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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 20-F



|o |  | Registration statement pursuant to section 12(b) or (g) of the Securities Exchange Act of 1934
|- |  | ----------------------------------------------------------------------------------------------

or



|x |  | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ------------------------------------------------------------------------------------
|  |  | For the fiscal year ended: March 31, 2003                                           

or



|o |  | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
|- |  | ----------------------------------------------------------------------------------------
|  |  | For the transition period from _____________ to ___________                             

Commission file number: 0-29368

NOVEL DENIM HOLDINGS LIMITED




(Exact Name of Registrant as Specified in its Charter)


NOVEL DENIM HOLDINGS LIMITED




(Translation of Registrants Name Into English)


British Virgin Islands




(Jurisdiction of Incorporation or Organization)


1/F, Novel Industrial Building
850-870 Lai Chi Kok Road
Cheung Sha Wan, Kowloon, Hong Kong




(Address of Principal Executive Offices)


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

Securities registered or to be registered pursuant to Section 12(g) of the Act:

|                    |  |                            
|------------------- |  | ---------------------------
|                    |  | Name of Each Exchange      
|Title of Each Class |  | On Which Registered        
|                    |  |                            
|Ordinary Shares     |  | National Market Tier of the
|                    |  | Nasdaq Stock Market        

Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: None

Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the Annual
Report.

|                                    |  |  |           | 
|----------------------------------- |  |  | --------- | 
|Ordinary Shares, par value US $1.00 |  |  | 8,027,809 | 

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
filling requirements for the past 90 days. Yes x No o

Indicate by check mark which financial statement item the registrant has
elected to follow. Item 17 x Item 18 o

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TABLE OF CONTENTS

TABLE OF CONTENTS



|                                           |                                                                                       |  |  |  |  |  |  | 
|------------------------------------------ | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PRELIMINARY NOTE                          
|PART I                                    
|                                           | ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        
|                                           | ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE                                      
|                                           | ITEM 3. KEY INFORMATION                                                              
|                                           | ITEM 4. INFORMATION ON THE COMPANY                                                   
|                                           | ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 
|                                           | ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   
|                                           | ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            
|                                           | ITEM 8. FINANCIAL INFORMATION                                                        
|                                           | ITEM 9. THE OFFER AND LISTING                                                        
|                                           | ITEM 10. ADDITIONAL INFORMATION                                                      
|                                           | ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - UPDATE         
|                                           | ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       
|PART II                                   
|                                           | ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                             
|                                           | ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|PART III                                  
|                                           | ITEM 15. CONTROL AND PROCEDURES                                                      
|PART IV                                   
|                                           | ITEM 17. FINANCIAL STATEMENTS                                                        
|                                           | ITEM 18. FINANCIAL STATEMENTS                                                        
|                                           | ITEM 19. EXHIBITS                                                                    
|EXHIBIT INDEX                             
|SIGNATURES                                
|EMPLOYMENT AGREEMENT                      
|LIST OF SUBSIDIARIES                      
|CREDIT AGREEMENT DATED JANUARY 18, 2002   
|CREDIT AGREEMENT DATED FEBRUARY 18, 2002  
|CREDIT AGREEMENT DATED MARCH 27, 2002     
|CREDIT AGREEMENT DATED MAY 21, 2002       
|CREDIT AGREEMENT DATED JUNE 6, 2002       
|CREDIT AGREEMENT DATED JULY 16, 2002      
|CREDIT AGREEMENT DATED JULY 16, 2002      
|CREDIT AGREEMENT DATED OCTOBER 29, 2002   
|CREDIT AGREEMENT DATED JANUARY 16, 2002   
|CREDIT AGREEMENT DATED JUNE 10, 2002      
|CONSENT OF PRICEWATERHOUSECOOPERS         
|SECTION 302 CERTIFICATION OF THE CEO      
|SECTION 302 CERTIFICATION OF THE CFO      
|SECTION 906 CERTIFICATION OF THE CEO & CFO



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|         |  |                                                                              |  |                                          |    |  |    |      |  | 
|-------- |  | ---------------------------------------------------------------------------- |  | ---------------------------------------- | -- |  | -- | ---- |  | 
|         |  |                                                                              |  |                                          |    |  |    | Page
|         |  |                                                                              |  |                                          |    |  |    |     
|         |  |                                                                              |  | Preliminary Note                         |    |  |    |     
|         |  |                                                                              |  | PART I                                   |    |  |    |     
|Item 1.  |  | Identity of Directors, Senior Management and Advisors                        |  |                                          | 1  | 
|Item 2.  |  | Offer Statistics and Expected Timetable                                      |  |                                          | 1  | 
|Item 3.  |  | Key Information                                                              |  |                                          | 2  | 
|Item 4.  |  | Information on the Company                                                   |  |                                          | 10 | 
|Item 5.  |  | Operating and Financial Review and Prospects                                 |  |                                          | 19 | 
|Item 6.  |  | Directors, Senior Management and Employees                                   |  |                                          | 29 | 
|Item 7.  |  | Major Shareholders and Related Party Transactions                            |  |                                          | 34 | 
|Item 8.  |  | Financial Information                                                        |  |                                          | 36 | 
|Item 9.  |  | The Offer and Listing                                                        |  |                                          | 37 | 
|Item 10. |  | Additional Information                                                       |  |                                          | 38 | 
|Item 11. |  | Quantitative and Qualitative Disclosures About Market Risk                   |  |                                          | 43 | 
|Item 12. |  | Description of Securities Other than Equity Securities                       |  |                                          | 44 | 
|         |  |                                                                              |  | PART II                                  |    |  |    |     
|Item 13. |  | Defaults, Dividend Arrearages and Delinquencies                              |  |                                          | 45 | 
|Item 14. |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  |                                          | 45 | 
|         |  |                                                                              |  | PART III                                 |    |  |    |     
|Item 15. |  | Controls and Procedures                                                      |  |                                          | 45 | 
|Item 16. |  | [RESERVED]                                                                   |  |                                          | 45 | 
|         |  |                                                                              |  | PART IV                                  |    |  |    |     
|Item 17. |  | Financial Statements                                                         |  |                                          | 45 | 
|Item 18. |  | Financial Statements                                                         |  |                                          | 45 | 
|Item 19. |  | Exhibits                                                                     |  |                                          | 46 | 
|         |  |                                                                              |  | Financial Statements Pursuant to Item 17 |    |  | 52 |     





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PRELIMINARY NOTE

This Annual Report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are indicated
by words or phrases such as anticipate, estimate, project, expect,
believe and similar words or phrases. Such statements are based on current
expectations and are subject to certain risks and uncertainties including, but
not limited to, the overall level of consumer spending on apparel, the
financial strength of the retail industry generally and the Companys customers
in particular, changes in trends in the market segments in which the Company
competes, the level of demand for the Companys garments and fabrics, actions
by its major customers or existing or new competitors and changes in economic
or political conditions in the markets where the Company sells or manufactures
its products, as well as other risks and uncertainties both referenced and not
referenced in this Annual Report. These risks are more fully described under
Item 3. Key InformationRisk Factors of this Annual Report. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. The Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.

All references in this document to Novel Denim or the Company are to
Novel Denim Holdings Limited, a British Virgin Islands (BVI) international
business company, and its subsidiaries.

In this Annual Report, unless otherwise specified or unless the context
otherwise requires, all references to $ or dollars are to U.S. dollars and
all references to fiscal or fiscal year refer to the fiscal year ended
March 31 of the calendar year mentioned.




PART I




ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.




ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

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ITEM 3. KEY INFORMATION

The selected consolidated financial and other information presented below
have been prepared in accordance with U.S. generally accepted accounting
principles (U.S. GAAP) and are derived from the Consolidated Financial
Statements of the Company for, and as of, the years ended March 31, 1999
through 2003. The Consolidated Financial Statements for, and as of, the years
ended March 31, 1999 through 2003 have been audited by PricewaterhouseCoopers,
independent accountants. The information should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Annual Report and Item 5. Operating and Financial Review and
Prospects.

|                                                                            |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |       |  
|--------------------------------------------------------------------------- | -------------------------- | - | ---------------------------------------- | ---- | ---- | - | ------- | ---- | ---- | - | ------- | ---- |  | - | ------- | ---- |  | - | ------- | ----- | -
|                                                                            |                            |   | Fiscal Year Ended March 31,             
|                                                                            |                            |   |                                         
|                                                                            |                            |   | 1999                                     |      | 2000 |   | 2001    |      | 2002 |   | 2003   
|                                                                            |                            |   |                                          |      |      |   |         |      |      |   |        
|                                                                            |                            |   | (in thousands, except per share amounts)
|Statement of Income Data:                                                   |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      
|Net sales                                                                   |                            | $ | 97,702                                   |      |      | $ | 105,101 |      |      | $ | 138,046 |      |  | $ | 158,585 |      |  | $ | 144,986 |      
|Cost of goods sold                                                          |                            |   | 70,185                                   |      |      |   | 84,456  |      |      |   | 107,465 |      |  |   | 132,201 |      |  |   | 131,986 |      
|                                                                            |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      
|Gross profit                                                                |                            |   | 27,517                                   |      |      |   | 20,645  |      |      |   | 30,581  |      |  |   | 26,384  |      |  |   | 13,000  |      
|Other revenues (1)                                                          |                            |   | 337                                      |      |      |   | 638     |      |      |   | 440     |      |  |   | 789     |      |  |   | 1,459   |      
|Selling, general and administrative expenses                                |                            |   | 9,901                                    |      |      |   | 12,248  |      |      |   | 15,187  |      |  |   | 18,693  |      |  |   | 31,615  |      
|Impairment loss (2)                                                         |                            |   |                                         |      |      |   |        |      |      |   |        |      |  |   | 2,375   |      |  |   | 2,788   |      
|Other expenses (3)                                                          |                            |   | 225                                      |      |      |   |        |      |      |   | 589     |      |  |   |        |      |  |   | 1,222   |      
|                                                                            |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      
|Operating income/(loss)                                                     |                            |   | 17,728                                   |      |      |   | 9,035   |      |      |   | 15,245  |      |  |   | 6,105   |      |  |   | (21,166 | )    
|Interest expense, net                                                       |                            |   | 1,499                                    |      |      |   | 2,723   |      |      |   | 3,169   |      |  |   | 3,955   |      |  |   | 4,310   |      
|                                                                            |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      
|Income/(loss) before minority interest, tax and effect of accounting change |                            |   | 16,229                                   |      |      |   | 6,312   |      |      |   | 12,076  |      |  |   | 2,150   |      |  |   | (25,476 | )    
|Minority interest                                                           |                            |   | 48                                       |      |      |   | (52     | )    |      |   | 48      |      |  |   | 82      |      |  |   | (50     | )    
|Taxation                                                                    |                            |   |                                         |      |      |   |        |      |      |   |        |      |  |   | 298     |      |  |   | 753     |      
|                                                                            |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      
|Income/(loss) before effect of accounting change                            |                            |   | 16,181                                   |      |      |   | 6,364   |      |      |   | 12,028  |      |  |   | 1,770   |      |  |   | (26,179 | )    
|Cumulative effect of accounting change                                      |                            |   |                                         |      |      |   |        |      |      |   |        |      |  |   | (308    | )    |  |   |        |      
|                                                                            |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      
|Net income/(loss)                                                           |                            | $ | 16,181                                   |      |      | $ | 6,364   |      |      | $ | 12,028  |      |  | $ | 2,078   |      |  | $ | (26,179 | )    
|                                                                            |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      
|Earnings per share after accounting change                                  |                            |   |                                          |      |      |   |         |      |      |   |         |      |  |   |         |      |  |   |         |      
|                                                                            | Basic Earnings per share   |   | $                                        | 1.71 |      |   | $       | 0.67 |      |   | $       | 1.30 |  |   | $       | 0.23 |  |   | $       | (2.97 | )
|                                                                            | Diluted Earnings per share |   | $                                        | 1.71 |      |   | $       | 0.67 |      |   | $       | 1.29 |  |   | $       | 0.22 |  |   | $       | (2.96 | )
|Weighted average Ordinary Shares outstanding  Basic (7)                    |                            |   | 9,438                                    |      |      |   | 9,438   |      |      |   | 9,221   |      |  |   | 9,110   |      |  |   | 8,808   |      
|Weighted average Ordinary Shares outstanding  Diluted (7)                  |                            |   | 9,479                                    |      |      |   | 9,439   |      |      |   | 9,316   |      |  |   | 9,256   |      |  |   | 8,837   |      

|                                                             |  |                 |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         |  
|------------------------------------------------------------ |  | --------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | -
|                                                             |  | As of March 31,
|                                                             |  |                
|                                                             |  | 1999            |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                             |  |                 |         |      |  |      |         |      |  |     
|                                                             |  | (in thousands) 
|Balance Sheet Data:                                          |  |                 |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         |  
|Cash and cash equivalents                                    |  | $               | 2,876   |      |  | $    | 2,017   |      |  | $    | 2,361   |  |  | $ | 12,995  |  |  | $ | 5,938   |  
|Working capital (exclusive of cash and cash equivalents) (4) |  |                 | 15,360  |      |  |      | 20,474  |      |  |      | 21,682  |  |  |   | 13,130  |  |  |   | (12,028 | )
|Total assets                                                 |  |                 | 116,670 |      |  |      | 124,710 |      |  |      | 149,120 |  |  |   | 189,380 |  |  |   | 160,934 |  
|Short-term debt (5)                                          |  |                 | 18,877  |      |  |      | 18,099  |      |  |      | 27,681  |  |  |   | 54,963  |  |  |   | 59,576  |  
|Long-term debt (6)                                           |  |                 | 4,545   |      |  |      | 5,068   |      |  |      | 3,610   |  |  |   | 17,542  |  |  |   | 13,132  |  
|Shareholders equity (7)                                     |  |                 | 79,386  |      |  |      | 85,750  |      |  |      | 94,880  |  |  |   | 97,209  |  |  |   | 67,322  |  

|                                         |  |                             |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|---------------------------------------- |  | --------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ |  |  |  | ------ | 
|                                         |  | Fiscal Year Ended March 31,
|                                         |  |                            
|                                         |  | 1999                        |        | 2000 |  | 2001 |        | 2002 |  | 2003
|                                         |  |                             |        |      |  |      |        |      |  |     
|Operating Data:                          |  |                             |        |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|Garment production (thousands of pieces) |  |                             | 7,708  |      |  |      | 8,711  |      |  |      | 12,395 |  |  |  | 15,391 |  |  |  | 9,776  | 
|Fabric production (thousands of meters)  |  |                             | 15,228 |      |  |      | 19,190 |      |  |      | 24,716 |  |  |  | 33,302 |  |  |  | 31,710 | 
|Fabric printing (thousands of meters)    |  |                             |       |      |  |      |       |      |  |      |       |  |  |  | 15,882 |  |  |  | 29,966 | 



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|(1) |  | Other revenues consist of disposals of property, plant and equipment,
sales of scrap materials, net proceeds from yarn sales, commissions
received from an affiliate and other related or nonrecurring items. See
Item 7. Major Shareholders and Related Party Transactions.                                                               
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Impairment loss consists of a partial write off of fixed assets in
Madagascar related to the closure of the Madagascar operations.                                                                                                                                                                                                           
|   
|(3) |  | Other expenses consist of start-up costs associated with the Companys
South African facilities in fiscal 2001 and 2003 and the Companys
Madagascar facilities in fiscal 1999.                                                                                                                                                              
|   
|(4) |  | Working capital consists of current assets less current liabilities.                                                                                                                                                                                                                                                                         
|   
|(5) |  | Including current portion of long-term debt and capital leases.                                                                                                                                                                                                                                                                              
|   
|(6) |  | Including long-term portion of capital leases.                                                                                                                                                                                                                                                                                               
|   
|(7) |  | During fiscal 2001, the Company repurchased 420,200 Ordinary Shares for a
total of approximately $3.1 million. During fiscal 2002, the Company
repurchased 20,100 Ordinary Shares for a total of approximately $0.2
million. During fiscal 2003, the Company repurchased 1,113,091 Ordinary
Shares for a total of approximately $3.7 million.

