Note
is subordinated and junior in right of payment and enforcement to the prior
payment of the amounts due under the Company's Revolving Credit Facility and the
Senior Notes. Interest on the Subordinated Note is compounded daily, with an
annual effective yield of 20.9%. The Subordinated Note together with accrued
interest thereon matures on February 3, 2009. The Subordinated Note is issued
under an agreement which cross-defaults upon certain events of default under the
Revolving Credit Agreement or the Senior Note Indentures.

As of December 31, 2000 and July 1, 2001, long term debt consists of the
following (in thousands):

                                       10

<PAGE>

                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

                                                       Dec 31,        Jul 1,
                                                         2000           2001
                                                                   unaudited
                                                    ---------     ----------
10% $100,000,000 Senior Notes ....................  $ 100,000     $ 100,000
9.38% DM110,000,000 Senior Notes .................     52,884        48,035
19% $20,000,000 Subordinated Note ................     20,000        20,000
                                                    ---------     ----------
Total long-term debt .............................  $ 172,884     $ 168,035
                                                    =========     ==========

The Senior Note Indentures required the Issuers, after making the payments and
retaining the funds as described in Note 1 above, to use any remaining proceeds
of the Gazelle Sale (including certain amounts that were to be received
post-closing) to make offers to repurchase a portion of the Senior Notes. On
July 30, 2001 the Issuers made offers to purchase (the "Offers") for cash up to
$14,058,000 principal amount of the outstanding Senior Notes at par value plus
accrued interest thereon. On September 7, 2001 the Issuers amended the Offers to
increase the maximum principal amount of outstanding Senior Notes they are
offering to purchase to $21,404,000, as a result of the proceeds received from
the Gazelle Sale since completion. To the extent that the Issuers receive
further additional proceeds from the Gazelle Sale, they may amend the Offers to
further increase the principal amount of Senior Notes they will offer to
purchase, or make additional offers to purchase Senior Notes using such further
proceeds.

8. Commitments and Contingencies:

International operations; dependence on foreign suppliers and sales
A significant portion of the Company's operations are conducted in foreign
countries and are subject to the risks that are inherent in operating abroad,
including, without limitation, the risks associated with foreign governmental
regulation, foreign taxes, import duties and trade restrictions. The Company's
business is highly dependent upon products manufactured by foreign suppliers
located primarily in Taiwan, Japan and the People's Republic of China. A
substantial majority of the Company's multi-speed bicycles contain components
supplied on a purchase order basis by one Japanese manufacturer. The Company's
business is also subject to the risks generally associated with doing business
abroad, such as delays in shipment and foreign governmental regulations which
could have a material adverse effect on the results of operations and financial
condition of the Company. In addition, several of the Company's manufacturing
operations are unionized.

Product liability
Because of the nature of the Company's business, the Company at any particular
time is a defendant in a number of product liability lawsuits and expects that
this will continue to be the case in the future. The plaintiffs in these
lawsuits generally seek damages, sometimes in amounts that may be material, for
personal injuries allegedly sustained as a result of alleged defects in the
Company's products. Although the Company maintains product liability insurance,
due to the uncertainty as to the nature and extent of manufacturers' and
distributors' liability for personal injuries, there can be no assurance that
the product liability insurance maintained by the Company is or will be adequate
to cover product liability claims or that the applicable insurer will be solvent
at the time of any covered loss. In addition, due to deductibles, self-retention
levels and aggregate coverage amounts applicable under the Company's insurance
policies, the Company may bear responsibility for a significant portion, if not
all, of the defense costs (which include attorneys' fees and expenses incurred
in the defense of any claim), and the related payments to satisfy any judgments
associated with any claim asserted against the Company in excess of any
applicable coverage. The successful assertion or settlement of an uninsured
claim, the settlement of a significant number of insured claims, or a claim
exceeding the Company's insurance coverage could have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, there can be no assurance that insurance will remain available or, if
available, will not be prohibitively expensive. The self-insured retention under
the Company's insurance policies is currently $125,000 per claim for domestic
claims and $1,000 for foreign claims; however, prior to 1993, the self-insured
retention for domestic claims was $1,000,000 per claim. Not all claims arising
during the period in which the Company's self-insured retention for domestic
claims was $1,000,000 have been resolved and it is possible that additional
claims may be filed. The aggregate amount of liability under existing and
potential claims, so far as they are not covered by insurance, could exceed the
reserves of $184,000 established by the Company as at July 1, 2001 for product
liability claims.

                                       11

<PAGE>

                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

Common stock and preferred stock
During the six months ended July 1, 2001 the Company repurchased and cancelled
1,860 Class A and 465 Class C common shares issued under the management stock
plan. Of the total number of 2,325 shares repurchased, 200 shares were
repurchased for cash at a price of $248,000 and loans receivable from
shareholders of $2,125,000 were cancelled in consideration for the repurchase of
2,125 shares.

The terms of the Class C common stock include mandatory redemption and therefore
this stock is classified in the balance sheet with preferred stock, rather than
with shareholders' equity.

Following the repurchase of management held shares as listed above, the stock in
the Company (at issue price plus accrued preferred stock dividends) was held by
the following shareholders and their affiliates as of July 1, 2001 (in
thousands):

<TABLE>
<CAPTION>
                                                                                       Directors
                                                                                             and
                                      Thayer        Perseus      DICSA      Quantum   management       Total
                                    ----------    ----------  ----------  ----------  ----------    ----------
<S>                                <C>           <C>         <C>         <C>         <C>           <C>
Preferred stock
  Series A, 25,000 shares ......... $   37,500    $        -  $        -  $        -  $        -    $   37,500
  Accrued dividend $200 per
    share pa ......................     19,601             -           -           -           -        19,601
  Series B, 3,000 shares ..........          -             -       3,000           -           -         3,000
  Accrued dividend 9.75% pa .......          -             -       1,023           -           -         1,023
  Series D, 12,000 shares .........      2,250         2,250           -       7,500           -        12,000
  Accrued dividend 30.0% pa .......        416           416           -       1,383           -         2,215
   Series D-1, 7,410 shares .......      3,705         3,705           -           -           -         7,410
  Accrued dividend 19.0% pa .......        429           429           -           -           -           858
  Class C common, 23,060 shares ...     18,950         3,800           -           -         310        23,060
  Accrued dividend 20.0% pa .......     11,012         2,208           -           -         190        13,410
  Class C common, 2,500 warrants ..        200           200           -           -           -           400
                                    ----------    ----------  ----------  ----------  ----------    ----------
                                    $   94,063    $   13,008  $    4,023  $    8,883  $      500    $  120,477
                                    ==========    ==========  ==========  ==========  ==========    ==========
Stock rights
  Class A common, 8,300 shares ....          -             -       8,300           -           -         8,300
  Class B common, 15,000 shares....          -             -      15,000           -           -        15,000
                                    ----------    ----------  ----------  ----------  ----------    ----------
                                    $        -    $        -  $   23,300  $        -  $        -    $   23,300
                                    ==========    ==========  ==========  ==========  ==========    ==========
Paid-in capital
  Class A common, 23,820 shares ... $   12,500    $   10,000  $        -  $        -  $    1,240    $   23,740
                                    ==========    ==========  ==========  ==========  ==========    ==========
Stock warrants
  Class A common, 9,000 shares .... $        -    $        -  $        -  $        -  $        -    $        -
                                    ==========    ==========  ==========  ==========  ==========    ==========
Retained equity
  Class A common, 21,700 shares ... $        -    $        -  $   21,700  $        -  $        -    $   21,700
                                    ==========    ==========  ==========  ==========  ==========    ==========
</TABLE>




                                       12

<PAGE>

                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

9.     Discontinued Operations:

On June 6, 2000 the Company determined to dispose of the bicycle component and
other engineering component manufacturing segment of its business, Sturmey
Archer. The sale of the U.K. net trading assets and certain overseas
subsidiaries to Lenark Limited, on a going concern basis, was completed on June
30, 2000.