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Risk Factors

Uncertainties in Garment and Fabric Industries

In fiscal 2003, approximately 35% of total sales were to U.S. customers,
approximately 25% of total sales were directly to European customers (primarily
in Belgium, France, The Netherlands and the United Kingdom), approximately 18%
of total sales were to customers in African countries for further conversion
and sale, approximately 21% of total sales were to customers in Asian countries
and approximately 1% of total sales were to customers in other countries.
Historically, the apparel industry has been subject to substantial cyclical
variations. In particular, Europe and the United States (U.S.) have
experienced fluctuations in demand for denim and chino in recent years. There
can be no assurance that the Companys financial condition and results of
operations will not be adversely affected by any such fluctuations. In
addition, a recession in the general European and/or U.S. economies or
uncertainties regarding future economic prospects that affect consumer spending
habits has had and could continue to have a material adverse effect on Novel
Denims results of operations.

Dependence on Key Customers; No Long-term Contracts with Customers

The Gap, Inc. (the Gap) has been a substantial customer of Novel Denim
and accounted for approximately 7.7% of Novel Denims total sales (and
approximately 13.7% of its total garment sales) in fiscal 2003. For the same
period, Tommy Hilfiger Corporation and its subsidiaries (Tommy Hilfiger)
accounted for approximately 11.4% of the Companys total sales (and
approximately 20.4% of its total garment sales) and Vetir S.A. (Mi-Temps)
(Mi-Temps) accounted for approximately 8.5% of the Companys total sales in
fiscal 2003 (and approximately 15.2% of its total garment sales). Combined,
these top three customers (which are all garment customers), accounted for
approximately 27.6% of Novel Denims total sales in fiscal 2003 (and
approximately 49.3% of its total garment sales). The loss of The Gap, Tommy
Hilfiger or Mi-Temps as a customer, or a significant reduction in their
purchases from Novel Denim, has had and could continue to have a material
adverse effect on the Companys financial condition and results of operations.

The Company does not have any long-term contracts with its customers. As a
result, there can be no assurance that historic levels of business from any
customer of the Company will continue in the future.

Foreign Operations in Mauritius, Madagascar and South Africa

The Companys operations are affected by economic, environmental,
political, governmental and labor conditions in Mauritius, Madagascar and South
Africa, where all of its manufacturing facilities are presently located.

During the last few years, the Company has experienced a shortage of labor
and rising labor costs. The government of Mauritius currently permits the
importation of foreign labor. As of March 31, 2003 approximately 25% of the
Companys employees in Mauritius were expatriate employees. In March 2002, the
Companys operations in Mauritius were adversely affected by a labor dispute
relating to the Companys expatriate employees who requested that the Company
make a number of changes before they returned to work. Following negotiations,
the Company agreed to make some modifications to its existing operations and
all but a small number of expatriate employees subsequently returned to work.
As a result, garment production was adversely affected with orders having
delayed shipments, increased air freight costs and some order cancellations.
While the Company believes that it will recover from these events within fiscal
2004, no assurances can be made that additional customers will not cancel or
reduce orders with the Company. There also can be no assurance that the
Companys results of operations will not be adversely affected by an increase
in labor costs in the future. See Item 5. Operating and Financial Review and
Prospects. Furthermore, there can be no assurance that economic, political,
governmental or labor conditions in Mauritius will not have an adverse effect
on the Companys results of operations.

In early calendar 2002, the Companys operations in Madagascar were
significantly and adversely affected by strikes resulting from disputed
presidential elections. As a result, the Company announced on March 28, 2002
that it was moving out of the country and began shipping its equipment to
Mauritius and South Africa. The Companys

3



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production during this period was adversely affected by order cancellations,
increased air freight costs, impairment of fixed assets in Madagascar and the
write down of raw material and finished good inventories. The Company ceased
operations at the end of fiscal 2002 and incurred costs associated with the
closure of these operations, the transfer of equipment to Mauritius and South
Africa, and the write-off of inventory.

South Africa, where the Company began operating fabric manufacturing
facilities in 1998, has undergone significant political and economic
instability. Since the historic all-races election of 1994, which marked the
end of apartheid, the African National Congress (ANC) sought to rebuild
both the political, social and economic foundations of the country. Political,
economic and social tensions continue to sustain a high level of violence in
South Africa. In 1999, Mr. Thabo Mbeki, Nelson Mandelas successor, was
inaugurated as the countrys new president, following the re-election of the
ANC government. The Mbeki government is now focused on easing monetary policy,
stabilizing the South African rand, which has experienced significant
volatility in the past two years, and increasing consumer consumption. A
significant portion of the population in South Africa is unemployed and/or
uneducated. Accordingly, no predictions can be made regarding the political,
social or economic stability of South Africa. Furthermore, there can be no
assurance that economic, political, governmental or labor conditions in South
Africa will not have an adverse effect on the Companys results of operations.

Uncertainties Relating to Operations in China

In October 2001, the Company began operations in Peoples Republic of
China (PRC or China) through the acquisition of NDP Holdings Limited
(NDP) (see Item 7. Major Shareholders and Related Party
TransactionsAcquisition of NDP Holdings Limited), which began operations in
1988. The PRC has historically had a planned economy but has, in certain
aspects, been transitioning to a more market-oriented economy. Although the
Company believes the economic reform and the macroeconomic measures adopted by
the PRC, including the encouragement of private economic activity and greater
economic decentralization, have had and may continue to have a positive effect
on the economic development of the PRC, the Company cannot predict the future
direction of these economic reforms or the effects these measures may have on
the Companys business, financial position or results of operations.
Furthermore, the Chinese government may not continue to pursue these policies
or may significantly alter them to the Companys detriment from time to time
without notice.

Specifically, changes in policies by the Chinese government resulting in
changes in rules, regulations, laws, or their interpretation, or the imposition
of confiscatory taxation, restrictions on currency conversion or imports and
sources of supply could materially and adversely affect either the Companys
financial condition or results of operations. For example, the nationalization
or other expropriation of private enterprises by the Chinese government could
result in the total loss of the Companys investment in China. NDPs
subsidiary operations in China are also, by law, subject to administrative
review by various national, provincial and local agencies of the Chinese
government. Governmental oversight or changes to existing the rules and
regulations relating to administrative review could adversely affect the
Companys results of operations.

The Companys operations in China are subject to other risks as well,
including:

A lack of remedies and impartiality under the Chinese legal system may
prevent the Company from enforcing the tenancy agreements under which NDP
operates its factories or affect its ability to maintain NDPs business
license.

NDP operates its factory under long term tenancy agreements (through 2038)
with the local Chinese government. These tenancy agreements may be difficult to
enforce in China, which could force the Company to accept terms that may not be
as favorable as those provided in its other tenancy agreements. Unlike the
U.S., China has a civil law system in which judicial decisions have little
precedential value. The Chinese government has enacted some laws and
regulations dealing with matters such as corporate organization and governance,
foreign investment, commerce, taxation and trade. However, the Companys
ability to enforce commercial claims or to resolve commercial disputes is
unpredictable because the laws may be relatively new. These matters may also
be subject to the exercise of considerable discretion by agencies of the
Chinese government, and forces unrelated to the legal merits of a particular
matter or dispute may influence their outcome.

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NDPs activities in China also require business licenses which are subject
to review and approval by various national and local agencies of the Chinese
government. Should NDPs business licenses in China not be renewed or
approved, NDP would be required to move its operations out of China, which
would impair its profitability, competitiveness and market position and would
jeopardize NDPs ability to continue operations.

·     Possible changes and uncertainties in economic policies in the Special
Economic Zones of China in which NDP operates could harm NDPs operations by
eliminating benefits it currently enjoys.

As part of its economic reform, China has designated certain areas,
including Shenzhen where NDP has certain manufacturing facilities, as Special
Economic Zones. Foreign enterprises in these areas benefit from greater
economic autonomy and more favorable tax treatment than enterprises in other
parts of China. Changes in the policies or laws governing Special Economic
Zones could eliminate these benefits. Moreover, economic reforms and growth in
China have been more successful in certain provinces than others, and the
continuation or increase of these disparities could affect the political or
social stability of China.

Uncertain applications of Chinese tax laws could subject the Company to
greater taxes in China.

Under applicable Chinese law, the Company has been afforded a number of
tax concessions by the Chinese taxing authorities and have avoided paying taxes
on a substantial portion of its operations in China. The Chinese tax system is
subject to substantial uncertainties and was subject to significant changes
enacted on January 1, 1994, the interpretation and enforcement of which are
still uncertain. Currently, under the Chinese tax system the Company can obtain
tax benefits by reinvesting profits of its subsidiary in China. The Company is
subject to taxes at a rate of 15% of the Companys Chinese taxable profits.
Changes in Chinese tax laws or their interpretation or application may, subject
the Company to greater Chinese taxation in the future.

Controversies affecting Chinas trade with the United States could harm
the Companys operations or depress its share price.

While China has been granted permanent most favored nation trade status in
the United States, controversies between the United States and China may arise
that threaten the status quo involving trade between the United States and
China. These controversies could adversely affect NDPs business by, among
other things, causing its products in the United States to become more
expensive, which could result in a reduction in the demand for its products by
customers in the United States. Political or trade friction between the United
States and China, whether or not actually affecting the Companys business,
could also adversely affect the prevailing market price of the Companys
ordinary shares.

Changes in currency rates involving the Hong Kong dollar or Chinese yuan
could increase the Companys expenses or cause economic or political problems
affecting its business.

NDPs sales are predominately denominated in Hong Kong and U.S. dollars.
In addition, a significant portion of NDPs operating costs including labor and
electricity costs are denominated in Chinese yuan. The Hong Kong government may
not continue to maintain the present currency exchange mechanism, which fixes
the Hong Kong dollar at approximately 7.80 to each U.S. dollar. If the currency
exchange mechanism between the Hong Kong dollar and the U.S. dollar is changed,
the Companys results of operations and financial condition could be materially
adversely affected. Any material increase in the value of the Hong Kong dollar
or Chinese yuan relative to the U.S. dollar would increase the Companys
expenses.

A significant portion of NDPs business is generated from Hong Kong. In
addition a significant portion of NDPs costs are denominated in Hong Kong
dollars. Hong Kong is a Special Administrative Region (SAR) of PRC with its
own government and legislature and it currently enjoys a high degree of
autonomy from the PRC. The Company can give no assurance that Hong Kong will
continue to enjoy autonomy from the PRC. The Hong Kong dollar has remained
relatively constant due to the U.S. dollar peg and currency board system that
has been in effect in Hong Kong since 1983. However, in early 1999, the Hong
Kong dollar was subject to currency speculation and the SAR government
substantially supported the market for the Hong Kong dollar, both directly and
indirectly through the large-scale purchase of securities listed on the Hong
Kong Stock Exchange. The Company can give no

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assurance that the historical currency peg of the Hong Kong dollar to the U.S.
dollar will be maintained, and changes to the historical currency peg could
adversely affect the Companys business.

The absence of an active trading market for the Companys Ordinary Shares
could result in difficulty in selling your Ordinary Shares

On July 23, 2003, the Company received a delisting warning letter from
NASDAQ because the market value of its publicly held shares was less than $5.0
million for 30 consecutive trading days. If the market value of the Companys
publicly held shares does not exceed $5.0 million for 10 consecutive trading
days prior to October 21, 2003, the Company may have to delist its shares. The
Company is currently considering its options, including transferring its
Ordinary Shares to The NASDAQ SmallCap Market. If the Companys Ordinary
Shares are delisted, the market price of the shares could be severely and
adversely affected. The Company cannot assure you that an active market for
its Ordinary Shares will develop or, if developed, will continue. Accordingly,
you may not be able to sell your Ordinary Shares at attractive prices or at
all.

Changes in International Trade Policies Affecting Import Duties and Quotas

The Companys operations are subject to changes in international trade
policies, practices and agreements. The export of garments and fabric by the
Company to the European Community (EC) is largely governed by the terms of
the Fourth Lomé Convention (the Lomé Convention or Lomé IV), an
international cooperation agreement among the 15 nations of the EC and 70
African, Caribbean and Pacific countries (ACP States). As Mauritius is a
member of the Lomé Convention, exports of garments and fabric manufactured in
the country to the EC are not subject to EC import duties or quotas. The Lomé
Convention was extended in June 2000 for an additional period of 20 years. Any
change in the Lomé Convention that would subject the Company to import duties
or quotas could have a material adverse effect on the Companys results of
operations.