The Statement of Operations for the discontinued segment for the quarter and six
months ended July 2, 2000 was as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        Quarter ended        Six months ended
                                                                   ----------------------  ---------------------
                                                                      Jul 2,       Jul 1,     Jul 2,      Jul 1,
                                                                       2000         2001       2000        2001
                                                                   ---------    ---------  ---------   ---------
<S>                                                                <C>          <C>        <C>         <C>
Net external revenues .........................................
Cost of goods sold ............................................    $   4,066    $       -  $   8,616   $       -
                                                                      (3,338)           -     (7,153)          -
        Gross profit ..........................................    ---------    ---------  ---------   ---------
Selling, general, and administrative expenses .................          728            -      1,463           -
                                                                        (440)           -       (905)          -
        Operating income ......................................    ---------    ---------  ---------   ---------
        Interest income .......................................          288            -        558           -
        Other income (expense) net ............................          105            -        149           -
        Loss on dispositions of property, plant and equipment..            -            -        (75)          -
                                                                         (11)           -        (11)          -
          Income before income taxes ..........................    ---------    ---------  ---------   ---------
Provision for income taxes ....................................          382            -        621           -
                                                                        (102)           -       (179)          -
          Net income applicable to common shareholders ........    ---------    ---------  ---------   ---------
                                                                   $     280    $       -  $     442   $       -
                                                                   =========    =========  =========   =========
</TABLE>


There was no tax impact from the disposal of Sturmey Archer.

10.    Segmental Information:

Reportable business segments

The Company manages its business in six major operating units as shown in the
following tables. In addition "HQ, treasury, sourcing and elimination of group
transactions" comprises the Chinese and Taiwanese sourcing operations (Derby
Trading Co.), the recently closed internet operation (Bikeshop.com), the
headquarters, treasury operations and consolidation adjustments. Certain small
European distribution and non-operating companies are now included in the
operating units where management responsibility lies, and the comparative
figures for 2000 have been re-allocated accordingly. The reportable segments are
managed separately because each business has differing customer requirements,
either as a result of the regional environment of the country or differences in
products and services offered.

                                       13

<PAGE>

                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

A summary of net revenues and operating income categorized by business segment
is as follows (in thousands):

<TABLE>
<CAPTION>
                                                               Quarter ended           Six months ended
                                                          ----------------------    ----------------------
                                                            Jul 2,       Jul 1,       Jul 1,       Jul 1,
                                                             2000         2000         2000        2000
                                                          unaudited    unaudited    unaudited    unaudited
                                                          ---------    ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>          <C>
Net revenues:
     Raleigh U.K ......................................   $  17,684    $  15,067    $  31,128    $  27,193
     Gazelle ..........................................      42,571       41,459       80,898       86,106
     Derby Germany ....................................      61,057       36,881      109,928       81,888
     Derby U.S.A ......................................      32,211       23,275       58,092       42,796
     Raleigh Canada ...................................       8,087        5,563       20,627       14,763
     Probike ..........................................       3,638        2,732        7,554        5,855
     HQ, treasury, sourcing and elimination of group
          transactions ................................       1,541          979        3,141        2,207
                                                          ---------    ---------    ---------    ---------
          Total net revenues ..........................   $ 166,789    $ 125,956    $ 311,368    $ 260,808
                                                          =========    =========    =========    =========
Operating income:
     Raleigh U.K ......................................   $     651    $  (1,620)   $    (212)   $  (4,113)
     Gazelle ..........................................       7,350        6,752       12,726       13,888
     Derby Germany ....................................       4,614          253        8,015        4,098
     Derby U.S.A ......................................        (808)        (573)      (2,514)      (2,937)
     Raleigh Canada ...................................         920          139        2,201          746
     Probike ..........................................         125         (141)         457         (101)
     HQ, treasury, sourcing and elimination of group
          transactions ................................      (1,893)        (357)      (4,527)      (2,681)
                                                          ---------    ---------    ---------    ---------
          Underlying operating income .................      10,959        4,453       16,146        8,900
     Restructuring charge .............................        (112)        (259)        (112)      (1,916)
     Non-recurring items ..............................         (61)      (2,057)         (61)      (3,089)
     Impairment of property, plant and equipment ......          --           --           --         (621)
     Gain (loss) on dispositions of property, plant and
          equipment ...................................         (11)         512         (569)         517
                                                          ---------    ---------    ---------    ---------
          Total operating income ......................   $  10,775    $   2,649    $  15,404    $   3,791
                                                          =========    =========    =========    =========
</TABLE>

11.  Lyon Investments B.V.:

Lyon, a Dutch company, is a wholly owned subsidiary of the Company which is a
co-issuer of the Senior Notes. As co-issuers, Lyon and the Company are jointly
and severally liable with respect to the Senior Notes. Lyon received $20,250,000
plus DM110,000,000 of the issue proceeds of the Senior Notes, which are included
as liabilities in Lyon's balance sheet. The Company received $79,750,000 of the
issue proceeds, which are shown as liabilities in the Company's unconsolidated
balance sheet. As co-issuer, Lyon has a contingent liability for the $79,750,000
of proceeds due by the Company should the Company default in servicing those
Senior Notes.

12.  Subsequent events:

On July 19, 2001, Derby Nederland B.V., an indirect subsidiary of the Company,
sold all of the issued and outstanding shares of its subsidiary Gazelle, to
Gazelle Holding B.V., a company controlled by Gilde Investment Management B.V.
and located in The Netherlands. The purchase price was (euro)142,500,000
($125,400,000 at the July 19, 2001 exchange rate) in cash, less (euro)11,970,000
($10,534,000 at the July 19, 2001 exchange rate) of debt and taxes outstanding
of Gazelle as of, June 1, 2001, and subject to certain adjustments based on
Gazelle's balance sheet as of June 1, 2001. (euro)10,000,000 ($8,800,000 at the
July 19, 2001 exchange rate) of the purchase price was placed in escrow, to be
released to the Company upon

                                       14

<PAGE>

                          The Derby Cycle Corporation

              Notes to Condensed Consolidated Financial Statements

the determination of certain contingencies. The Company estimates that the book
gain on disposal of Gazelle will be approximately $66,000,000, net of tax,
although only $2,500,000 of the proceeds has been retained by the Issuers (see
below for utilization of proceeds). Gazelle constituted a substantial portion of
the consolidated assets and operating profits of the Company.

On July 19, 2001, the Company and Lyon , pursuant to the terms of the Senior
Note Indentures, used portions of the proceeds of the Gazelle Sale to repay or
collateralize all the outstanding amounts under the Company's Revolving Credit
Facility, which was terminated as a result of such repayment. Additionally,
pursuant to the Senior Note Indentures, the Issuers have retained the equivalent
of $2,500,000 for working capital and other corporate purposes. Expenses of the
Gazelle Sale, amounting to the equivalent of $4,041,000, were paid. The
remaining net Gazelle Sale proceeds of $21,903,000 were delivered to the
trustees under the Senior Note Indentures on July 19, 2001. The trustees applied
$7,445,000 of the net Gazelle Sale proceeds to make the interest payments on the
Senior Notes that the Issuers had failed to make when due on May 15, 2001. Since
completion of the Gazelle Sale, $3,638,000 of the proceeds used to collateralize
outstanding amounts under the Company's Revolving Credit Facility have been
released and $4,071,000 due from Gazelle to Derby Nederland B.V. has been paid
to the trustees under the Senior Note Indentures.

Indentures required the Issuers, after making the payments and retaining the
funds as described above, to use any remaining proceeds of the Gazelle Sale
(including certain amounts that were to be received post-closing) to make offers
to repurchase a portion of the Senior Notes. On July 30, 2001 the Issuers made
offers to purchase for cash up to $14,058,000 principal amount of the
outstanding Senior Notes at par value plus accrued interest thereon. On
September 7, 2001, the Issuers amended the Offers to increase the maximum
principal amount of outstanding Senior Notes they are offering to purchase to
$21,404,000, as a result of the proceeds received from the Gazelle Sale since
completion. The deadline for tendering Senior Notes in the Offers has also been
extended to September 24, 2001, and the scheduled payment date is now September
27, 2001. To the extent that the Issuers receive more of the proceeds from the
Gazelle Sale, they may amend the Offers to further increase the principal amount
of Senior Notes they will offer to purchase, or make additional offers to
purchase Senior Notes using such further proceeds.

On August 20, 2001 the Company filed a motion in the Bankruptcy Court seeking
authorization to consummate an asset purchase agreement between the Company and
Cycle Bid Co., a corporation controlled by Alan Finden-Crofts and other
executives of the Company. The asset purchase agreement provides for the sale of
substantially all of the operations and assets of the Company (the "MBO") for
approximately $43,000,000. Under the terms of the MBO, certain liabilities of
the Company including trade accounts payable aggregating approximately
$23,000,000 will be assumed by Cycle Bid Co., and approximately $20,000,000 will
be paid in cash. The obligations assumed exclude the Senior Notes, the
Subordinated Note and certain other excluded liabilities.