In June 2000, the United States passed legislation to create a favorable
trade relationship between the United States and certain sub-Saharan countries,
including Mauritius and South Africa, under the Africa Growth and Opportunity
Act (AGOA). The new legislation allows the Company to sell its garments
into the United States on a duty-free and quota-free basis, subject to certain
conditions, the most significant of which requires the Company to use fabric
manufactured in either Africa or the United States. In January 2001, Mauritius
received permission from the United States to begin shipping products under the
AGOA and in March 2001, South Africa received similar approvals. Any change in
AGOA that would subject the Company to import duties or quotas or changes in
the fabric sourcing requirements could have a material adverse effect on the
Companys operations.

Outside of the EC, the Companys activities are affected by trade
agreements which limit imports from Mauritius and South Africa. Any further
limits on garment and fabric imports from the countries in which the Company
exports into the United States, or any expansion in the number of signatory
countries to the North American Free Trade Agreement (NAFTA), could have a
material adverse effect on the Companys operations.

The impact of multilateral agreements intended to liberalize global trade
could also significantly affect global textile producers and the Company. The
World Trade Organization (WTO) is overseeing the phase-out of textile and
apparel quotas over a 10-year period through 2004. Tariffs on textile/apparel
products are being reduced (but not eliminated) over the same 10-year period.
In addition, Chinas admission to the WTO will have a significant impact on
global textile and apparel trade. By gaining admission to the WTO, China is
able to take advantage of the elimination of quota limitations into the U.S.
market, and there could be a negative impact on the African textile industry,
including the Company. With respect to the EC, this may result in a reduction
in the competitive advantage afforded to ACP States under the Lomé Convention
vis à vis non-ACP States (such as China). Elsewhere, including in the United
States, this may result in reduced quotas and tariffs on exports from other
countries which are not parties to NAFTA or agreements such as the AGOA. There
can be no assurance, however, as to the ultimate effect of any such changes on
Novel Denims results of operations.

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The Bush Administration has recently unveiled a proposal to eliminate
worldwide tariffs for manufactured goods by 2015. The European Union has also
proposed significant reductions in tariffs. These proposals could lead to
further reductions in worldwide tariffs. The U.S. government has also engaged
in discussions with a number of countries or trade blocs with the intent of
further liberalizing trade. Fast track authority granted by Congress in 2002
makes new agreements even more likely, as evidenced by recent proposals related
to a Free Trade Area of the Americas with the goal of essentially expanding
NAFTA to all countries in the western hemisphere, with the exception of Cuba,
by January 2005. The Administration has also entered into a free trade
agreement with Jordan and Chile and proposed similar agreements with Singapore
and certain African countries.

Constraints in Production Capacity

The Company has limited production capacity. From inception through late
fiscal 1999, the Companys manufacturing facilities operated at full capacity
and the Company from time to time limited supply to certain customers when
demand for its products exceeded its capacity.

The Companys production capacity is also subject to some seasonal
fluctuations.

During fiscal 2000, the Companys operations in Mauritius, which accounted
for 82% of the Companys total production during fiscal 2000, were adversely
affected by a continued serious drought, which forced the Company to find
alternative water sources necessary for its operations. The drought limited the
Companys washing and dyeing capabilities and caused the Company to operate
both its fabric and garment operations in Mauritius at less than full capacity.
As a result, the Company rescheduled and reduced orders to certain of its
customers, which inturn resulted in a reduction in sales, and made additional
investments to increase its water resources, including opening a new garment
washing and finishing facility in St. Felix, Mauritius. If severe seasonal
fluctuations or drought conditions occur in the future, the Companys results
of operations could be materially and adversely affected.

In addition, during fiscal 2002 and fiscal 2003, the Company was adversely
affected by production disruptions in Madagascar following disputed
presidential elections as well disruptions in Mauritius resulting from a labor
dispute. See Item 5. Operating and Financial Review and ProspectsClosure of
Madagascar Operations.

Potential Risks in Managing Rapid Growth

Novel Denim has significantly expanded its operations since 1994. As a
result, the Companys sales have grown from $34.1 million in fiscal 1994 to
$145.0 million in fiscal 2003, primarily as a result of significant expansions
in production in Mauritius and other countries as well as through limited
acquisitions. This growth has placed increasing demands on the Companys
management resources and operating systems. The Company has experienced
problems in the past in connection with the integration of local labor at new
facilities. There can be no assurance that Novel Denim will not experience
manufacturing problems and/or product delivery delays in the future as a result
of, among other things, construction delays, the integration and training of
local labor and ramping up production at new facilities.

There can be no assurance that the Companys historical growth rates will
continue in the future. Novel Denims success will, in part, depend upon the
ability of the Company to continue to manage growth effectively. In particular,
management continues to invest in computer hardware and software to further
integrate its accounting and production systems. There can be no assurance that
such systems can be implemented within a reasonable time period without
disruption in customer service or deliveries and without diversion of
managements resources.

Possible Fluctuations in Availability and Cost of Raw Materials

Cotton is the primary raw material used in the production of Novel Denims
products. In fiscal 2003, approximately 47% of the Companys direct costs of
fabric and approximately 25% of the Companys direct costs of garments were
attributable to the cost of cotton. In fiscal 2003, the Companys consumption
of raw cotton was

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approximately 15,280 metric tons at a cost of approximately $18.6 million. The
availability and consequently the cost of cotton fluctuates as a result of a
variety of natural and economic factors. In recent years, the cost of cotton
has experienced unusual volatility, which has been reflected in the Companys
gross profit margins.

In order to diversify its sources of cotton, Novel Denim currently
purchases raw cotton from six suppliers. The cotton obtained from these
suppliers is grown in various regions of Africa, primarily West and East
Africa. Any shortage of cotton or material increase in price could materially
and adversely affect the Companys results of operations.

Dependence on Key Personnel

The Companys ability to maintain its competitive position is largely
dependent on the personal efforts and abilities of its senior management,
particularly Silas K.F. Chou, Chairman of the Board, K.C. Chao, Chief Executive
Officer and President, Alain Rey, Chief Financial Officer, Mei-Ling Liu, Senior
Vice PresidentOperations and Isaacs C.C. Lam, Senior Vice PresidentSales and
Marketing. Each of K.C. Chao, Alain Rey, Mei-Ling Liu and Isaacs C.C. Lam has
an employment contract with the Company. Novel Denim believes that the loss of
the services of any of these executives could have a material adverse effect on
the Company. The Company does not currently have key man insurance with
respect to any of these individuals.

Competition in the Garment and Fabric Businesses

The denim and chino garment and fabric businesses are highly competitive.
In its garment business, Novel Denim faces competition primarily from
manufacturers within Europe, the associated countries such as Algeria, Tunisia
and Morocco (the Associated Countries) and the ACP States and increasing
from the Far East and Mexico. In the manufacturing of printed and dyed fabrics
in China, the Company faces competition from a number of Far East dyeing and
pricing companies who are significantly larger and more diversified than the
Company and have substantially greater resources. In addition, the Company
requires a longer shipping time than many of its competitors. Management
believes that Novel Denims ability to compete effectively depends upon its
continued ability to offer high-quality garments and fabric at competitive
prices.

Rights of Shareholders under British Virgin Islands Law may be Less than
in U.S. Jurisdictions

Novel Denim is organized under the laws of the British Virgin Islands.
Principles of law relating to matters affecting the validity of corporate
procedures, the fiduciary duties of the Companys management, directors and
controlling shareholders and the rights of the Companys shareholders differ
from, and may not be as protective of shareholders as those that would apply if
Novel Denim were incorporated in a jurisdiction within the United States.
Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment of the Companys Memorandum of
Association or Articles of Association, a change in the Companys authorized
capital and certain fundamental corporate transactions, including
reorganizations, certain mergers or consolidations, the sale or transfer of
assets provided such assets form less than 50% of the assets of the Company or
the sale or transfer of such assets is not outside of the usual course of the
Companys business as well as the creation of a lien on the Companys assets.
In addition, there is doubt that the courts of the British Virgin Islands would
enforce liabilities predicated upon United States securities laws. See Item 10.
Additional InformationExchange Controls and Other Limitations Affecting
Security HoldersComparison of United States and British Virgin Islands
Corporate Laws.

Enforceability of Civil Liabilities

The Company is a British Virgin Islands international business company.
All but one of the Companys directors, all of its executive officers and its
controlling shareholder are residents outside of the United States. See Item 6.
Directors, Senior Management and Employees. All or a substantial portion of
the assets of such persons

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may be located outside the United States. As a result, it may be difficult for
investors to effect service of process within the United States upon such
persons or to realize against them upon judgments of courts of the United
States predicated upon civil liability provisions of the federal securities
laws of the United States. The Company has been advised by its British Virgin
Islands counsel that there is doubt as to the enforceability in the British
Virgin Islands in original actions or in actions for enforcement of judgments
of United States courts or of liabilities predicated upon the federal
securities laws of the United States.

Exchange Rate Fluctuations Could Cause a Decline in the Companys
Financial Condition and Results of Operations

As a result of the Companys international operations, the Company
generates a certain portion of its net sales and incurs a certain portion of
its expenses in currencies other than the U.S. dollar. To the extent the
Company is unable to match revenues received in foreign currencies with costs
paid in the same currency, exchange rate fluctuations in that currency could
have a material adverse effect on the Companys business. For example, where
the Company has significantly more costs than revenues generated in a foreign
currency, the Company is subject to risk if that foreign currency appreciates
against the U.S. dollar because the appreciation effectively increases the
Companys costs in that location. During fiscal 2003, the Mauritian rupee and
South African rand appreciated against the U.S. dollar, thereby increasing the
Companys locally denominated costs, particularly borrowing and labor costs.
These increases in costs have reduced the Companys profit margins and
competitiveness in the industries in which the Company operates. A prolonged
weakness of the U.S. dollar could materially and adversely affect the Companys
results of operations and prospects. From time to time, as and when the
Company determines it is appropriate and advisable to do so, the Company seeks
to mitigate the effect of exchange rate fluctuations through the use of forward
foreign exchange contracts. Although the Company hedges a portion of its
foreign exchange exposure, the Company may not be able to mitigate the effect
of fluctuations in the currencies in which it denominates its results of
operations. For instance, in fiscal 2003, the Company experienced a loss of
approximately $6.5 million compared to a gain of approximately $2.7 million in
fiscal 2002 due to exchange rate losses on non- U.S. dollar denominated
borrowings. The Company therefore cannot assure you that that it will be
successful in these efforts.See Item 5. Operating and Financial Review and
ProspectsInflation and Exchange Rates.

Control by Principal Shareholder; Conflicts of Interest

As of March 31, 2003, Novel Apparel (BVI) Limited (Novel Apparel)
owned 56.7% of the outstanding Ordinary Shares of the Company, net of treasury
stock, and is able to control the election of the Board of Directors of the
Company and approve or disapprove any other matters submitted to the
shareholders. In December 1998, Novel Enterprises Limited (NEL), a Hong
Kong corporation and a wholly owned subsidiary of Westleigh Limited
(Westleigh), transferred its 80% interest in Novel Apparel to Novel
Holdings (BVI) Limited (NHL), another wholly-owned subsidiary of Westleigh.
Westleigh is privately owned by members of the Chao family, including Messrs.
Silas Chou and Ronald Chao and Ms. Susana Chou. The Chao family thereby
indirectly controls the Company. In addition, during fiscal 2000, Mr. K.C.
Chao individually purchased, through open market transactions, 505,000 Ordinary
Shares of the Company. None of the shareholders of the Chao family reside in or
is a citizen of the United States. Certain affiliates of NEL produce fabric and
garments in the ordinary course for customers in the Far East. While these
products do not compete with those of the Company, there can be no assurance
that conflicts of interest with respect to business opportunities will not
arise in the future or that any such conflicts will be resolved in favor of the
Company.

The Companys customers include Pepe Jeans Europe B.V. and its affiliates
(Pepe Europe), Tommy Hilfiger, Tommy Hilfiger Europe B.V. (Tommy
Europe) which was acquired by Tommy Hilfiger in July 2001, and certain other
affiliates of NEL. Mr. Silas K.F. Chou, a member of the Chao family and
Chairman of the Board of Directors of the Company, was also Co-Chairman of the
Board of Tommy Hilfiger until October 2002 and is a Director of NEL and certain
of its affiliates. Certain other officers and directors of the Company are also
officers and/or directors of Tommy Hilfiger (until February 2003), Pepe Europe,
NEL and certain of its affiliates. See Item 6.

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Directors, Senior Management and Employees. In addition, the Chao family
has an approximately 11% indirect ownership interest in Pepe Europe.

If any conflicts of interest between the Company and Pepe Europe or
certain other affiliates of NEL arise, such disputes will be resolved by the
Companys independent directors. See Item 7. Major Shareholders and Related
Party Transactions.

Taxation of Foreign Corporations; Potential Changes in Circumstances
Affecting U.S. Shareholders

Because Novel Denim is a British Virgin Islands international business
company, the income of the Company and its foreign subsidiaries generally is
not subject to United States federal income taxation. However, various
provisions of the Internal Revenue Code of 1986, as amended, impose special
taxes in certain circumstances on non-United States corporations and their
shareholders. See Item 10. Additional InformationTaxationUnited States
Federal Income Taxation.




ITEM 4. INFORMATION ON THE COMPANY

Overview

Novel Denim is a world-class, vertically-integrated supplier of
high-quality denim and chino garments and fabric and printed and dyed fabrics
to the European Community (EC) and the United States. The Company was
incorporated in 1989 in the British Virgin Islands as an international business
company under the International Business Companies Act. The Company initially
was a denim fabric manufacturer, and became a vertically-integrated producer of
basic and value-added denim garments to complement its fabric production in
1990 with the addition of sewing and finishing facilities. In August 1998, the
Company further expanded into the production of chino fabric and garments. In
October 2001, the Company further expanded into the production of dyed and
printed fabrics through the acquisition of an existing business in Shenhzen,
China.

In response to adverse market conditions, the Company has ceased certain
of its operations. In March 2002, the Company terminated its operations in
Madagascar due to political instability and ceased producing knitted shirts.
The Company transferred a portion of those manufacturing assets to South Africa
and Mauritius and incurred charges of $2.8 million and $2.4 million in fiscal
2003 and 2002, respectively, as a result of impairment charges and recorded an
inventory provision of nil and $3.8 million in fiscal 2003 and 2002,
respectively as a result of write-downs of inventory. In fiscal 2003, the
Company experienced production disruptions in Mauritius due to labor disputes
which resulted in reduced production efficiencies which together with a Company
focus to reduce costs resulted in the Company closing its garment production
facility in Coromandel, Mauritius.