                                       15

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

Overview

On August 20, 2001, The Derby Cycle Corporation (the "Company") filed a
voluntary petition for relief under Chapter 11 (the "Chapter 11 Filing") of the
United States Bankruptcy Code (the "Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The Company is operating
as debtor-in-possession under the Code, which protects it from its creditors
pending reorganization under the jurisdiction of the Bankruptcy Court. As
debtor-in-possession, the Company is authorized to operate its business but may
not engage in transactions outside the ordinary course of business without
approval of the Bankruptcy Court. A statutory creditors committee may be
appointed in the Chapter 11 case, but at this point such a committee has not
been formed. As part of the Chapter 11 reorganization process, the Company has
attempted to notify all known or potential creditors of the Chapter 11 Filing
for the purpose of identifying all prepetition claims against the Company. Only
the Company has filed for relief under Chapter 11 of the Code. None of the
Company's subsidiaries have filed, and they continue to operate in the ordinary
course of business.

Substantially all of the Company's liabilities as of August 20, 2001
("prepetition liabilities") are subject to settlement under a plan of
reorganization. Generally, legal actions to enforce or otherwise effect
repayment of all prepetition liabilities as well as all pending litigation
against the Company are stayed while the Company continues to operate its
business as debtor-in-possession. The Company can only pay prepetition
obligations with the approval of the Bankruptcy Court. The Bankruptcy Court has
approved payment of most prepetition liabilities to trade suppliers. The
Bankruptcy Court also has approved payment of prepetition employee wages and
benefits. Schedules will be filed by the Company with the Bankruptcy Court
setting forth its assets and liabilities as of the filing date as reflected in
the Company's accounting records. Differences between amounts reflected in such
schedules and claims filed by creditors will be investigated and either mutually
resolved or subsequently adjudicated before the Bankruptcy Court. The ultimate
amount and settlement terms for such liabilities are subject to a plan of
reorganization. There can be no assurance that any reorganization plan that is
effected will be successful.

Under the Code, the Company may elect to assume or reject real property leases,
employment contracts, personal property leases, service contracts and other
executory prepetition contracts, subject to the review of the Bankruptcy Court.
Parties affected by any such rejections may file prepetition claims with the
Bankruptcy Court in accordance with bankruptcy procedures. At this time, because
of material uncertainties, any prepetition liabilities which arose on or before
July 1, 2001 are generally carried at par value in the accompanying balance
sheet as at July 1, 2001. The Company cannot presently determine or reasonably
estimate the ultimate liability that may result from rejecting leases or from
filing of claims for any rejected contracts, and no provisions have been made
for the majority of these items. The net expense resulting from the Chapter 11
Filing by the Company will be segregated and reported as reorganization costs in
the condensed consolidated statements of operations for the quarter ending
September 30, 2001, and accordingly have not been included in the accompanying
financial statements.

The accompanying condensed consolidated financial statements have been prepared
using accounting principles applicable to a going concern, which contemplate the
realization of assets and the payment of liabilities in the ordinary course of
business. As a result of the Chapter 11 Filing, such realization of assets and
liquidation of liabilities is subject to uncertainty. The Company's independent
auditor was not engaged to and did not review the condensed consolidated
financial statements included herein, as required by Rule 10-01 of Regulation
S-X promulgated under the Securities Exchange Act of 1934.

The Company is a designer, manufacturer and marketer of bicycles. Competing
primarily in the medium- to premium-priced market, the Company owns or licenses
many of the most recognized brand names in the bicycle industry, including
global brands such as Raleigh, Diamond Back and Univega, and regional brands
such as Kalkhoff, Musing, Winora and Staiger in Germany.

The Company designs, manufactures and markets a wide range of bicycles in all
major product categories: (i) all-terrain or mountain bicycles ("M.T.B.s"), (ii)
city bicycles, also called touring or upright bicycles, (iii) hybrid bicycles,
also called comfort or cross bicycles, (iv) juvenile bicycles, including bicycle
motocross ("B.M.X.") bicycles, and (v) race/road bicycles. The Company
distributes branded bicycles through local market networks of independent
bicycle dealers ("I.B.D.s") as well as through national retailers, and
distributes private label bicycles through mass merchandisers and specialty
stores.

                                       16

<PAGE>

The Company's operations are concentrated in the U.K. ("Raleigh U.K."), The
Netherlands ("Gazelle"), Germany ("Derby Germany"), the U.S.A. (the "Derby
U.S.A." division of the Company), Canada ("Raleigh Canada"), and South Africa
("Probike"), with manufacturing operations in all countries other than the
U.S.A. and South Africa, each led by local management. The Company maintains
marketing or purchasing operations in five additional countries.

Each local operation manages national distribution channels, dealer service and
working capital and benefits from shared product design and manufacturing
technologies as well as from economies of scale generated by the Company's
aggregate purchasing power.

The poor financial results of the Company in 2000 caused a breach of the
financial covenants under the Revolving Credit Facility and the Company applied
part of the proceeds of the Gazelle Sale (see Note 1) on July 19, 2001 to repay
this facility in full and thereby terminate it (see "Liquidity and Capital
Resources - Revolving Credit Facility").

The Company was unable to pay the May 15, 2001 interest payment due on the
Company's $100,000,000 of 10% Senior Notes due 2008, and DM110,000,000 of 9.38%
Senior Notes due 2008 (collectively, the "Senior Notes") until July 19, 2001,
which was after the end of the 30-day grace period for payment. As a result, the
Company was in default of the indentures which govern the Senior Notes (as
amended, the "Senior Note Indentures"), which default was cured by a subsequent
interest payment on July 19, 2001 (see Disposition of Assets, below).

During the first six months of 2001 the Company took certain steps to improve
future prospects. Manufacturing of bicycles at Derby U.S.A. ceased in the first
week of April, and products will now be imported. The Stamford, Connecticut
office and Bikeshop.com have been closed down, and both the employees and
certain consultancy arrangements were terminated. Experienced senior management
were appointed at corporate level and in the U.S.A. to (i) stabilize the
business, (ii) cut back on unnecessary corporate overhead, and (iii) manage cash
flow through the Company's February/March/April 2001 peak season. On June 30,
2000 the Company sold the business and assets of Sturmey Archer which was
engaged in the manufacture of bicycle components and other engineering
components.

On July 19, 2001 the Company sold its investment in Koninklijke Gazelle B.V.
("Gazelle") which operates the Gazelle bicycle business in The Netherlands.

In 2000, 56% of the Company's net revenues were earned in currencies which are
denominations of the Euro, 21% were denominated in U.S. Dollars, 11% were
denominated in Pounds Sterling and 12% were denominated in other currencies. The
Company reduces its currency exposure by maintaining operations in the major
markets in which it sells its products. However, as a result of the Company's
curtailment of its hedging program both in 2000 and 2001, the Company faced, and
will continue to face, significant exposure to foreign exchange risk (please see
"Quantitative and Qualitative Disclosures about Market Risk" for further
details).

Results of Operations

The Company manages its business in six major operating units as shown in the
following tables. In addition "HQ, treasury, sourcing and elimination of group
transactions" comprises the Chinese and Taiwanese sourcing operations (Derby
Trading Co.), the recently closed internet operation (Bikeshop.com), the
headquarters, treasury operations and consolidation adjustments. Certain small
European distribution and non-operating companies are now included in the
operating units where management responsibility lies, and the comparative
figures for 2000 have been re-allocated accordingly. All comparisons in the
following discussion and analysis are against the quarter and six months ended
July 2, 2000, unless otherwise stated. The results for 2000 of Sturmey Archer,
which was sold on June 30, 2000, have been excluded from the calculation of
operating income, but included in the balance sheets, statements of cash flows
and as income from discontinued operations in the statement of operations. All
results include Gazelle, although it was sold on July 19, 2001, as it is not
classified as a separate segment which would be shown as a discontinued
operation within the meaning given in Opinion No. 30 of the Accounting
Principles Board.

                                       17

<PAGE>

Units sold:                                      Quarter ended  Six months ended
                                                --------------- ----------------
Thousands of bicycles                            Jul 2,  Jul 1,   Jul 2,  Jul 1,
                                                  2000    2001     2000    2001
                                                ------- ------- -------  -------
Raleigh U.K. ................................      99      80      166     151
Gazelle .....................................     126     115      238     239
Derby Germany ...............................     259     129      477     316
Derby U.S.A. ................................     128      95      225     167
Raleigh Canada ..............................      93      70      237     182
Probike .....................................      41      29       85      60
HQ, treasury, sourcing and elimination of
     group transactions .....................      (4)      5      (20)    (13)
                                                -----   -----    -----   -----
     Total units sold .......................     742     523    1,408   1,102
                                                =====   =====    =====   =====

Units sold. Management believes that particularly bad weather in the first
quarter of 2001, weakening economies in several of its markets and the effect of
this on consumer confidence led to lower unit sales. Units sold decreased by 219
thousand units (30%) and 306 thousand units (22%) for the quarter and six months
ended July 1, 2001, as compared with the quarter and six months ended July 2,
2000.