Novel Denim offers a wide range of high-quality basic and value-added
garments and fabric in accordance with customer specifications. The Company
produces a wide variation of garments, including jeans, chinos, shirts, skirts,
shorts and jackets in a variety of styles, colors and finishes, such as
overdyed, stonewashed, sandblasted and stretch. The Company also produces an
extensive range of different kinds of denim and chino fabrics, including
lighter-weight fabrics, fabrics made with alternative weaves and treatments and
specialty colors and finishes. Novel Denims customers include major
manufacturers, retailers and licensees that market under proprietary labels and
trademarks.

The Companys principal executive offices are located at 1/F Novel
Industrial Building, 850-870 Lai Chi Kok Road, Cheung Sha Wan, Kowloon, Hong
Kong. Its telephone number is 011-852-2785-5988.

The Company

The Companys principal manufacturing facilities are currently located in
Mauritius, an island nation located in the southwest Indian Ocean, 1,100 miles
east of the African coastline. In May 1998, the Company expanded its

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sewing production capabilities by opening a new facility adjoining its existing
fabric mill and laundry facility in Mauritius. In August 1998, the Company
further expanded into South Africa with the acquisition of an existing textile
manufacturing facility in Cape Town. See Item 7. Major Shareholders and
Related Party TransactionsAcquisition of Novel Spinners and Novel Weavers.
The Companys yarn and fabric operations in South Africa serve as a foundation
to support the Companys fabric and garment operations in Mauritius. In October
2001, the Company expanded its manufacturing operations outside of Africa
through the acquisition of NDP Holdings Limited (NDP). See Item 7. Major
Shareholders and Related Party TransactionsAcquisition of NDP Holdings
Limited. The Company historically has benefited from relatively low labor
costs as compared to its competitors in Europe and the Associated Countries. In
addition, Mauritius laws and regulations relating to its Export Processing
Zone (EPZ) currently exempt Novel Denim from import duties on raw materials
and machinery.

The Company has benefited from favorable trade relationships between the
countries in which it manufactures its products and the United States and EC.
Because Mauritius is a member of the Lomé Convention, the Company benefits from
quota-free and duty-free access to the EC for its products shipped from
Mauritius. During fiscal 2001 the United States passed into law the African
Growth and Opportunity Act which provides qualified countries (Mauritius and
South Africa qualified in late fiscal 2001) to ship qualified apparel products
into the United States on a duty-free and quota-free basis, subject to certain
restrictions. See Item 3. Key InformationRisk FactorsChanges in
International Trade Policies Affecting Import Duties and Quotas. The Company
ceased producing knitted garments after closing its operations in Madagascar
because these products would be subject to additional import restrictions if
manufactured in another location, significantly increasing the costs to produce
such goods.

Since inception, Novel Denim has continued to increase its manufacturing
capacity to meet customer demands. The Company increased its production of
garments from 1.8 million pieces in fiscal 1994 to 9.8 million pieces in fiscal
2003 and its production of fabric from 7.7 million meters to 31.7 million
meters during the same period. In fiscal 2004, the Company expects to evaluate
its production capabilities in Mauritius, South Africa and China and is likely
to maintain its existing capabilities.

Historically, the Companys sales of garments and fabric have grown
primarily through the addition of new equipment, which has allowed the Company
to expand its production in response to increasing demand from its European and
U.S. customers.

Operating Strategies

The Companys principal growth strategies are to: (i) utilize its
vertically-integrated production to increase flexibility and improve margins
and to broaden its product range; (ii) further expand production capacity and
reduce costs; (iii) diversify geographically; and (iv) increase sales to
existing customers and expand sales to new customers in existing markets.



| |  |  | Utilize its Vertically-Integrated Production to Increase Flexibility
and Improve Margins and to Broaden its Product Range.The Companys
ability to manufacture a broad range of fabrics that can be sold to
third parties or used internally to produce high-quality garments
provides the company with flexibility to shift garment production to
make those products (whether chino or denim) in higher demand and
therefore improve overall margins. The Company expects to continually
expand its fabric operations as it gradually expands its garment
operations. The Company has expanded its garment operations from 4.7
million garments in fiscal 1997 to 9.8 million garments in fiscal 2003
and its fabric production capabilities from 15.8 million meters to 31.7
million meters during the same periods. The Company has broadened its
garment product range from denim in fiscal 1998 to chino garments and
fabrics in fiscal 1999. In fiscal 2002, the Company expanded its fabric
offering with the addition of printed fabrics and more sophisticated
fabric dyeing abilities through the acquisition of NDP, which through
its subsidiaries, owns and operates an integrated fabric dyeing,
printing and finishing facility in the Shenzhen region of the Peoples
Republic of China (PRC), near Hong Kong, capable of processing 40
million meters of fabric annually. NDP sells primarily to fabric
converters in Hong Kong, Southeast Asia and the PRC for eventual sales
into the United States, Europe and Japan. The Company expects to
integrate the marketing of these products into its garment operations as
well as market NDPs fabrics to the Companys existing fabric customers.
The Company also
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | believes that NDP could serve as a fabric foundation for the Company to
expand its garment manufacturing operations in China. See Item 7. Major
Shareholders and Related Party TransactionsAcquisition of NDP Holdings
Limited. During fiscal 2003, garment sales were comprised of
approximately 60% denim, 35% chino and 5% knits. During the same period
third party fabric sales were comprised of approximately 29% denim, 22%
chino, and 49% printed fabrics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Further Expand Production Capacity and Reduce Costs.In order to
reduce its labor costs and benefit from favorable trade relationships
with the United States and Europe, the Company has taken a number
actions to expand production and enhance its competitiveness. In 1998
the Company expanded its operations into South Africa through the
acquisition of an existing fabric spinning facility in Cape Town, South
Africa. The Company subsequently expanded this facility to include
weaving capabilities and denim fabric dyeing capabilities. The Company
commenced garment operations at the end of fiscal 2003. The facilitys
location allows the Company to benefit from the close proximity to the
Companys raw cotton sources, Cape Towns established infrastructure and
the areas relatively low electricity costs. In fiscal 2002, the
Company expanded beyond Africa with the acquisition of NDP in China
which it expects to serve as a foundation for future fabric and possibly
garment expansion within China. China currently benefits from favorable
labor costs and quality standards at least as high as Mauritius, however
without the favorable trade arrangements that the Companys African
operations have with respect to the EU and the United States. In fiscal
2004, the Company plans to evaluate its production capabilities in China
and the Far East, in light of the expected release of quota restrictions
expected in 2005.
|
| |  |  | Diversify Geographically.The Company believes that in order to
maintain its competitiveness in increasingly difficult global garment
and fabric markets, it needs to focus on diversifying its production.
The Company plans to develop operations in markets that provide
favorable labor or trade relationships with the Companys customers in
the United States and Europe. For example, the Company has already
expanded from production solely in Mauritius into South Africa and
China.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Increase Sales to Existing Customers and Expand Sales to New
Customers in Existing Markets.The Company believes there is potential
for further growth by expanding sales to existing garment and fabric
customers as Novel Denim increases its production and broadens its
product range. In particular, the Company believes there is an
opportunity to expand its sales to U.S. customers as a result of the
African Growth and Opportunity Act. See Item 3. Key InformationRisk
FactorsChanges in International Trade Policies Affecting Import Duties
and Quotas. Although there can be no assurance, the Company believes
that sales to such accounts can be increased as its customers benefit
from the continuing demand for products. The Company also intends to
expand its customer base in its existing markets. The Company believes
that this expansion can be accomplished by leveraging its customer
portfolio and extensive industry contacts to attract new customers
particularly with respect to NDP where the Company is introducing a
broader fabric range for its existing customers.                                                                                                                                                                                                                                                                                                                                                        

Products

Novel Denim manufactures denim garments and fabric, chino fabric and
garments, Dyed and printed fabrics and from March 2001 until approximately
March 2002 produced knitted shirts. Net sales represented by each of the
Companys segments from fiscal 1999 to 2003 are set forth below:

|                                          |                        |       |        |                             |        |      |        |         |         |      |         |         |         |   |         |         |         |   |        |         |         | 
|----------------------------------------- | ---------------------- | ----- | ------ | --------------------------- | ------ | ---- | ------ | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------- | ------- | 
|                                          |                        |       |        | Fiscal Year Ended March 31,
|                                          |                        |       |        |                            
|                                          |                        |       |        | 1999                        |        | 2000 |        | 2001    |         | 2002 |         | 2003   
|                                          |                        |       |        |                             |        |      |        |         |         |      |         |        
|                                          |                        |       |        | (in thousands)             
|Garments                                  |                        | $     | 77,197 |                             |        | $    | 81,650 |         |         | $    | 109,971 |         |         | $ | 118,460 |         |         | $ | 81,236 |        
|Fabric (including inter-divisional sales) |                        |       | 45,502 |                             |        |      | 48,714 |         |         |      | 63,308  |         |         |   | 84,273  |         |         |   | 92,502 |        
|                                          | Inter-divisional sales |       |        | (24,997                     | )      |      |        | (25,263 | )       |      |         | (35,233 | )       |   |         | (44,148 | )       |   |        | (28,752 | )      
|                                          |                        |       |        |                             |        |      |        |         |         |      |         |         |         |   |         |         |         |   |        |        
|                                          |                        | Total |        | $                           | 97,702 |      |        | $       | 105,101 |      |         | $       | 138,046 |   |         | $       | 158,585 |   |        | $       | 144,986 | 
|                                          |                        |       |        |                             |        |      |        |         |         |      |         |         |         |   |         |         |         |   |        |        

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Garments

In 1990, Novel Denim began manufacturing high-quality denim garments
following the addition of sewing and finishing facilities to its existing
fabric manufacturing plant. As a result of these additions, the Company
established a vertically-integrated facility encompassing all manufacturing
processes necessary to convert raw cotton into high-quality garments. In 1998,
the Company expanded its product offering with the development of a
vertically-integrated chino fabric and garment operation. Vertical integration
allows Novel Denim to produce both denim and chino garments cost-effectively
because: (i) the quality of the fabric supplied is assured; (ii) less fabric
inventory is required; (iii) packaging costs are greatly reduced; and (iv)
certain transportation costs are eliminated. This vertically-integrated process
also provides the Company with the flexibility to manufacture a variety of
garments and fabric according to customers specifications and delivery
requirements. During fiscal 2003, Novel Denim used approximately 53% of the
fabric it produced for the production of garments, as compared with
approximately 58% in fiscal 2002 and approximately 53% in fiscal 2001.

Novel Denim produces a broad and diverse range of garment types including
a variety of jeans, chinos, shirts, shorts, skirts and jackets. For fiscal
2003, the Companys denim, chino and knitted garments represented approximately
60%, 35%, and 5% respectively, of total garment sales. The Company ceased
producing knitted garments in fiscal 2003. Among these items, denim jeans are
the most popular and accounted for approximately 4.5 million pairs or 48% of
the Companys total garment sales in fiscal 2003. Novel Denim manufactures its
jeans in a variety of colors, weights and finishes. The Companys basic jeans
are stonewashed, indigo blue denim, 141/2 ounce, five-pocket jeans that are
commonly worn by both teenagers and adults. The remaining 52% of its garment
production consisted of value-added chino pants, denim jackets, shirts, shorts
and skirts. By varying colors, accessories and finishes, the Company has been
able to command higher prices and achieve a higher gross profit margin for
these value-added garments.

Fabric

Since its inception in 1988, the Company has been a manufacturer of denim
fabric and currently produces an extensive range of denim fabrics. Novel
Denims core denim fabric is an indigo blue 141/2 ounce fabric. In order to
take advantage of changing fashion trends, the Company complements its core
denim fabric with a variety of other denim fabrics which differ in weight,
finish and color. In early fiscal 2002, the Company completed the construction
of a new denim dyeing facility within its South African facility to further
expand it fabric capacity. In August 1998, the Company expanded its fabric
product offering to include chino fabric with the acquisition of an existing
textile facility in Cape Town, South Africa, which at the time of the
acquisition had only yarn production capabilities. Using the facility as its
foundation, the Company added weaving capacity in the new plant as well as in
its existing facilities in Mauritius, thereby expanding its total fabric
production capacity. In March 1999, the Company completed the construction of a
new dyeing and weaving facility in Mauritius to process the raw undyed chino
fabric for sale to third parties as well as for the manufacturing of chino
garments. During fiscal 2000, in response to the significant reduction in
demand for denim fabrics, the Company upgraded certain of its denim weaving
equipment to allow for conversion to weaving chino fabrics. In October 2001,
the Company significantly increased its fabric production capabilities through
the acquisition of NDP, a large fabric printing and dyeing plant in Shenhzen
China capable of processing over 30 million meters a year. See Item 7. Major
Shareholders and Related Party TransactionsAcquisition of NDP Holdings
Limited. The Companys current production capabilities allow for varying the
weaving capacity between chino and denim fabrics, thereby increasing the
flexibility of the Companys production abilities. In fiscal 2003, the
Companys fabric production was comprised of approximately 29% denim, 22% chino
and 49% printed fabrics. The Company expects to continue to develop its fabric
production capabilities to better service its garment operations as well as to
provide its third-party fabric customers with high-quality and a broader range
of denim and other fabrics.

Customers

Novel Denim sells its garments to over 50 customers and its fabric to
approximately 180 customers. Novel Denims major garment customers include The
Burton Group plc (Burton), The Gap, Mi-Temps and Tommy

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Hilfiger. The Companys major fabric customers are VF Corporation and
Jordache International and fabric converters such as Cogimex (France) and China
Point (Asia) Limited. In fiscal 2003, approximately 34.7% of the Companys
total sales were to U.S. customers, approximately 24.8% of the Companys total
sales were directly to European customers (primarily in Belgium, France, The
Netherlands and the United Kingdom), approximately 18.7% of total sales were to
customers in African countries for further conversion and sale to Europe and
approximately 21.8% of total sales were to customers in other countries
including those in Asia. For the same period, the Companys top three
customers, Tommy Hilfiger, The Gap and Mi-Temps, accounted for approximately
26.2% of its total sales. During the past two fiscal years, The Gap and Tommy
Hilfiger each accounted for more than 10% of the Companys total sales. The
Gap, accounted for approximately 7.7% and 31% of the Companys total sales in
fiscal 2003 and fiscal 2002, respectively, and Tommy Hilfiger accounted for
approximately 11.4% of the Companys total sales in fiscal 2003 compared to
approximately 15% in fiscal 2002.