Sales in the U.K. in the first quarter of 2001 included 25 thousand units of
obsolete models with low promotional prices to generate cash, compared with 12
thousand such units sold in the first quarter of 2000.

Derby Germany reduced its participation in the lowest margin segments of the
private label and contract manufacturing areas of the market, in order to
increase overall margin to a more acceptable level. In addition, the market fell
by 22% in the second quarter compared with year ago and a dominant German retail
buying group has switched more of its products from domestic German sources to
foreign sources, which adversely affected sales to I.B.D.s by Derby Germany, as
well as other German manufacturers.

In the U.S.A., sales fell by 25% for both the quarter and the six month period,
as the market fell, with the key segments for Raleigh (M.T.B.) and Diamond Back
(B.M.X.) down 19% and 9% respectively, for the quarter, and down 22% and 11%
respectively, for the six months ended July 1, 2001. In addition, competitors
carrying over high inventory levels from December 2000 launched aggressive close
out programs during the season, resulting in further volume loss at Derby
U.S.A..

Business from mass merchandisers for private label products in Canada gained in
2000 was lost in 2001 to lower priced offers from competitors, both local
manufacturers and importers, taking 18 thousand units out of the sales program
for the first quarter. In addition, the market is exceptionally soft in both
I.B.D. and mass merchandiser channels, with promotional pricing needed to
stimulate sales.

The weakening of the South African consumer durable market seen in the last
quarter of 2000, continued in 2001 as limited discretionary spending has been
diverted into other areas. Management believes that this has in part caused a
reduction in sales from 85 thousand units in the first half of 2000, to 60
thousand units in the six months ended July 1, 2001, which is very close to 1999
levels.

Net revenues:                                    Quarter ended  Six months ended
                                                --------------- ----------------
                                                 Jul 2,  Jul 1,   Jul 2,  Jul 1,
$ millions                                        2000    2001     2000    2001
                                                ------- ------- -------- -------
Raleigh U.K. ................................   $  17.7 $  15.1 $  31.1  $  27.2
Gazelle .....................................      42.6    41.5    80.9     86.1
Derby Germany ...............................      61.1    36.9   109.9     81.9
Derby U.S.A. ................................      32.2    23.3    58.1     42.8
Raleigh Canada ..............................       8.1     5.6    20.6     14.8
Probike                                             3.6     2.7     7.6      5.9
HQ, treasury, sourcing and elimination of
     group transactions .....................       1.5     0.9     3.2      2.1
                                                ------- ------- -------  -------
     Total net revenues .....................   $ 166.8 $ 126.0 $ 311.4  $ 260.8
                                                ======= ======= =======  =======

                                       18

<PAGE>

Net revenues for the quarter and six months ended July 1, 2001 compared with
year ago at comparable foreign exchange rates decreased by $33.4 million (20%)
and $35.0 million (11%). The relative weakness of the Euro in 2001, together
with, to a lesser extent, Pound Sterling, the Canadian Dollar and the South
African Rand, reduced the consolidated net revenues by $7.4 million and $15.6
million for the quarter and six months ended July 1, 2001 upon translation of
net revenues into U.S. Dollars at the actual rates applicable to each year.
While the lost bicycle sales volume reduced sales revenues by $49.0 million and
$60.4 million for the quarter and six months ended July 1, 2001, this was partly
recovered through higher sales prices, which contributed $17.5 million and $28.5
million to net revenues for the quarter and six month periods. The higher price
was driven by the success of upscale models at Gazelle, price increases and a
withdrawal from the lower priced segments of the market in Germany, the partial
recovery of adverse exchange rates in South Africa and by an increase in models
sold with suspension.

Sales of parts and accessories remained stable in all markets apart from the
U.S.A Parts and accessories revenues fell by $1.2 million and $2.4 million for
the quarter and six month periods at Derby U.S.A. due to weak market conditions.
Sales in the Diamond Back fitness business of Derby U.S.A. fell back in the
second quarter and ended $0.1 million below year ago for the six month period.

Net revenues for the quarter and six months ended July 2, 2000 have been
adjusted to include $1.4 million and $2.4 million of revenue from charging for
shipping costs previously treated as an expense recovery.

Gross profit. Gross profit for the quarter and six months ended July 1, 2001
decreased by $10.0 million and $12.4 million in-line with the decrease in
revenues. Gross margins for the Company saw a small improvement on year ago,
although this was a combination of stronger figures in The Netherlands and
Germany as the impact of the weak Euro on component costs was recovered through
price rises, and weaker figures in U.K., Canada and South Africa due to weak
markets, intense price competition and, in the U.K., the disposal of excess
inventories at substantially below cost.

Selling, general and administrative expenses:    Quarter ended  Six months ended
                                                 -------------- ----------------
                                                 Jul 2,  Jul 1,  Jul 2,  Jul 1,
$ millions                                        2000    2001    2000    2001
                                                 ------  ------  ------  ------
Operating companies ............................  $27.8  $26.7   $54.9   $52.8
Bikeshop.com ...................................    0.6      -     1.1     0.3
Headquarters ...................................    1.9    0.4     3.9     1.4
Corporate expenses .............................    0.4    1.3     0.8     2.5
Consulting fees ................................    0.7   (0.4)    1.0    (0.4)
                                                  -----  -----   -----   -----
     Total selling, general and administrative
          expenses as reported .................  $31.4  $28.0   $61.7   $56.6
                                                  =====  =====   =====   =====

Selling, general and administrative expenses. Selling, general and
administrative expenses of the operating companies were reduced by $1.1 million
and $2.1 million for the quarter and six months ended July 1, 2001 upon
translation into U.S. Dollars at the actual rates applicable for each year, due
to the relative weakness of European currencies in 2001. In the first quarter,
expenses at Raleigh U.K. increased by $0.4 million as they included (i) the
higher expenses of the new leased stand alone warehouse for the parts and
accessories business, which the Company moved to in May 2000 from its former
freehold premises adjoining the U.K. manufacturing site and (ii) higher sales
promotional expenses. Bikeshop.com's expenses fell by $0.2 million in the first
quarter following its closure then, with no expenses in the second quarter
compared with $0.6 million in the second quarter of 2000. Headquarters' expenses
for the quarter and six month periods fell by $0.9 million and $1.5 million
following the closure of the Stamford office during the first quarter, and were
further reduced by $0.5 million and $0.9 million of pension income arising on
the Sturmey Archer pension plans for those periods. The Company remains the
principal employer under these plans, which were not transferred upon the
disposal of the Sturmey Archer business in June 2000. The pension income was
included in the results of Sturmey Archer in the 2000 financial statements,
which is included in the results from discontinued operations in the comparative
figures in the attached statement of operations. Corporate expenses for the
quarter and six month periods rose by $1.0 million and $1.8 million, in the main
due to legal and accounting monitoring costs reimbursed to the lenders under the
Revolving Credit Facility and related expenses. The consulting arrangements have
been terminated, and no fees were incurred in 2001. Discounts were obtained on
the payment of fees incurred in 2000, resulting in credits in the second quarter
of $0.1 million for headquarters' expenses, $0.1 million for corporate expenses
and $0.4 million for consulting expenses.