Tommy Hilfiger designs, sources and markets mens and womens sportswear,
jeanswear and childrenswear under the Tommy Hilfiger® and related labels and
trademarks in the United States and Europe. The Gap is an international
specialty retailer selling casual apparel, personal care and other accessories
for men, women and children. The Gap sells its products under a number of
brands including the Gap, Banana Republic and Old Navy. Mi-Temps is a
French-based discount retailer of value-oriented footwear and apparel with
stores throughout Europe. It sells denim products under the private label name
DYNAM. Pepe Europe designs, sources and markets mens and womens jeans
and jeans-related products to retailers in Europe under the Pepe® label and
trademarks.

The Company does not have any long-term contracts with its customers.
Nevertheless, due to its reliable customer service, its high-quality denim and
chino products and its competitive pricing, the Company has maintained
long-term relationships with many of its customers such as Bonnit, Burton, The
Gap, Mi-Temps, Tommy Hilfiger and VF Europe, who have been customers for more
than five years. Novel Denims garment customers generally submit and reserve
their preliminary indications of potential order quantity six months in
advance. The orders are then confirmed by the customers three to four months
prior to the beginning of the manufacturing process by specifying colors,
styles and sizes. Because of this order time lag, the Company can assess
accurately its garment production capacity on a monthly basis to satisfy its
customers requirements. The Companys regular fabric customers place their
fabric orders and secure them with a letter of credit approximately one month
in advance.

Marketing and Sales; Distribution

The Company sells its products primarily in the United States, Belgium,
France, Germany, The Netherlands and the United Kingdom to well-known designers
of denim and chino garments, popular retailers of fashionable denim and chino
garments as well as to other manufacturers. Novel Denims sales and marketing
staff of 130 individuals is divided into garment and fabric groups, with 90
individuals specializing in garments and 40 individuals specializing in fabric.
These two teams are responsible for: (i) soliciting and obtaining purchase
orders from customers; (ii) translating customer specifications into guidelines
for the production of high-quality products; (iii) in the case of garments,
purchasing accessories; and (iv) arranging for shipment. The Companys sales
group operates from Hong Kong, Mauritius, Macau and London. Novel Denims
fabric sales team coordinates all of the Companys fabric sales from Mauritius.

In addition to the Companys own marketing and sales teams, Novel Denim
employs three sales agencies whose sales agents frequently visit the Companys
customers in France, The Netherlands and the United Kingdom to maintain strong
working relationships. The sales agencies receive a commission on sales of
Novel Denims products. The agencies do not market any other denim
manufacturers products.

Novel Denim distributes its products to its customers directly from its
manufacturing facilities in Mauritius and South Africa, primarily by sea. The
time required for the Company to manufacture a customers order is
approximately 45 days. In addition, the Company requires approximately one
month to ship its products to its customers. Although Novel Denim has a longer
shipping time than many of its competitors, this has not had an adverse effect
on the Companys sales because denim and chino garments are typically worn
year-round and, as a result, customers typically order garments six months in
advance.

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Manufacturing and Capital Expenditures

The Companys vertically-integrated facilities provide Novel Denim with
the flexibility and efficiency necessary to offer its customers a variety of
denim and chino products tailored to their design and delivery requirements.
These facilities encompass every aspect of the production process, from the
spinning, weaving, dyeing and finishing of fabric and the manufacturing of
garments. In addition, because its facilities are vertically integrated, the
Company can strictly enforce quality control throughout the entire
manufacturing process.

Novel Denims textile facilities clean and spin cotton into yarn through
the use of spinning machinery which produces quality yarns at high speeds. The
Company produces both the traditional open-end yarn and the value-added ring
spun yarn. The yarn is then woven into fabric on weaving machines.

After the yarn has been woven into fabric, the fabric is forwarded to the
fabric finishing lines. It is then dyed and treated by applying special
chemicals and/or resins to give it a smooth quality as well as certain other
properties. The Company may also dye its fabric again to produce an overdyed
look in blue, black or a variety of other colors. In the case of denim fabrics,
the yarn is dyed before being woven into fabric. Novel Denim stores
approximately 60 days of fabric in inventory.

The Companys garment production strategy has been to modernize its sewing
plants in order to minimize production costs and cycle times while maximizing
design flexibility and improving quality. The Company has invested in automated
sewing and computerized cutting machines which offer several advantages over
conventional machines, including faster sewing speed, higher quality and lower
production costs. Novel Denim also utilizes automated machines to sew delicate
and more intricate embroidery patterns. The Companys garments are then
finished to provide them with a variety of special qualities such as
stonewashed, bleached or overdyed. The Companys production lines enable it to
produce varying styles of garments and thus fill multiple orders
simultaneously. The Company manufactures garments according to specific
customer purchase orders which prevents an unnecessary, costly accumulation of
inventory.

Production and capital expenditures from fiscal 1999 to fiscal 2003 are
set forth below:

|                                            |          |  |                             |        |      |  |        |        |      |  |        |        |  |  |        |        |  |  |        |        | 
|------------------------------------------- | -------- |  | --------------------------- | ------ | ---- |  | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ | 
|                                            |          |  | Fiscal Year Ended March 31,
|                                            |          |  |                            
|                                            |          |  | 1999                        |        | 2000 |  | 2001   |        | 2002 |  | 2003  
|                                            |          |  |                             |        |      |  |        |        |      |  |       
|Garment Products (thousands of pieces)      |          |  | 7,708                       |        |      |  | 8,711  |        |      |  | 12,395 |        |  |  | 15,391 |        |  |  | 9,776  |       
|Fabric (thousands of meters)                |          |  | 15,228                      |        |      |  | 19,190 |        |      |  | 24,716 |        |  |  | 49,184 |        |  |  | 61,676 |       
|Capital Expenditures (thousands of dollars) |          |  |                             |        |      |  |        |        |      |  |        |        |  |  |        |        |  |  |        |       
|                                            | Garments |  | $                           | 6,925  |      |  | $      | 3,844  |      |  | $      | 10,824 |  |  | $      | 3,755  |  |  | $      | 2,536  | 
|                                            | Fabric   |  |                             | 16,959 |      |  |        | 6,313  |      |  |        | 5,462  |  |  |        | 7,228  |  |  |        | 8,146  | 
|                                            |          |  |                             |        |      |  |        |        |      |  |        |        |  |  |        |        |  |  |        |       
|                                            | Total    |  | $                           | 23,884 |      |  | $      | 10,157 |      |  | $      | 16,286 |  |  | $      | 10,983 |  |  | $      | 10,682 | 
|                                            |          |  |                             |        |      |  |        |        |      |  |        |        |  |  |        |        |  |  |        |       

In February 2002, the Company announced that it was experiencing
significant production disruptions at its Madagascar plants due to events
following the countrys disputed presidential elections. For fiscal year 2002,
the Company shipped approximately 5.1 million garments from Madagascar
representing 36% of total garments and 28% of total sales. As a result of the
operational instability caused by these events, the Company announced the
closure of these facilities, the ceasing of production of knitted shirts, and
the transfer of assets to its existing operations in Mauritius and South
Africa. In fiscal 2002, , the Company took an impairment charge of $2.4
million, wrote-down inventories and provided for redundancy costs. In fiscal
the Company transferred a portion of those assets to its other facilities in
Mauritius and South Africa and wrote-down those and other assets not utilized
by the amount of $2.8 million.

During fiscal 2002, the Company invested to expand its fabric production
capabilities in South Africa and China following the acquisition of NDP in
October 2001 as well as upgraded its existing capabilities. In South Africa,
the Company completed the construction of a new denim fabric dyeing facility
providing it the capabilities to dye and finish over 6 million meters of fabric
a year. In addition, the Company began construction of a modern

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garment manufacturing facility adjacent to its existing fabric operations in
Cape Town. The facility, which opened late in fiscal 2003, has capacity to
produce over 250,000 garments a month for export primarily to the U.S. The
Company is currently working to improve production efficiencies towards
capacity, but is producing less than 50% of capacity due to inefficiencies, For
additional information see Item 5. Operating and Financial Review And
ProspectsLiquidity and Capital Resources.

Geographic breakdown of sales by location from fiscal 2001 to fiscal 2003
is set forth below:

|       |          |  |                             |         |      |  |      |         |  |  |   |         | 
|------ | -------- |  | --------------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|       |          |  | Fiscal Year Ended March 31,
|       |          |  |                            
|       |          |  | 2001                        |         | 2002 |  | 2003
|       |          |  |                             |         |      |  |     
|U.S.   |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Garments |  | $                           | 56,127  |      |  | $    | 78,679  |  |  | $ | 49,405  | 
|       | Fabric   |  |                             | 65      |      |  |      | 1,725   |  |  |   | 860     | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Total    |  | $                           | 56,192  |      |  | $    | 80,404  |  |  | $ | 50,265  | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|Europe |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Garments |  | $                           | 49,521  |      |  | $    | 37,043  |  |  | $ | 30,085  | 
|       | Fabric   |  |                             | 1,531   |      |  |      | 6,784   |  |  |   | 5,851   | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Total    |  | $                           | 51,052  |      |  | $    | 43,827  |  |  | $ | 35,936  | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|Asia   |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Garments |  | $                           | 1,322   |      |  | $    | 512     |  |  | $ | 292     | 
|       | Fabric   |  |                             | 1,973   |      |  |      | 14,803  |  |  |   | 29,895  | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Total    |  | $                           | 3,295   |      |  | $    | 15,315  |  |  | $ | 30,187  | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|Other  |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Garments |  | $                           | 3,001   |      |  | $    | 2,226   |  |  | $ | 1,454   | 
|       | Fabric   |  |                             | 24,506  |      |  |      | 16,813  |  |  |   | 27,144  | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Total    |  | $                           | 27,507  |      |  | $    | 19,039  |  |  | $ | 28,598  | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|Total  |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Garments |  | $                           | 109,971 |      |  | $    | 118,460 |  |  | $ | 81,236  | 
|       | Fabric   |  |                             | 28,075  |      |  |      | 40,125  |  |  |   | 63,750  | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        
|       | Total    |  | $                           | 138,046 |      |  | $    | 158,585 |  |  | $ | 144,986 | 
|       |          |  |                             |         |      |  |      |         |  |  |   |        

Quality Control

Novel Denims quality control team has adopted strict standards at each
stage of garment and fabric production to ensure the quality of its products.
The Company monitors the quality of its products throughout the manufacturing
process beginning with the raw cotton fiber and ending with the final garment.
In its garment manufacturing facilities, a quality control team consisting of
80 members, under the leadership of an operations director and manager,
inspects a sample of the garment production on a daily basis. Novel Denim
employs a quality control staff of 21 people in its fabric manufacturing
facilities. The Company tests the quality of the raw cotton it purchases and
also tests intermediate yarn products along the spinning process to ensure
strong, high-quality spun yarn. As a result, the Company has not experienced
any significant quality claims from its customers.

Raw Materials

Cotton is the primary raw material used in the production of Novel Denims
products. In fiscal 2003, approximately 47% of the Companys direct costs of

fabric and approximately 25% of the Companys direct costs of garments were
attributable to the cost of cotton. In fiscal 2003, the Companys consumption
of raw cotton was approximately 15,280 metric tons at a cost of approximately
$18.6 million. The availability and consequently the cost of cotton fluctuates
as a result of a variety of natural and economic factors. In recent years, the
cost of cotton has experienced unusual volatility, which has been reflected in
the Companys gross profit margins.

In order to diversify its sources of cotton, Novel Denim currently
purchases raw cotton from six suppliers. The Company uses cotton which is
hand-picked and grown in various regions of Africa, primarily West and East
Africa.

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Because its cotton is grown in Africa in close proximity to Mauritius and South
Africa, the Company benefits from low transportation costs. Novel Denim enters
into purchase contracts with its cotton suppliers six to eight months in
advance of delivery to provide for a continuous supply of cotton and to limit
the effect of short-term fluctuations in cotton prices.

The Company also purchases dyes, chemicals and garment accessories from a
variety of suppliers. These raw materials have historically been available in
adequate supply.

Management Information Systems

The Company has invested in computer hardware, systems applications and
software to: (i) enhance the speed and efficiency of its garment design and
manufacturing and its denim fabric production; (ii) support the sale and
distribution of denim products to its customers; and (iii) improve the
integration and efficiency of its Mauritius, South African and Hong Kong
operations. Currently, the Company has compiled a database of its production
data ranging from raw cotton quality checks to garment washing processes, as
well as spare parts and warehouse inventory figures. The Companys computer
network facilitates quick, secure and accurate data transfer and
communications. The Companys production control system is comparable to that
of other denim garment and fabric manufacturers. However, because the Company
recognizes that expansion and increased production may burden its current
system, it intends to continue to invest in existing and new systems in
conjunction with its increased production and expansion.

Research and Development

The Company employs a team of 16 people in its research and development
(R&D) department. Members of the Companys R&D team are highly skilled and
experienced. Their primary functions are to research and review production
programs and processing methods to meet increasingly stringent customer demands
while maintaining the Companys high quality standards. As a result of the
efforts of its R&D team, Novel Denim has been able to replicate and refine
special dyeing and spinning techniques requested by its customers, such as
overdyeing and the ring spun process. Ultimately their work leads to the
development of new fabrics.

Governmental Regulation

Federal, state and local regulations relating to the workplace and the
discharge of materials into the environment are continually changing;
therefore, it is difficult to gauge the total future impact of such regulations
on the Company. However, existing government regulations are not expected to
have a material effect on the Companys financial position, operating results
or planned capital expenditures. The Company currently has an active
environmental protection committee and an active workplace safety organization.

Competition

The garment and fabric businesses are highly competitive. In its garment
business, Novel Denim faces competition primarily from manufacturers within
Europe, the Associated Countries and the ACP States and more recently Mexico
and the Far East for U.S. customers. In the manufacturing of fabric, Novel
Denim faces competition from manufacturers in Europe and the Associated
Countries. In the manufacturing of printed and dyed fabrics in China, the
Company faces competition from numerous dyeing and printing companies in Asia.
Some of the Companys fabric competitors are significantly larger and more
diversified than the Company and have substantially greater resources. The
major competitive factors among manufacturers of products include price,
quality and flexibility, product styling and differentiation and customer
service, with the significance of each factor depending upon the particular
needs of the customer and the product involved.

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Novel Denim competes primarily on the basis of quality, price, flexibility
and service. By manufacturing garments in Mauritius and South Africa (fiscal
2003) which have relatively low labor costs, the Company maintains a
comparative cost advantage over its competitors who manufacture in Europe and
the Associated Countries and, as a result, can provide its products at
attractive prices. In addition, Mauritiuss EPZ currently exempts Novel Denim
from import duties on raw materials and machinery. Because Mauritius is a
member of the Lomé Convention, Novel Denim also benefits from quota-free and
duty-free access for its products to the EC. Compared to its competitors who
manufacture in Lomé Convention countries, management believes the Company
offers high-quality products at competitive prices. Similarly, Mauritius and
South Africa are approved to benefit from the U.S. African Growth and
Opportunity Act. The Companys vertically-integrated garments operation permits
it to produce its garments from its own fabric, thereby maximizing margins,
reducing transportation costs and enabling it to monitor quality. The Company,
however, requires a longer shipping time than many of its competitors. See
Item 3. Key InformationRisk Factors Changes in International Trade Policies
Affecting Import Duties and Quotas.

Backlog

Novel Denims garment customers generally submit their preliminary
indications of potential order quantity three to six months in advance. The
orders are then confirmed by the customers three to four months prior to the
beginning of the manufacturing process by specifying colors, styles and sizes.
Because of this order time lag, the Company can assess accurately its garment
production capacity on a monthly basis to satisfy its customers requirements.
The Companys backlog in garments as of March 31, 2002 and March 31, 2003 was
6.0 million and 4.4 million pieces, respectively. Because the fabric business
is a commodity type business, the Company does not have significant backlog in
fabric.

Properties

The principal executive offices of Novel Denim are located at 1/F, Novel
Industrial Building, 850-870 Lai Chi Kok Road, Cheung Sha Wan, Kowloon, Hong
Kong. The general location, use and approximate size of the Companys principal
properties are set forth below. All properties are leased except where
otherwise specified.

|                           |  |                                                |  |                  |         | 
|-------------------------- |  | ---------------------------------------------- |  | ---------------- | ------- | 
|                           |  |                                                |  | Approximate Area
|Location                   |  | Use                                            |  | in Square Feet  
|                           |  |                                                |  |                 
|Hong Kong                  |  | Executive office(1)                            |  |                  | 14,500  | 
|Port Louis, Mauritius      |  | Executive office                               |  |                  | 12,800  | 
|Ile dAmbre, Mauritius     |  | Fabric factory(1,2),
laundry(1),sewing
factory |  |                  | 636,000 | 
|Coromandel, Mauritius      |  | Laundry                                        |  |                  | 15,000  | 
|Montagne Longue, Mauritius |  | Sewing factory                                 |  |                  | 70,000  | 
|Grand Bois, Mauritius      |  | Sewing factory                                 |  |                  | 50,000  | 
|St. Felix, Mauritius       |  | Laundry, sewing factory                        |  |                  | 165,000 | 
|Cape Town, South Africa    |  | Fabric, laundry and
sewing factory(3)          |  |                  | 305,000 | 
|Shenhzen, China            |  | Fabric factory and
executive offices(4)        |  |                  | 550,000 | 



(1)  Properties leased from affiliates of NEL.


(2)  200,000 square feet owned freehold.

(3)  100,000 square feet owned freehold.

(4)  Land owned under a ground lease expiring in 2038. Property owned.

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Novel Denim leases the space for its executive offices in Hong Kong and
the land for certain of its operations in Mauritius from affiliates of NEL. See
Item 7. Major Shareholders and Related Party Transactions. The Company
believes that its existing facilities are well maintained and in good operating
condition and are adequate for its present level of operations.

Organization Structure

The following is a list of all of Novel Denims significant subsidiaries
as of March 31, 2003, including the name, country of incorporation or residence
and of ownership interest and voting power held.

|                                        |  |                        |  |                 |       |  
|--------------------------------------- |  | ---------------------- |  | --------------- | ----- | -
|                                        |  | Country of             |  | Percentage     
|                                        |  | incorporation          |  | of ownership,  
|Name of Subsidiary                      |  | or residence           |  | voting interest
|                                        |  |                        |  |                
|Novel Textiles Ltd.                     |  | Mauritius              |  |                 | 98.7  | %
|Novel Denim (HK) Ltd.                   |  | Hong Kong              |  |                 | 100.0 | %
|Novel Garments (Mauritius) Ltd.         |  | Mauritius              |  |                 | 100.0 | %
|Nomacotex Ltd.                          |  | Jersey                 |  |                 | 100.0 | %
|Novel Garments International Ltd.       |  | Jersey                 |  |                 | 100.0 | %
|Byren Trading Ltd.                      |  | Jersey                 |  |                 | 100.0 | %
|Novel Garments (Madagascar) S.A.        |  | Madagascar             |  |                 | 100.0 | %
|Novel Spinner (S.A.)(Pty) Ltd.          |  | South Africa           |  |                 | 100.0 | %
|Novel Weavers (S.A.)(Pty) Ltd.          |  | South Africa           |  |                 | 100.0 | %
|Battel Ltd.                             |  | British Virgin Islands |  |                 | 100.0 | %
|Kotten Ltd.                             |  | British Virgin Islands |  |                 | 100.0 | %
|Good Port Finance Ltd.                  |  | British Virgin Islands |  |                 | 100.0 | %
|Novel Dyers (Pty) Ltd.                  |  | South Africa           |  |                 | 100.0 | %
|Novel Garments (S.A.) (Pty) Ltd.        |  | South Africa           |  |                 | 100.0 | %
|NDP Holdings Limited                    |  | British Virgin Islands |  |                 | 100.0 | %
|NDP Investment Limited                  |  | British Virgin Islands |  |                 | 100.0 | %
|Noveltex Trading Limited                |  | Hong Kong              |  |                 | 100.0 | %
|NDP Trading Limited                     |  | Hong Kong              |  |                 | 100.0 | %
|NDP Fabrics Limited                     |  | Hong Kong              |  |                 | 100.0 | %
|Income Pearl Limited                    |  | Hong Kong              |  |                 | 100.0 | %
|Novel Dyeing and Printing Mills
Limited |  | China                  |  |                 | 100.0 | %




ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Operating Results

The information should be read in conjunction with the Companys
Consolidated Financial Statements and related notes thereto included elsewhere
in this Annual Report.

Cotton is the single largest component of the Companys cost of goods
sold. The Company enters into purchase contracts with its cotton suppliers six
to eight months in advance of delivery to provide for a continuous supply of
cotton and to limit the effect of short-term fluctuations in cotton prices. In
fiscal 2001, 2002 and 2003, cotton costs were more in line with current market
values. As of March 31, 2003, the Company had outstanding contractual
commitments to purchase cotton inventory of $8.3 million of which the contract
unit price was lower than the spot price at year end date.

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Another component of the Companys cost of goods sold is labor costs,
which are primarily denominated in Mauritian rupees. As a result of near
full-employment in Mauritius over the last several years, general wage rates
have been subject to upward pressures. Labor costs historically have not had a
significant effect on the Companys results of operations because of the
devaluation of the rupee against the U.S. dollar (which declined over 50%
between March 1992 and March 2002 although offset by the appreciation of the
Mauritian rupee against the U.S. dollar by 11.6% in fiscal 2003). In addition,
the Companys operations in Mauritius were adversely affected by a labor
dispute which increased labor costs for the Company during fiscal 2003.

Management believes that in a relatively stable cotton price environment,
the steady increase in higher margin garment production, coupled with reduced
labor costs and a continued commitment to increasing efficiency, should result
in relatively stable gross margins for the Company in a price competitive
environment.

Results of Operations

The following table sets forth, for the periods indicated, the percentage
relationship to net sales of selected items as summarized from the Companys
Consolidated Financial Statements:

|                                             |  |                             |       |      |  |      |       |   |  |  |       |   
|-------------------------------------------- |  | --------------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | --
|                                             |  | Fiscal Year Ended March 31,
|                                             |  |                            
|                                             |  | 2001                        |       | 2002 |  | 2003
|                                             |  |                             |       |      |  |     
|Net sales                                    |  |                             | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | % 
|Cost of goods sold                           |  |                             | 77.8  |      |  |      | 83.4  |   |  |  | 91.0  |   
|                                             |  |                             |       |      |  |      |       |   |  |  |       |   
|Gross profit                                 |  |                             | 22.1  |      |  |      | 16.6  |   |  |  | 9.0   |   
|Other revenues                               |  |                             | .3    |      |  |      | .5    |   |  |  | 1.0   |   
|Selling, general and administrative expenses |  |                             | 11.0  |      |  |      | 11.8  |   |  |  | 21.9  |   
|Impairment loss                              |  |                             |      |      |  |      | 1.5   |   |  |  | 1.9   |   
|Other expenses                               |  |                             | .4    |      |  |      |      |   |  |  | 0.8   |   
|                                             |  |                             |       |      |  |      |       |   |  |  |       |   
|Operating income/(loss)                      |  |                             | 11.0  |      |  |      | 3.8   |   |  |  | (14.6 | ) 
|Interest expense, net                        |  |                             | 2.3   |      |  |      | 2.5   |   |  |  | 3.0   |   
|Minority interest                            |  |                             |      |      |  |      |      |   |  |  |      |   
|Taxation                                     |  |                             |      |      |  |      | .2    |   |  |  | 0.5   |   
|Cumulative effect of accounting change       |  |                             |      |      |  |      | .2    |   |  |  |      |   
|                                             |  |                             |       |      |  |      |       |   |  |  |       |   
|Net income/(loss)                            |  |                             | 8.7   | %    |  |      | 1.3   | % |  |  | (18.1 | )%
|                                             |  |                             |       |      |  |      |       |   |  |  |       |   

Year Ended March 31, 2003 Compared to Year Ended March 31, 2002

Net salesdecreased 8.6% to $145.0 million in fiscal 2003 from $158.6
million in fiscal 2002. Net sales in the garment division were $81.2 million
in fiscal 2003 compared to $118.5 million in fiscal 2002, a decrease of 31.4%.
The reduction in garment sales was the net result of decreased production
capacity following the closure of the Companys Madagascar operations as well
reductions in Mauritius, slightly offset by a small increase in the average
garment selling price. The garment division sold 9.8 million pieces in fiscal
2003 as compared to 15.4 million pieces in fiscal 2002, a decrease of 36.5%.
Net sales in the fabric division (including inter-divisional sales) increased
9.8% to $92.5 million in fiscal 2003 from $84.3 million in fiscal 2002,
primarily due to an increase in production capacity after the acquisition of a
dyeing and printing company in China in October 2001. The fabric division sold
45.5 million meters of fabric in fiscal 2003 as compared to 32.0 million meters
in fiscal 2002, an increase of 42%. Third party fabric sales were $63.8 million
in fiscal 2003 compared to $40.1 million in fiscal 2002, an increase of 59.1%.
This increase in third party fabric sales was primarily due to the increase in
production capacity after the acquisition of a dyeing and printing company in
China in October 2001.

Gross profitdecreased 50.7% to $13.0 million in fiscal 2003 from $26.4
million in fiscal 2002. Gross profit as a percentage of net sales decreased to
9.0% in fiscal 2003 from 16.6% in fiscal 2002. This decrease in gross profit
margin was primarily due to the decreased production efficiencies in garment
production resulting from the labor dispute in late March 2002 and more
competitive market conditions.

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Other revenuesincreased to $1.5 million in fiscal 2003 from $0.8 million
in fiscal 2002. Other revenues consisted of net gains on disposal of property,
plant and equipment, claims received from third parties, proceeds from sales of
scrap materials, a government grant received in South Africa and a recognized
gain on financial instruments, relating to the Companys de-designated currency
contracts for sales in non-U.S. denominated currencies.

Selling, general and administrative expensesas a percentage of net sales
increased to 21.9% in fiscal 2003 compared to 11.8% in fiscal 2002. Selling,
general and administrative expenses increased 69% to $31.6 million in fiscal
2003 from $18.7 million in fiscal 2002. The increases were mainly related to
the newly acquired operations in China and increases in selling and marketing
expenses associated with the increase in sales, together with the exchange loss
from borrowings denominated in Mauritius rupees and South African rand
amounting to approximately $6.5 million in fiscal 2003 compared to a gain of
approximately $2.7 million in the fiscal 2002.

Impairment lossesamounting to $2.8 million in fiscal 2003 compared to
$2.4 million in fiscal 2002. Impairment losses for 2003 and 2002 mainly
represent a partial write off of fixed assets in Madagascar related to the
closure of the Madagascar operations.

Other expensesof $1.2 million in fiscal 2003 mainly represented start-up
costs associated with the plant expansion in South Africa.

Operating lossof $21.2 million in fiscal 2003 compared to operating
income of $6.1 million in fiscal 2002. Operating (loss)/income as a percentage
of net sales decreased to (14.6)% in fiscal 2003 from 3.8% in fiscal 2002,
primarily as a result of the decrease in gross profit margin and the increase
in exchange losses. In the garment division, the Company reported an operating
loss of $19.6 million in fiscal 2003 compared to an operating loss of $7.8
million in fiscal 2002. Operating loss as a percentage of net sales for the
garment division decreased to (24.2)% in fiscal 2003 from (6.6)% in fiscal
2002, primarily due to production disruptions in Madagascar and Mauritius and
continued pricing pressure. In the fabric division, the Company reported an
operating loss of $1.6 million in fiscal 2003 as compared with an operating
income of $13.3 million in fiscal 2002, primarily due to production disruptions
in Mauritius and continued pricing pressure. Operating (loss)/income as a
percentage of net sales for the fabric division decreased to (1.7)% in fiscal
2003 from 15.8% in fiscal 2002.

Interest expense, netin fiscal 2003 increased 9.0% to $4.3 million from
$4.0 million in fiscal 2002, primarily due to the increase in working capital
required to operate the Companys expanding operations and the borrowings
associated with the acquisition of NDP. Interest expense, net as a percentage
of net sales increased to 3.0% in fiscal 2003 from 2.5% in fiscal 2002.