                                       19

<PAGE>

<TABLE>
<CAPTION>
Operating income:                                                      Quarter ended             Six months ended
                                                                 --------------------------  --------------------------
$ millions                                                             Jul 2,        Jul 1,       Jul 2,       Jul 1,
                                                                        2000           2001         2000         2001
                                                                 ------------  ------------  ------------  ------------
<S>                                                              <C>           <C>           <C>           <C>
Raleigh U.K. ..................................................  $       0.7   $      (1.6)  $     (0.2)   $     (4.1)
Gazelle .......................................................          7.3           6.8         12.8          13.9
Derby Germany .................................................          4.6           0.2          8.0           4.1
Derby U.S.A. ..................................................         (0.8)         (0.6)        (2.5)         (2.9)
Raleigh Canada ................................................          0.9           0.1          2.2           0.7
Probike .......................................................          0.1          (0.1)         0.5          (0.1)
HQ, treasury, sourcing and elimination of group transactions ..         (1.8)         (0.4)        (4.6)         (2.7)
                                                                 ------------  ------------  ------------  ------------
     Underlying operating income ..............................         11.0           4.4         16.2           8.9
Restructuring charge ..........................................         (0.1)         (0.3)        (0.1)         (2.0)
Non-recurring items ...........................................         (0.1)         (2.1)        (0.1)         (3.1)
Impairment of property, plant and equipment ...................          -             -            -            (0.6)
Loss on dispositions of property, plant and equipment .........          -             0.6         (0.6)          0.6
                                                                 ------------  ------------  ------------  ------------
     Total operating income as reported .......................  $      10.8   $       2.6   $     15.4    $      3.8
                                                                 ===========   ============  ============  ============
</TABLE>

Operating income. The underlying operating income of $4.4 million and $8.9
million for the quarter and six months ended July 1, 2001, compares with
operating income of $11.0 million and $16.2 million for the quarter and six
months ended July 2, 2000. The decrease in operating income of $6.6 million and
$7.3 million for the quarter and six month periods was the result of lower gross
profit due to lower revenues, without a corresponding reduction in selling,
general and administrative expense at the operating companies and high bank
monitoring expenses.

Restructuring charge, non-recurring items and impairment of property, plant and
equipment. The Company has now closed down its domestic bicycle manufacturing
plant in Kent, Washington at a cost of $2.6 million expensed in the first
quarter, of which $0.5 million was in respect of remaining component inventory
that has been expensed in cost of goods sold, $1.5 million was included in the
restructuring charge and $0.6 million was expensed as impairment of recoverable
value of property, plant and equipment. The Company closed its internet
operation, Bikeshop.com, in February 2001, at a cost of $1.5 million, of which
$1.0 million was shown as the impairment of the recoverable value of plant and
equipment (including software) in the statement of operations for the year ended
December 31, 2000 and $0.2 million and $0.5 million were included in the
restructuring charge for the quarter and six month periods. Following the
closure of the Stamford headquarters, all the remaining employees were
terminated, resulting in $0.1 million in termination benefits included in
non-recurring items for the first quarter. $2.1 million and $3.0 million of fees
for financial advisory services and related professional advice paid by the
Company for the review of its business and exploration of alternatives available
in order to repay the Revolving Credit Facility have also been included in
non-recurring items for the quarter and six months ended July 1, 2001. The
expenses increased from the first to the second quarter, as the more recent
figures include the expenses of legal counsel and financial advisors to the ad
hoc committee of holders of the Senior Notes.


                                       20

<PAGE>

<TABLE>
<CAPTION>
Interest expense:                                                       Quarter ended         Six months ended
                                                                    ---------------------  ---------------------
$ millions                                                            Jul 2,      Jul 1,      Jul 2,      Jul 1,
                                                                        2000        2000        2000        2000
                                                                    ---------  ----------  ---------  ----------
<S>                                                                 <C>        <C>         <C>        <C>
Senior Notes .....................................................  $    3.8   $     3.7   $    7.6   $     7.4
Subordinated Note ................................................       1.2         1.5        2.5         2.9
Revolving Credit Facility ........................................       1.5         1.4        3.1         3.1
Bridge loan ......................................................       -           -          0.4         -
Other interest ...................................................       0.2         0.3        0.6         0.6
Amortization of deferred financing costs .........................       0.5         0.8        0.9         1.6
                                                                    ---------  ----------  ---------  ----------
     Total interest expense ......................................  $    7.2         7.7   $   15.1   $    15.6
                                                                    =========  ==========  =========  ==========
</TABLE>

Interest expense. Interest expense increased by $0.5 million for both the
quarter and six months ended July 1, 2001, due to a $0.3 million and $0.7
million increase in amortization of the deferred financing costs on the
Revolving Credit Facility for those periods as a consequence of the shorter term
of the facility and the effect of compounding the interest on the $20.0 million
19% subordinated note (the "Subordinated Note"), which added $0.3 million and
$0.4 million to interest expense in the quarter and six months ended July 1,
2001. This was offset by the elimination of $0.4 million of interest on a bridge
loan in the first quarter of 2000, which was converted into series D-1 preferred
stock in November 2000. The interest on the Bridge Loan was paid by way of issue
of 2,500 Class C common stock warrants. These warrants were initially valued at
$2.9 million in the financial statements for July 2, 2000, but this was
re-evaluated in the 2000 annual financial statements as $0.4 million, which has
been shown as the comparative figure in the attached financial statements.

<TABLE>
<CAPTION>
Provision for income taxes:                                            Quarter ended         Six months ended
                                                                    ---------------------  ---------------------
$ millions                                                            Jul 2,      Jul 1,      Jul 2,      Jul 1,
                                                                        2001        2001        2000        2000
                                                                    ---------  ----------  ---------  ----------
<S>                                                                 <C>        <C>         <C>        <C>
Current taxes ....................................................  $    2.3   $     2.4   $    3.5   $     4.6
Deferred taxes ...................................................       0.5         0.7        1.0         1.3
                                                                    ---------  ----------  ---------  ----------
     Total provision for income taxes ............................  $    2.8   $     3.1   $    4.5   $     5.9
                                                                    =========  ==========  =========  ==========
</TABLE>

The tax charge increased due to the higher income earned in The Netherlands.
Taxable losses continue to be made in certain jurisdictions, including Germany,
the U.S.A. and the U.K., which cannot be offset against the taxable income in
other jurisdictions, including The Netherlands.

Net loss. The net loss increased by $1.7 million and $6.4 million in the quarter
and six months ended July 1 2001. The higher loss was, in the main, the result
of the lower underlying operating income, cost of closure of the U.S.
manufacturing plant, financial and professional advice and higher provision for
income taxes.

Dividends accrued on preferred stock. Dividends accrued on the preferred stock
in the quarter and six months ended July 1 2001 increased by $3.8 million and
$7.2 million as additional preferred stock was issued in November 2000.


                                       21

<PAGE>

<TABLE>
<CAPTION>
EBITDA:                                                                      Quarter ended         Six months ended
                                                                         ---------------------   --------------------
$ millions                                                                 Jul 2,      Jul 1,      Jul 2,      Jul 1,
                                                                             2000        2000        2000        2000
                                                                         --------    --------    --------     -------
<S>                                                                      <C>         <C>         <C>          <C>
Raleigh U.K. ......................................................      $    0.6    $   (1.4)   $   (0.2)    $  (3.8)
Gazelle ...........................................................           7.7         6.8        13.2        14.1
Derby Germany .....................................................           5.7         1.3         9.9         5.9
Derby U.S.A. ......................................................          (0.6)       (0.3)       (2.1)       (2.5)
Raleigh Canada ....................................................           1.0         0.2         2.5         1.0
Probike ...........................................................           0.2        (0.1)        0.5        (0.1)
HQ, treasury, sourcing and elimination of group transactions ......          (1.9)       (0.8)       (4.1)       (2.5)
                                                                         --------    --------    --------     -------
     Total EBITDA as reported .....................................      $   12.7    $    5.7    $   19.7     $  12.1
                                                                         ========    ========    ========     =======
</TABLE>


EBITDA. EBITDA for the quarter and six months ended July 1 2001 decreased by
$7.0 million and $7.6 million below year ago due to the lower underlying
operating income. EBITDA represents earnings before interest, taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted supplemental indicator of an entity's ability to incur and service
debt. However, EBITDA should not be considered by an investor as an alternative
to net income or operating income as an indicator of operating performance, or
as an alternative to cash flows as a measure of liquidity.

EBITDA is calculated as follows (excluding discontinued operations):

<TABLE>
<CAPTION>
                                                                               Quarter ended             Six months ended
                                                                         ------------------------    ------------------------
EBITDA:                                                                      Jul 2,        Jul 1,        Jul 2,        Jul 1,
$ millions                                                                     2000          2000          2000          2000
                                                                         ----------     ---------    ----------   -----------
<S>                                                                      <C>            <C>          <C>          <C>
Underlying operating income ......................................       $     11.0     $     4.5    $     16.2   $       8.9
Foreign currency contracts allocated to other income .............              0.3           -             0.5           0.5
Depreciation .....................................................              1.9           1.7           4.0           3.6
Amortization
    Intangibles ..................................................              0.1           0.2           0.3           0.3
    Investment grants ............................................             (0.1)         (0.2)         (0.2)         (0.2)
    Positive goodwill ............................................             (0.1)         (0.1)         (0.2)         (0.2)
    Negative goodwill ............................................              0.1           0.1           0.2           0.2
    Pension transition asset .....................................             (0.5)         (0.5)         (1.1)         (1.0)
                                                                         ----------     ---------    ----------   -----------
                                                                         $     12.7     $     5.7    $     19.7   $      12.1
         Total EBITDA ............................................       ==========     =========    ==========   ===========
</TABLE>

Liquidity and Capital Resources

Demand for bicycles in the Company's principal markets is seasonal,
characterized in most cases by a majority of consumer sales in the spring and
summer months. The exceptions to this are, firstly, in the U.K., South Africa
and Ireland, where consumer sales of bicycles increase in the months preceding
Christmas: accordingly, I.B.D.s peak purchasing months in those countries are
October and November when they build inventory in anticipation of Christmas
sales of juvenile bicycles, and secondly in the U.S.A., where I.B.D.s replenish
their inventories in the fall with the next season's model range. Excluding this
holiday seasonality, the Company's working capital requirements are greatest
during February, March and April (the Company's "Peak Season"), as receivable
levels increase. The Company offers extended credit terms on sales during the
months prior to the Peak Season, although the Company encourages early payments
through trade discounts.

Finished goods inventory remains relatively constant throughout the fiscal year
and the level of raw materials increases and decreases normally only to
accommodate production needs. Work in process represents, on average, nine days'
production. Inventory levels reach a minimum at the end of the Peak Season.

Net cash flows used by operating activities were reduced by $3.1 million to a
$2.4 million outflow for the six months ended July 1 2001 from a $5.5 million
outflow in the six months ended July 2, 2000. This improvement of $3.0 million,
despite an $11.6 million drop in operating income, resulted from the delayed
payment of interest due on the Senior Notes on May 15, 2001 of $7.4 million and
$8.1 million less cash

                                       22

<PAGE>

used in increasing working capital (defined as receivables, inventories, other
current assets, accounts payable and accrued liabilities) compared with year
ago. The lower working capital was a consequence of lower revenues, purchases
and production than year ago including the cessation of manufacturing in the
U.S.A The interest payments on the Senior Notes together with defaulted interest
were paid on July 20, 2001.

The Company's capital expenditures were $2.1 million in the six months ended
July 1, 2001, consisting of (i) on-going cost reduction projects, (ii)
replacements and (iii) items required to satisfy statutory environmental and
health and safety legislation. Whenever possible, expenditure planned for the
six months ended July 1, 2001 has been deferred in order to conserve cash.

As discussed below in "Revolving Credit Facility" and "Senior Notes" the Company
was in default of the Revolving Credit Agreement (see Note 6) and had defaulted
in the payment of interest due on the Senior Notes as at July 1, 2001, but the
Revolving Credit Facility was repaid on July 19, 2001 and the outstanding
interest on the Senior Notes was paid together with defaulted interest on July
20, 2001. As the Company is no longer in default under the Senior Note
Indentures, the Senior Notes continue to be classified as long term debt. See
also "Management's Plans".

Debt overview. As of July 1, 2001, the Company had $236.3 million of combined
indebtedness, comprising $148.0 million of Senior Notes, the $20.0 million
Subordinated Note, $62.0 million of borrowings and $4.9 million of letters of
credit and guarantees under the Revolving Credit Facility, and $1.3 million of
borrowings under a credit facility available to the Company's South African
subsidiaries (the "South African Credit Facility").

Disposition of Assets. On July 19, 2001, Derby Nederland B.V., an indirect
subsidiary of the Company, sold all of the issued and outstanding shares of its
subsidiary, Gazelle, to Gazelle Holding B.V., a company controlled by Gilde
Investment Management B.V. and located in The Netherlands (the "Gazelle Sale").
The purchase price was (euro)142.5 million ($125.4 million at the July 19, 2001
exchange rate) in cash, less (euro)11.9 million ($10.5 million at the July 19,
2001 exchange rate) of debt and taxes outstanding of Gazelle as of June 1, 2001,
and subject to certain adjustments based on Gazelle's balance sheet as of June
1, 2001. (euro)10.0 million ($8.8 million at the July 19, 2001 exchange rate) of
the purchase price was placed in escrow, to be released to the Company upon the
determination of certain contingencies. Gazelle constituted a substantial
portion of the consolidated assets and operating profits of the Company. The
Company estimates that the book gain on disposal of Gazelle will be
approximately $66,000,000, net of tax, although only $2,500,000 of the proceeds
has been retained by the Issuers (see below for utilization of proceeds).

On July 19, 2001 the Company and Lyon Investments B.V. ("Lyon"), pursuant to the
terms of the Senior Note Indentures, used portions of the proceeds of the
Gazelle Sale to repay or collateralize all the outstanding amounts under the
Company's Revolving Credit Facility, which was terminated as a result of such
repayment. Additionally, pursuant to the Senior Note Indentures, Lyon and the
Company (the "Issuers") have retained the equivalent of $2.5 million for working
capital and other corporate purposes. Expenses of the Gazelle Sale, amounting to
the equivalent of $4.0 million, were paid. The remaining net Gazelle Sale
proceeds of $21.9 million were delivered to the trustees under the Senior Note
Indentures on July 19, 2001. The trustees applied $7.4 million of the net
Gazelle Sale proceeds to make the interest payments on the Senior Notes that the
Issuers had failed to make when due on May 15, 2001. Since completion of the
Gazelle Sale, $3.6 million of the proceeds used to collateralize outstanding
amounts under the Company's Revolving Credit Facility have been released and
$4.1 million due by Gazelle to Derby Nederland B.V. has been paid to the
trustees under the Senior Note Indentures.

The Senior Note Indentures required the Issuers, after making the payments and
retaining the funds as described above, to use any remaining proceeds of the
Gazelle Sale (including certain amounts that were to be received post-closing)
to make offers to repurchase a portion of the Senior Notes. On July 30, 2000 the
Issuers made offers to purchase (the "Offers") for cash up to $14.1 million
principal amount of the outstanding Senior Notes. On September 7, 2001, the
Issuers amended the Offers to increase the maximum principal amount of
outstanding Senior Notes they are offering to purchase to $21.4 million, as a
result of the proceeds received from the Gazelle Sale since completion. The
deadline for tendering Senior Notes in the Offers has also been extended to
September 24, 2001, and the scheduled payment date is now September 27, 2001. To
the extent that the Issuers receive more of the proceeds from the Gazelle sale,
they may amend the Offers to increase the principal amount of Senior Notes they
will offer to purchase, or make additional offers to purchase Senior Notes using
such further proceeds.

                                       23

<PAGE>

Revolving Credit Facilities. The Revolving Credit Agreement provided for the
DM209.4 million ($97.8 million at the July 1, 2001 exchange rate) secured senior
revolving credit facility to be made available to the Company's operating and
finance subsidiaries until June 30, 2002. Borrowings under this Revolving Credit
Agreement were available subject to a borrowing base determined as a percentage
of eligible assets. The South African Credit Facility provides for maximum
indebtedness of South African Rand 30 million ($3.7 million at the July 1, 2001
exchange rate). The Company's borrowings peak in February, March and April each
year.

The Revolving Credit Agreement contained a number of covenants that, among other
things, restricted the ability of the Company and its subsidiaries to dispose of
shares in any subsidiary, dispose of assets, incur additional indebtedness,
incur liens and encumbrances, engage in mergers and acquisitions, exercise
certain options, make investments, incur guaranty obligations, make loans, make
capital distributions, enter into joint ventures, repay the Senior Notes and to
make loans or pay any dividend or distribution to the Issuers for any reason
other than (among other things) to pay interest (but not principal) owing in
respect of the Senior Notes.

As of July 1, 2001, the Company had indebtedness outstanding under the Revolving
Credit Facility of $66.9 million, which was secured and guaranteed by the
obligors thereunder through a first priority security interest in all the
assets, properties and undertakings of the Company and $1.3 million of
borrowings under the South African Credit Facility which are secured by a
security interest in certain of the assets of the Company's South African
subsidiaries. The Senior Notes are unsecured and, unlike the indebtedness under
the Revolving Credit Facility and the South African Credit Facility, do not have
the benefit of any collateral.

The Company was in breach of the financial covenants under the Revolving Credit
Agreement as at December 31, 2000 and July 1, 2001. The Revolving Credit
Facility was repaid in full on July 19, 2001 and has been terminated.