Cumulative effect of accounting changeamounting to $308,000 in fiscal
2002 was the cumulative gain resulting from the adoption on April 1, 2001 of
Statement of Financial Accounting Standards (SFAS) No.133, Accounting for
Derivative Instruments and Hedging Activities which contributes $0.03 in both
basic and diluted earnings per share in fiscal 2002.

Net lossdecreased to $26.2 million in fiscal 2003 compared with net
income of $2.1 million in fiscal 2002. Such decrease was primarily
attributable to lower operating income and an increase in interest expense as
described above.

Year Ended March 31, 2002 Compared to Year Ended March 31, 2001

Net salesincreased 14.9% to $158.6 million in fiscal 2002 from $138.1
million in fiscal 2001. Net sales in the garment division were $118.5 million
in fiscal 2002 compared to $110.0 million in fiscal 2001, an increase of 7.7%.
The increase in garment sales was primarily the result of an increase in
garment production capacity in the Companys sewing plants in Mauritius and
Madagascar. The garment division sold 15.4 million pieces in fiscal 2002 as
compared to 12.4 million pieces in fiscal 2001, an increase of 24.2%. Net sales
in the fabric division (including inter-divisional sales) increased 33.1% to
$84.3 million in fiscal 2002 from $63.3 million in fiscal 2001, primarily due
to an increase in production capacity after the acquisition of a dyeing and
printing company in China in October

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2001. The fabric division sold 32 million meters of fabric in fiscal 2002 as
compared to 24.7 million meters in fiscal 2001, an increase of 29.4%. Third
party fabric sales were $40.1 million in fiscal 2002 compared to $28.1 million
in fiscal 2001, an increase of 42.9%. This increase in third party fabric
sales was primarily due to the increase in production capacity after the
acquisition of a dyeing and printing company in China in October 2001.

Gross profitdecreased 13.7% to $26.4 million in fiscal 2002 from $30.6
million in fiscal 2001. Gross profit as a percentage of net sales decreased to
16.6% in fiscal 2002 from 22.2% in fiscal 2001. This decrease in gross profit
margin was primarily due to the political deadlock in the Madagascar
presidential elections which caused national strikes and other severe
disruptions to production resulting in the write down of cancelled orders and
raw materials, partially offset by higher margins associated with the Companys
newly acquired NDP operations.

Other revenuesincreased to $790,000 in fiscal 2002 from $440,000 in
fiscal 2001. Other revenues consisted of net gains on disposal of property,
plant and equipment, claims received from third parties, proceeds from sales of
scrap materials, a government grant received in South Africa and a recognized
gain on financial instruments, relating to the Companys de-designated currency
contracts for sales in non-U.S. denominated currencies.

Selling, general and administrative expensesas a percentage of net sales
increased to 11.8% in fiscal 2002 compared to 11.0% in fiscal 2001. Selling,
general and administrative expenses increased 23.1% to $18.69 million in fiscal
2002 from $15.19 million in fiscal 2001. The increases were mainly related to
the newly acquired operations in China and increases in selling and marketing
expenses associated with the increase in sales, partially offset by the
exchange gain from borrowings denominated in Mauritius rupees and South African
rand amounting to approximately $2.73 million in fiscal 2002 compared to a gain
of approximately $1.95 million in the fiscal 2001.

Impairment lossesamounting to $2.38 million in fiscal 2002 represented a
partial write off of fixed assets in Madagascar related to the closure of the
Madagascar operations.

Other expensesof $589,000 in fiscal 2001 represented start-up costs
associated with the plant expansion in Madagascar.

Operating incomedecreased 60.0% to $6.1 million in fiscal 2002 from $15.2
million in fiscal 2001. Operating income as a percentage of net sales decreased
to 3.8% in fiscal 2002 from 11.0% in fiscal 2001, primarily as a result of the
decrease in gross profit margin. In the garment division, the Company reported
an operating loss of $7.8 million in fiscal 2002 compared to an operating
profit of $11.6 million in fiscal 2001. Operating income as a percentage of net
sales for the garment division decreased to (6.6)% in fiscal 2002 from 10.6% in
fiscal 2001, primarily due to production disruptions in Madagascar and
Mauritius in the fourth quarter of fiscal 2002, events of September 11 and
continued pricing pressure. In the fabric division, operating income increased
significantly to $13.3 million in fiscal 2002 from $6.4 million in fiscal 2001,
primarily due to an improvement in the average fabric selling price as well as
operating efficiencies. Operating income as a percentage of net sales for the
fabric division increased to 15.8% in fiscal 2002 from 10.1% in fiscal 2001.

Interest expense, netin fiscal 2002 increased 24.8% to $4.0 million from
$3.2 million in fiscal 2001, primarily due to the increase in working capital
required to operate the Companys expanding operations and the borrowings
associated with the acquisition of NDP. Interest expense, net as a percentage
of net sales increased to 2.5% in fiscal 2002 from 2.3% in fiscal 2001.

Cumulative effect of accounting changeamounting to $308,000 in fiscal
2002 was the cumulative gain resulting from the adoption on April 1, 2001 of
Statement of Financial Accounting Standards (SFAS) No.133, Accounting for
Derivative Instruments and Hedging Activities which contributes $0.03 in both
basic and diluted earnings per share in fiscal 2002.

Net incomedecreased 82.7% to $2.1 million in fiscal 2002 from $12.0
million in fiscal 2001. Such decrease was primarily attributable to lower
operating income and an increase in interest expense as described above.

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Liquidity and Capital Resources

In fiscal 2003, the Companys primary funding requirements related to the
financing of capital expenditure and working capital (principally the purchase
of raw cotton and the financing of receivables). The Companys current sources
of liquidity are cash on hand, cash from operations and available credit. The
Company believes that its available capital resources and banking facilities
are sufficient for the Companys present requirements.

As of March 31, 2003, the Company had approximately $6.0 million of cash
and cash equivalents compared to $13.0 million at March 31, 2002. This decrease
was the net effect of an increase in cash provided by operating activities,
partially offset by a reduction in cash provided by investing and financing
activities.

Net cash from operating activities in fiscal 2003 was $13.4 million. This
amount was the net result of a decrease in working capital, partially offset by
the net loss. The decrease in working capital was principally due to a lower
inventory level and a decrease in accounts receivable. Inventory decreased
18.5% to $41.5 million at March 31, 2003 from $50.9 million at March 31, 2002,
primarily as a result of the decrease in the Companys raw material inventory.
Accounts receivable decreased 29.7% to $17.5 million at March 31, 2003 from
$24.8 million at March 31, 2002, primarily as a result of the decrease in
turnover.

The Company maintains working capital, overdraft and other short-term
facilities with various commercial banks in Mauritius, Madagascar, South Africa
and Hong Kong. Credit facilities available under such arrangements totaled
$79.6 million and $71.3 million as of March 31, 2003 and 2002, respectively.
These facilities bear interest at rates based on the respective Mauritius,
Madagascar and South African base rates, the Hong Kong prime rate and lending
rates available on other non-U.S. dollar currencies and ranged from 1.7% to
17.0% in fiscal 2003. The weighted average interest rate for the Companys
short-term borrowings at and for the fiscal year ended March 31, 2003 was 4.85%
and 5.63% respectively.

The short-term credit facilities available in Mauritius require one of the
Companys subsidiaries in Mauritius to maintain a certain maximum debt/equity
ratio. The Company was in compliance with this covenant as of March 31, 2003.
In addition, these short-term facilities are secured by the assets of the
Companys Mauritius subsidiaries.

In connection with the acquisition of NDP in October 2001, the Company
incurred long-term loans to partially fund the acquisition. As of March 31,
2003, the Company had $12.6 million of long-term debt comprised of three notes.
The first note is for $9 million with no payment during the first year and then
quarterly payment during the next 4 years. The second note is for approximately
50 million Mauritian rupees (approximately $1.8 million) with equal monthly
payment during the loan period of 5 years. The third note is for $3.5 million
with equal monthly payment during the loan period of 5 years. During fiscal
2003 the Company also repaid approximately $5.9 million in long-term debt.

Capital expenditures, primarily for construction of industrial buildings,
purchases of equipment, machinery and leasehold improvements, were
approximately $10.7 million in fiscal 2003. Capital expenditures in fiscal 2003
were financed principally through operating cash flows of the Company and
short-term borrowings. The Company intends to incur capital expenditure of
approximately $3.1 million in fiscal 2004, primarily to upgrade its dyeing and
weaving facilities in the fabric division and to expand the garment division
with a new garment facility in Cape Town, South Africa. Management expects
these future capital expenditure will be financed by internally generated funds
and available credit facilities. Funds may also be required to finance the
Companys share repurchase program, announced June 5, 2000, in which the Board
of Directors authorized the repurchase of up to $5 million of its outstanding
shares in the open market from time to time. On November 4, 2002, the Board of
Directors authorized an increase in the share repurchase plan from $5 million
to $10 million. Since the inception of the share repurchase program through
March 31, 2003 the Company has repurchased 1,553,391 shares at an aggregate
cost of approximately $7.0 million. During fiscal 2003, the Company repurchased
1,113,091 Ordinary Shares from open market amounting to approximately $3.7
million.

The Company generally does not extend credit to its customers. However,
for certain major customers, the Company does extend credit for periods of up
to 120 days. A majority of the Companys sales are guaranteed by

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letters of credit or other bank guarantees. The Company has credit policies and
procedures which it uses to manage its credit risk. Over the past three fiscal
years, the Company has had no bad-debt write-offs.

The Company conducts much of its business in various non-U.S. dollar
currencies. As a result, it is subject to the transaction exposures that arise
from foreign exchange rate movements between the dates that foreign currency
transactions are entered into and the date they are consummated. In response to
this exposure, the Company entered forward foreign exchange contracts to hedge
approximately 70% of its foreign currency denominated firm commitments for
fiscal 2003, primarily consisting of sales to customers invoiced in currencies
other than the U.S. dollar. Forward foreign exchange contracts as of March 31,
2003 generally had maturities of less than five months and related to major
European currencies. Counterparties to the transactions are typically large
international financial institutions.

Critical Accounting Policies

The preparation of consolidated financial statements requires the Company
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to revenue recognition, inventories, property, plant
and equipment, forward foreign exchange contracts, income taxes, financing
operations, claims, impairment cost, and contingencies and litigation. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.

Revenue recognitionThe Company recognizes revenue when the goods are
shipped and title passes to the customer provided that: there are no
uncertainties regarding customer acceptance; persuasive evidence of an
arrangement exists; the sales price is fixed or determinable; and
collectibility is probable. Revenue is recognized net of an allowance for
estimated returns, discounts and incentives when the sale is recorded.

The Company recognizes allowances for estimated returns, discounts and
incentives when the sale is recorded. Actual allowances may differ from
estimates due primarily to changes in sales volume based on consumer demand.
Actual allowances have not materially differed from estimates.

Inventories. Stocks and work in progress are stated at the lower of cost
or net realizable value. Cost, calculated on a weighted average basis,
comprises the cost of raw materials, direct labor and an appropriate portion of
production overhead. The Company continually reviews the value of its
inventories and makes adjustments when it believes the likely realizable value
is below cost. The amount of any write-down of inventories are recognized as an
expense in the period the write-down or loss occurs. The Company continually
evaluates its inventories by assessing slow moving current products. Net
realizable value of non-current inventory is estimated based on historical
sales trends for this category of inventory of the Companys individual product
lines, the impact on market trends, an evaluation of economic conditions and
the value of current orders relating to the future sales of this type of
inventory. Estimates of realizable value may differ from actual results.

The Company enters into commitments for the purchase of raw cotton which
is a component of the finished goods it manufactures. In determining the net
realizable value of such finished goods, the Company considers the effect of
changes in the price of raw cotton between the date it enters into the purchase
commitments and the balance sheet date. Where such changes result in a
reduction in the estimated net realizable value of inventory to less than cost,
appropriate provisions are made.

Property, plant and equipment.The carrying value of property, plant and
equipment is impacted by a number of policy elections made by the Company,
including impairment charges, estimated useful lives and residual values.
Property, plant and equipment is stated at cost or at managements estimate of
fair market value if considered impaired under the provisions of SFAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets

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less accumulated depreciation. Long-lived assets are reviewed for impairment
whenever events of changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Assets are grouped and evaluated at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. The Company considers
historical performance and future estimated results in its evaluation of
potential impairment. If such assets are considered impaired, the impairment
recognized is measured by the amount by which the carrying amount of the assets
exceeds its fair value. The Company estimates fair value based on the best
information available. The Company calculates the estimated useful lives of
assets based on industry practice and determines its ability to fully utilize
these assets. Depreciation of property, plant and equipment is calculated to
write off the cost of individual assets in equal annual installments over their
estimated useful lives which range from 3 1/3 to 50 years.

Forward Foreign Exchange Contracts.The Company conducts certain
transactions in various non-U.S. dollar currencies. As a result, it is subject
to the transaction exposures that arise from foreign exchange rate movements
between the dates that foreign currency transactions are entered into and the
date they are consummated. In response to this exposure, the Company enters
into forward foreign exchange contracts to hedge certain foreign currency
denominated firm commitments, primarily sales to customers invoiced in
currencies other than the U.S. dollar. The primary purpose of the Companys
foreign currency hedging activities is to manage the volatility associated with
foreign currency revenues and the other assets and liabilities created in the
normal course of business. The Company does not hold or issue financial
instruments for trading purposes. On April 1, 2001, the company adopted SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended by SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities. Under SFAS No. 133, all derivative instruments
(including certain derivative instruments embedded in other contracts) are
recognized in the balance sheet at their fair values and changes in fair value
are recognized immediately in earnings, unless the derivatives qualifies as
hedges of future cash flows. For derivatives qualifying as hedges of future
cash flows, the effective portion of changes in fair value is recorded
temporarily in equity, then recognized in earnings along with the related
effects of the hedged items. Any ineffective portion of hedges is reported in
earnings as it occurs.

Income Taxes. As part of the process of preparing the Companys
consolidated financial statements, management is required to estimate the
income taxes in each of the jurisdictions in which the Company operates. This
process involves estimating the actual current tax exposure, together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. The Company records a valuation allowance to
reflect the estimated amount of deferred tax assets which more likely than not,
will not be realized. The resulting deferred tax assets and liabilities are
included within the Companys consolidated balance sheet. Estimates may differ
from actual results.