Senior Notes. The Senior Notes are issued under the Senior Note Indentures.
Interest on the Senior Notes is payable semi-annually on May 15 and November 15.
As discussed below under "Management's plans", the Company has retained Lazard
Freres & Co. L.L.C. ("Lazard") as its financial advisor, and has been working
with an informal committee of holders of more than 50% of the principal amount
of its Senior Notes (the "Informal Committee") for the purposes of negotiating a
consensual restructuring of its outstanding securities. In this regard, the
Company filed a voluntary petition for reorganization under the provisions of
Chapter 11 of title 11 of the United States Code, 11 U.S.C. Para 101-1330 on
August 20, 2001 in the Bankruptcy Court.

The Senior Note Indentures contain certain covenants that, among other things,
restrict the ability of the Company and its restricted subsidiaries to incur
additional indebtedness, pay dividends, redeem capital stock, redeem
subordinated obligations, make investments, undertake sales of assets and
subsidiary stock, engage in transactions with affiliates, issue capital stock,
permit liens to exist, operate in other lines of business, engage in certain
sale and leaseback transactions and engage in mergers, consolidations or sales
of all or substantially all the assets of the Company. On July 30, 2001 the
Company and Lyon offered to purchase for cash up to $14.1 million principal
amount of the outstanding Senior Notes at their par value plus accrued interest
thereon, and on September 7, 2001 they amended the Offers to increase the
maximum principal amount of Senior Notes they were offering to purchase to $21.4
million. The deadline for tendering Senior Notes in the Offers has also been
extended to September 24, 2001, and the scheduled payment date is now September
27, 2001.

Management's plans. The Company has retained Lazard as its financial advisor.
Lazard advised the Company on the Gazelle Sale and has been exploring all
alternatives available to the Company, including the sale of some or all
remaining assets and operations. In order both to address its long-term capital
and debt service requirements, and in connection with the repayment of the
Revolving Credit Facility, the Company began working with the Informal Committee
on March 21, 2001, for the purposes of negotiating a consensual restructuring of
its outstanding securities.

On August 20, 2001 the Company filed a motion in the Bankruptcy Court seeking
authorization to consummate an asset purchase agreement between the Company and
Cycle Bid Co., a corporation controlled by Alan Finden-Crofts and other
executives of the Company. The asset purchase agreement provides for the sale of
substantially all of the operations and assets of the Company (the "MBO") for
approximately $43 million. Under the terms of the MBO, certain liabilities of
the Company including trade

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<PAGE>

accounts payable aggregating approximately $23 million will be assumed by Cycle
Bid Co., and approximately $20 million will be paid in cash. The obligations
assumed exclude the Senior Notes, the Subordinated Note and certain other
excluded liabilities.

The conditions leading to the Chapter 11 Filing raise substantial doubt about
the Company's ability to continue as a going concern. The condensed consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern. Nevertheless, the Company considers it appropriate
to prepare the accompanying condensed consolidated financial statements on the
going concern basis of accounting.

Accounting for pensions. The Company adopted Statement of Financial Accounting
Standards ("SFAS") 87, "Employers' Accounting for Pensions" on January 1, 1993.
The impact of adopting SFAS 87 was the recognition of a transition asset of
$37.8 million. The transition asset is being amortized into income over the 15
years from January 1, 1989, the effective date of SFAS 87. Net periodic pension
income was $3.2 million in the six months ended July 1, 2001 compared with $2.7
million in the six months ended July 2, 2000. Net periodic pension income
includes amortization of the transition asset into income of $1.1 million in the
six months ended July 1, 2001, compared with $1.0 million in the six months
ended July 2, 2000. The main pension plans of the Company, which are in the U.K.
and The Netherlands, had actuarial surpluses and therefore no employer's
contributions were made to those plans in 2000 or 2001. No assurance can be
given that the Company can continue to run these pension plans without making
employer's contributions to those plans.

Derivative financial instruments. The Company uses derivative financial
instruments including currency swaps, interest rate swaps, interest rate caps,
forward foreign exchange contracts, and currency options. The Company enters
into currency and interest rate swaps such that the notional principal amount is
equal to the principal amount of the underlying debt. The swaps achieve the
effect of synthetically converting the original U.S. Dollar denominated debt
into several other foreign currencies and converting the interest rate on the
debt from U.S. Dollar rates to those applicable for that currency. During the
fall of 1998 the Company entered into forward foreign exchange contracts and
options to minimize the impact of currency movements in the following season,
principally on purchases of inventory and sales of goods denominated in
currencies other than the subsidiaries' functional currencies. This program was
curtailed for 2000 and 2001 to release the credit line for an increased debt
requirement. Consequently the Company is almost completely exposed at present to
the full impact on margins of any adverse changes in foreign exchange rates.
Interest rate caps were purchased in 1998 to limit the blended interest rate
paid on the Revolving Credit Facility to under 8.5% until July 2001. Separately
from the Company's seasonal hedging program, currency options were purchased in
1998 to substantially maintain the value of most of the foreign operating income
upon conversion into U.S. Dollars, in order to protect the ability to service
the U.S. Dollar Senior Notes from the effect of changes in foreign exchange
rates until May 2001. The interest rate caps and currency options purchased in
1998 covered a basket of currencies, and therefore could not be designated as
hedges under SFAS 133.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage the risk arising from these
exposures, the Company may enter into a variety of foreign currency and interest
rate contracts and options.

Foreign Currency Exchange Rate Risk
The Company has foreign currency exposures related to buying and selling in
currencies other than the functional currencies in which it operates. The
Company's net trading position is long in the Euro, Pounds Sterling, Canadian
Dollar and South African Rand, arising from its revenues in those currencies,
and short of the New Taiwan Dollar, Japanese Yen and U.S. Dollar as a result of
components purchased in those currencies.

The Company generally introduces its new bicycle model ranges in the fall of
each year, at a similar time to most of its competitors. Product specifications,
component costs and selling prices are kept as stable as possible during the
model year to satisfy the requirements of mass-merchandisers and facilitate
orderly marketing of branded products amongst I.B.D.s. In the fall of 1998 the
Company initiated foreign currency forward exchange contracts or options to
hedge a portion of its foreign currency trading transaction exposure for the
upcoming season. This program was substantially curtailed for the 1999/2000 and

                                       25

<PAGE>

2000/2001 seasons in order to release more of the Revolving Credit Facility for
the incurrence of additional borrowing. The curtailment of the hedging program
has resulted in the Company being almost completely exposed at present to the
full impact on margins of any adverse changes in foreign exchange rates. At July
1, 2001 the Company had no foreign exchange contracts. Each year the Company
changes the specification of its products to endeavor to optimize its
competitive position and margins. Since most of the Company's competitors
purchase comparable components from similar sources to the Company and are
believed not to hedge beyond the current season, the Company would not generally
hedge its transaction exposure beyond the end of the season, to stay
competitive, and management believes the likelihood of obtaining a competitive
advantage would not justify the cost of hedging beyond the end of the season. As
noted above, the Company subsequently curtailed this program for 2000 and 2001.
Sales and purchases in currencies other than the functional currencies in which
the Company operates were $6.6 million and $109.0 million respectively in 2000.

The foreign currency element of the Company's debt under the Senior Notes and
under the Revolving Credit Facility (now repaid in full and terminated) had
generally been arranged to align with the denomination of the book value of net
assets. By doing this, the Company reduced the translation exposure of net worth
to changes in foreign currency exchange rates. The three principal exceptions
were: (i) $21 million of net assets denominated in Pounds Sterling arising from
the Company's former large presence in U.K., (ii) $43 million of foreign pension
assets in U.K. and The Netherlands, and, (iii) $5 million denominated in South
African Rand due to limits placed by the South African Reserve Bank on the
maximum indebtedness allowed by foreign owned corporations.

The Company generates most of its trading income in foreign currencies. In order
to ensure that such trading income could be converted to yield sufficient U.S.
Dollars to service 67% of the interest on the $100 million Dollar Senior Notes
through May 2001, currency options were purchased in 1998. These currency
options were for $6.7 million per year, selling NLG6 million, (Pounds) 2 million
and C$1.2 million. These currency options covered a basket of currencies, and
therefore could not be designated as hedges under SFAS 133.

Interest Rate Risk
Interest expense relating to the Senior Notes was $15.6 million and $15.4
million in 1999 and 2000 respectively, which were at fixed interest rates.
Interest expense of $5.0 million on the Subordinated Note in 2000 is accrued and
falls due for payment on February 3, 2009. The fair value of warrants given as
consideration for the use of the Bridge Loan of $0.4 million was expensed as
interest in 2000. The other major element of the Company's interest expense was
$4.3 million and $4.8 million on the Revolving Credit Facility in 1999 and 2000
respectively. These were at floating rates of 2.0% above the London Interbank
Offer Rate through August 31, 1999, 2.5% through November 22, 2000 and 2.75%
thereafter. A hypothetical one percentage point shift in floating interest rates
would have made a $0.6 million approximate impact on annual interest expense. As
interest rates on the Revolving Credit Facility were capped at 8.5% effective
August 1998 through July 2001, increases in floating interest rates above that
level would only have had a limited impact on interest expense up to July 2001.
The interest rate cap purchased covered a basket of currencies, and therefore
could not be designated as a hedge under SFAS 133.

Commodity Price Risk
The business of the Company does not carry a significant direct exposure to the
prices of commodities.

Risk of Foreign Exchange Rate Fluctuations
The Company's business is conducted by operating subsidiaries in many countries,
and, accordingly, the Company's results of operations are subject to currency
translation risk and currency transaction risk. With respect to currency
translation risk, the results of operations of each of these operating
subsidiaries are reported in the relevant local currency and then translated
into U.S. Dollars at the applicable currency exchange rate for inclusion in the
Company's financial statements. The appreciation of the U.S. Dollar against the
local currencies of the operating subsidiaries will have a negative impact on
the Company's sales and operating margin. Conversely, the depreciation of the
U.S. Dollar against such currencies will have a positive impact. Fluctuations in
the exchange rate between the U.S. Dollar and the other currencies in which the
Company conducts its operations may also affect the book value of the Company's
assets and the amount of the Company's shareholders' equity. In addition, to the
extent indebtedness of the Company is denominated in different currencies,
changes in the values of such currencies relative to other currencies in which
the Company conducts its operations may have a negative impact on the Company's
ability to meet principal and interest obligations in respect of such
indebtedness.

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<PAGE>

In addition to currency translation risk, the Company incurs currency
transaction risk to the extent that the Company's operations involve
transactions in differing currencies. Fluctuations in currency exchange rates
will impact the Company's results of operations to the extent that the costs
incurred by the operating subsidiaries are denominated in currencies that differ
from the currencies in which the related sale proceeds are denominated. To
mitigate such risk, the Company may enter into foreign currency forward exchange
contracts primarily relating to the Pound Sterling, the U.S. Dollar, the Dutch
Guilder, the Deutsche Mark, the New Taiwan Dollar and the Yen. Given the
volatility of currency exchange rates, there can be no assurance that the
Company will be able to effectively manage its currency transaction risks or
that any volatility in currency exchange rates will not have a material adverse
effect on the Company's business, financial condition or results of operations.

Forward Looking Statements
This discussion contains certain forward-looking statements that involve risks
and uncertainties. In addition, the Company may from time to time make oral
forward-looking statements. As discussed in the Company's prospectus on Form
S-4A filed with the SEC on December 4, 1998 and its later public filings, actual
results are uncertain and may be impacted by various factors. In particular,
certain risks and uncertainties that may impact the accuracy of the
forward-looking statements with respect to revenues, expenses and operating
results include, without limitation, cycles of customer orders, general economic
and competitive conditions and changing consumer trends, foreign exchange rates,
technological advances and the number and timing of new product introductions,
shipments of products and componentry from foreign suppliers, the timing of
operating and advertising expenditures and changes in the mix of products
ordered by I.B.D.s and mass merchandisers. As a result, actual results may
differ materially from those projected in forward-looking statements. Because of
these and other factors that may affect the Company's operating results, past
financial performance should not be considered an indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.

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                                     PART II
                                     -------

ITEM 1.  LEGAL PROCEEDINGS

Product Liability

Due to the nature of the Company's business, the Company at any particular time
is a defendant in a number of product liability lawsuits and expects that this
will continue to be the case in the future. The plaintiffs in these lawsuits
generally seek damages, in amounts that may be material, for personal injuries
allegedly sustained as a result of alleged defects in the Company's products.
Although the Company maintains product liability insurance, due to the
uncertainty as to the nature and extent of manufacturers' and distributors'
liability for personal injuries, there can be no assurance that the product
liability insurance maintained by the Company is or will be adequate to cover
product liability claims or that the applicable insurer will be solvent at the
time of any covered loss. In addition, due to deductibles, self-retention levels
and aggregate coverage amounts applicable under the Company's insurance
policies, the Company may bear responsibility for a significant portion, if not
all, of the defense costs (which include attorneys' fees and expenses incurred
in the defense of any claim) and the related payments to satisfy any judgments
associated with any claim asserted against the Company in excess of any
applicable coverage. The settlement of a significant number of insured claims,
the settlement of a claim exceeding the Company's insurance coverage or the
successful assertion or settlement of an uninsured claim could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, there can be no assurance that insurance will remain
available, or, if available, will not be prohibitively expensive. The
self-insured retention under the Company's insurance policies is currently
$125,000 per claim for domestic claims and $1,000 for foreign claims; however,
prior to 1993, the self-insured retention for domestic claims was $1.0 million
per claim. Not all claims arising during the period in which the Company's
self-insured retention for domestic claims was $1.0 million have been resolved
and it is possible that additional claims may be filed. The aggregate amount of
liability under existing and potential claims, so far as they are not covered by
insurance, could exceed the reserves of $184,000 established by the Company as
at July 1, 2001 for product liability claims.

Product Recalls

Although the Company has not recently experienced a significant product recall,
the Company has, in the past, recalled certain bicycle models. If the Company
were required to make a significant product recall, such a recall could have a
material adverse effect on the Company's business, financial condition or
results of operations. In common with the rest of the bicycle industry,
components fitted to its bicycles may be subject to a recall program of the
component supplier.

Liability For Environmental Matters

The Company is subject to a wide variety of governmental requirements related to
environmental protection including, among other things, the management of
hazardous substances and wastes. Although the Company has made and will continue
to make significant expenditures related to its environmental compliance
obligations, there can be no assurance that the Company will at all times be in
compliance with all such requirements. Moreover, the Company's existing and
historical operations, including the operations of its predecessors, expose the
Company to the risk of clean-up liabilities or environmental or personal injury
claims related to releases and emissions of hazardous substances and wastes.
Such liabilities and claims could require the Company to incur material costs
related to such releases or to the investigation or remediation of contaminated
property. Also, changes in existing environmental requirements or the imposition
of additional environmental liabilities related to existing or historical
operations could result in substantial cost to the Company.

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<PAGE>

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

The Company was in default under its Revolving Credit Facility, and was in
default in a payment of interest due on the Senior Notes. On July 19, 2001 the
Company repaid the Revolving Credit Facility. On July 20, 2001 the Company paid
all outstanding interest due on its Senior Notes, together with defaulted
interest.

The Company filed a voluntary petition for relief with the Bankruptcy Court
under the provisions of Chapter 11 of title 11 of the United States Code, 11
U.S.C. Para 101-1330 on August 20, 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources".

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits.

      See " Index to Exhibits" set forth on page 31.

(b)   Reports on Form 8-K.

      The Company filed a Current Report on Form 8-K on May 15, 2001 relating to
      Item 5. Other Events, announcing it would not make its scheduled interest
      payment on its Senior Notes.

      The Company filed a Current Report on Form 8-K on June 6, 2001 relating to
      Item 5. Other Events, announcing that it had received a bid from certain
      members of its management.

      The Company filed a Current Report on Form 8-K on June 18, 2001 relating
      to Item 5. Other Events, announcing that it had entered into a Sale and
      Purchase Agreement relating to its indirect subsidiary, Koninklijke
      Gazelle B.V..

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned, thereunto duly authorized, on October 17, 2001.

The Derby Cycle Corporation


By: /s/ Alan J. Finden-Crofts
    ------------------------------------
ALAN J. FINDEN-CROFTS
EXECUTIVE CHAIRMAN


By: /s/ John C. Burdett
    ------------------------------------
JOHN C. BURDETT
CHIEF FINANCIAL OFFICER


By: /s/ Simon J. Goddard
    ------------------------------------
SIMON J. GODDARD
VICE PRESIDENT AND CORPORATE CONTROLLER

                                       30

<PAGE>

INDEX TO EXHIBITS

  Exhibit     Description
  No.         -----------
  ---
  2.1         Sale and Purchase Agreement dated June 15, 2001 for the sale of
              Koninklijke Gazelle B.V. between Derby Nederland B.V., the
              Purchaser, The Derby Cycle Corporation as Warrantor and Gazelle
              Holding B.V., the Buyer (Incorporated by reference to exhibit
              10.1 to the Company's current report on Form 8-K filed with the
              Commission on July 2, 2001, Commission File Number 0001067447).

                                       31