Inflation and Exchange Rates

Local expenses incurred in Mauritius mainly relate to wages, salaries and
short-term borrowings. Wage rates are reviewed on a yearly basis to take
account of inflation and other price increases. Wage rate increases in fiscal
year 2003 were approximately 6.5%. In addition, the Mauritian Rupee appreciated
11.6% against the U.S. dollar during fiscal 2003.

Local expenses incurred in South Africa mainly relate to local borrowings,
the purchase of raw materials, electricity costs and wages and salaries. During
fiscal 2003, the South African rand appreciated approximately 29.3% against the
U.S. dollar.

Local expenses incurred in China mainly relate to local borrowings, the
purchase of raw materials, electricity costs and wages and salaries. During
fiscal 2003, the Chinese yuan held constant against the U.S. dollar. Wage rate
increases in the Shenzhen region in fiscal year 2003 were approximately 8.0%.

The Company has also been able to offset the effects of inflation it
experienced in recent years by increases in productivity through investments in
modern and cost-effective manufacturing facilities. As a result, inflation has
not had a material impact on the Companys results of operations in recent
years.

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Seasonality of Business

Garments are worn year-round and, as such, demand for Novel Denims
products and the level of its sales fluctuate only moderately throughout the
year.

Euro Conversion

On January 1, 1999, 11 of the 15 member countries of the European Union
established permanent, fixed conversion rates between their existing currencies
and the European Unions common currency called the euro.

The transition period for the introduction of the euro was phased in over
a period ending January 1, 2002, with the existing currencies being completely
removed from circulation on July 1, 2002. The Company believes the
introduction of the euro and the phasing out of the other currencies did not
have a material impact on the Companys consolidated financial statements.

Taxation

The Company operates in four jurisdictions where it is subject to profits
taxes; namely Mauritius, South Africa, China and Hong Kong. The Company became
subject to tax in Mauritius effective April 1, 2000. No tax charge has been
recorded during the year ended March 31, 2003, in respect of the Mauritian
operations, as the Company had sufficient tax losses carried forward to off-set
taxable profits.

The Companys subsidiaries incorporated in South Africa are subject to tax
at a rate of 30%. During the year ended March 31, 2003, the Companys South
African subsidiaries had taxable income and a provision amounting to $128,762
has been provided in the financial statements. During the year ended March 31,
2003, a deferred tax provision amounting to $434,606 has been provided in the
financial statements in respect of temporary differences within the South
African subsidiaries.

The Companys subsidiaries incorporated in Hong Kong are subject to tax at
a rate of 16%. During the year ended March 31, 2003, the Companys Hong Kong
subsidiaries had taxable income and a provision amounting to $31,666 has been
provided in the financial statements.

The Companys subsidiary incorporated in China, is subject to tax at a
rate of 15%. During the year ended March 31, 2003, the Companys China
subsidiary had taxation income and a provision amounting to $158,097 has been
provided in the financial statements.

Closure of Madagascar Operations

Following a strategic review of the Companys operations in Madagascar,
the Company announced on March 28, 2002 its intention to close its Madagascar
operations after more than three months of significant political and social
unrest in the country and severe disruptions to the business caused by national
strikes, road and port blockages and fuel shortages. As a result, in fiscal
2002, the Company recorded an impairment charge to its fixed assets totaling
$2.4 million reflecting a write-down in the value of equipment relating to its
knitwear business as well as the write-off of other equipment and tools,
leasehold improvement and furniture and fixtures. For the woven and laundry
machinery and computer equipment, in fiscal 2002 no provision has been made
based on the Companys expectation and assumption that the machinery and
equipment can be successfully relocated. In fiscal 2003, only part of these
assets were successfully relocated and utilized by the Companys South African
operation. The management has impaired those assets not utilized by a further
$2.8 million. In addition, during fiscal 2002, the Company made a provision
for inventories of $3.8 million and redundancy costs of $0.4 million which were
paid in April 2002.

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Expansion into China

On August 7, 2001, the Company entered into an agreement to acquire NDP
for $18.97 million in cash from a subsidiary of Novel Enterprises Limited, an
affiliate of Novel Apparel Limited, the principal shareholder of the Company.
NDP, through its subsidiaries, owns and operates an integrated fabric dyeing,
printing and finishing facility in the Shenzhen region of the Peoples Republic
of China (PRC), near Hong Kong, capable of processing 40 million meters of
fabric annually. NDP sells primarily to fabric converters in Hong Kong,
South-east Asia and the PRC for eventual sales into the United States, Europe
and Japan. The transaction closed on October 1, 2001. The acquired business
contributed revenues of $14,088,680 and operating profit of $1,779,645 to the
Company for the period from October 1, 2001 to March 31, 2002. The acquisition
has been accounted for using purchase accounting, negative goodwill amounting
to $6.9 million arose on acquisition, which was primarily derived from the fair
value of NDPs property, plant and equipment, at the time of the acquisition,
being higher than the purchase price. The negative goodwill has been allocated
to reduce proportionally the values assigned to noncurrent assets.
Accordingly, the operating results of NDP have been included in the Companys
consolidated financial statement since the date of acquisition.

Recently Issued Accounting Standards

The Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, dated June 2001. SFAS No. 143
changes the way companies recognize and measure retirement obligations that are
legal obligations and result from the acquisition, construction, development,
or normal operation of a long-lived asset. The Company will adopt the
provisions of SFAS No. 143 on the first day of fiscal year 2004. The Company
does not believe that the adoption of SFAS No. 143 will have a material impact
on its financial position or results of operations.

In October 2001, the Board issued SFAS No. 144 which requires that those
long-lived assets to be sold be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continued operations or in
discontinued operations. Under this statement, discontinued operations will no
longer be measured at net realizable value or include amounts for operating
leases that have not yet occurred. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a
material impact on the Companys financial position or results of operations.

The FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections, dated
April 2002. SFAS No. 145 states that gains and losses from extinguishment of
debt that do not meet the criteria for classification as extraordinary items in
APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, should not be classified as
extraordinary items. Accordingly, SFAS No. 145 rescinds SFAS No. 4 Reporting
Gains and Losses from Extinguishment of Debt, and SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No.
145 is effective for the Company on the first day of fiscal year 2004. The
Company does not believe SFAS No. 145 will have a material impact on its
financial position or results of operations.

The FASB issued SFAS No. 146, Accounting for Costs Associated with Exit
or Disposal Activities, dated June 2002. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
In summary, SFAS No. 146 requires that the liability and cost shall be
recognized and measured initially at its fair value in the period in which the
liability is incurred, except for one-time termination benefits that meet
certain requirements. SFAS No. 146 is effective prospectively for exit or
disposal activities initiated after December 31, 2002. The Company does not
believe that the adoption of SFAS No. 146 will have a material impact on its
financial position or results of operations.

The FASB issued FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others in November 2002. This interpretation elaborates on
the disclosure to be made by a guarantor in its interim and annual financial
statements about its

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##### Table of Contents



obligations under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements in this
Interpretation are effective for financial statements of interim or annual
period ending after December 15, 2002. The Company does not anticipate the
Interpretation will have a material impact on its consolidated financial
statements.

The FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities in January 2003. This interpretation clarifies the
application of Accounting Research Bulletin No. 51 (ARB 51), Consolidated
Financial Statements, and requires companies to evaluate variable interest
entities for specific characteristics to determine whether additional
consolidation and disclosure requirements apply. This interpretation is
immediately applicable for variable interest entities created after January 31,
2003, and applies to fiscal periods beginning after June 15, 2003 for variable
interest entities acquired prior to February 1, 2003. This interpretation also
requires extensive disclosures, including disclosure that are applicable to
December 31, 2002 financial statements. The Company does not expect that the
adoption of this interpretation will have any material impact on its financial
position or results of operations because the Company has no variable interest
entities.

The FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, dated December 2002. SFAS 148 provides
alternative methods for a transition to the fair value method of accounting for
stock based compensation. The statement also amends the disclosure provision of
SFAS No. 123. Accounting for Stock Based Compensation by requiring disclosure
in the summary of significant accounting policies of the entitys accounting
policy, and additional disclosure of the impact on net income of the Companys
existing method and fair value method of accounting for stock based
compensation. While the Company has not elected to adopt the transition
provisions and use the fair value accounting for its stock based compensation,
it has complied with the new disclosure requirements under SFAS No. 148. As
adopted, this statement does not have any impact on the Companys results of
operations or financial position.

The FASB issued SFAS No. 149 Amendment of Statement 133 on Derivative
Instruments and Hedging Activities dated June 2003. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities. It is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. All provisions of SFAS No. 149 should be applied prospectively.
Management does not expect that the adoption of SFAS No. 149 will have a
material effect on Companys financial position or results of operations.

The FASB issued SFAS No. 150 Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity dated June 2003. SFAS No.
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or as an asset in some circumstances). It is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial instruments created
before the issuance date of SFAS No. 150 and still existing at the beginning of
the interim period of adoption. Restatement is not permitted. Management does
not expect that the adoption of SFAS No. 150 will have a material effect on
Companys financial position or results of operations.

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Trend Information

Since the end of fiscal 2003 when production difficulties were
encountered, the Companys operations and cash flow have improved, as the
Company increased garment production efficiencies, despite the closure of the
Coromandel garment factory in Mauritius at the end of fiscal 2003. Operating
costs were reduced in Mauritius, Hong Kong and South Africa. In addition, the
Company has seen continued volatility of the Mauritian rupee and South African
rand since March 2003.

The Companys key strategic focus is the evaluation of the likely impact
of the abolition of textile quotas under the Multi-Fiber Arrangement, as from
January 2005. Given the addition of the Republic of China as a member of the
WTO, the Company anticipates increasing competitive pressure from the phasing
out of import quota into the EU and the United States from China in 2005. The
Company expects to announce its plan to remain a leading competitive textile
and garment supplier within fiscal 2004.

Customer development continues to be a primary focus of the Company
particularly as the Company concentrates on maintaining its long-standing
customer relationships and further developing new customers particularly in the
U.S. The Company expects to improve production efficiencies in its new garment
operations in South Africa. In addition, the Company expects to continue to
develop its fabric business and plans to further increase sales from its NDP
operations. Given the continued difficulties within the global apparel market
due to the overall consumer market, increasing supply and shorter product
cycles, it is difficult to determine what impact a weakening global economy
will have on the Companys results.

As of March 31, 2003, the Company had a garment order backlog of
approximately 4.4 million pieces, representing approximately six months of
garment production. The shorter backlog, compared to prior years, is
reflective of the Companys production adjustments in both Madagascar and
Mauritius. Order backlog includes both specific orders as well as production
bookings.




ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Senior Management

The directors and executive officers of the Company are:

|                       |  |     |    |          |  |                                                 |  |                  |      | 
|---------------------- |  | --- | -- | -------- |  | ----------------------------------------------- |  | ---------------- | ---- | 
|                       |  |     |    |          |  |                                                 |  | Year in Which   
|                       |  |     |    |          |  |                                                 |  | Current Director
|Name                   |  | Age |    | Position |  | Term Expires                                   
|                       |  |     |    |          |  |                                                
|Silas K.F. Chou        |  |     | 57 |          |  | Director, Chairman of the Board                 |  |                  | 2004 | 
|K.C. Chao              |  |     | 54 |          |  | Director, Chief Executive Officer and President |  |                  | 2005 | 
|Alain Rey              |  |     | 43 |          |  | Director, Chief Financial Officer and           |  |                  | 2004 | 
|                       |  |     |    |          |  | Senior Vice PresidentFinance                   |  |                  |      | 
|Lester M.Y. Ma         |  |     | 56 |          |  | Director and Treasurer                          |  |                  | 2003 | 
|Mei-Ling Liu           |  |     | 56 |          |  | Senior Vice PresidentOperations                |  |                  | NA   | 
|Isaacs C.C. Lam        |  |     | 44 |          |  | Senior Vice PresidentSales and Marketing       |  |                  | NA   | 
|Ronald K.Y. Chao       |  |     | 64 |          |  | Director                                        |  |                  | 2003 | 
|Susana Chou            |  |     | 61 |          |  | Director                                        |  |                  | 2005 | 
|Noel Jervis            |  |     | 58 |          |  | Director                                        |  |                  | 2004 | 
|Leavitt B. Ahrens, Jr. |  |     | 59 |          |  | Director                                        |  |                  | 2003 | 
|Lawrence T.S. Lok      |  |     | 46 |          |  | Secretary                                       |  |                  | NA   | 

Silas K.F. ChouMr. Chou is a founder of the Company and has been the
Companys Chairman of the Board since 1996 and a Director since 1990. In 1996,
Mr. Chou was Managing Director of NEL from 1996 to 2002 and currently serves as
a Director. In addition, from 1992 until October 2002, Mr. Chou was Chairman of
the Board of

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##### Table of Contents



Directors of Tommy Hilfiger, an apparel company listed on the New York Stock
Exchange. In addition, Mr. Chou was Chairman of the Board of Pepe Jeans London
Corporation and its predecessors from 1992 to 1998. Mr. Chou devotes a
significant portion of his time to matters other than those relating to the
Company, including those relating to NEL and its affiliates, Pepe Europe and
A&G Group and Michael Kors Corporation.

K.C. ChaoMr. Chao is a founder of the Company and has been the Chief
Executive Officer and President of Novel Denim since February 1996. Mr. Chao is
responsible for the overall activities of the Company. He also has been a
Director of the Company since 1990. Mr. Chao has also been a Director of NEL
since 1996. He is a national of the Republic of Mauritius.

Alain ReyMr. Rey has been the Chief Financial Officer since 1996 and was
promoted to Senior Vice PresidentFinance in September 1998. He also has been a
Director of the Company since 1997. Mr. Rey is an associate member of the
Institute of Chartered Accountants in England and Wales. For more than five
years prior to joining the Company in 1996, Mr. Rey held various senior
managerial positions with textile companies in Mauritius. From 1986 to 1988,
Mr. Rey was the head of the audit division for France and Monaco in the
consumer services department of Citibank and prior to that performed audit, tax
and consulting services for Coopers & Lybrand in London. He is a national of
the Republic of Mauritius.

Lester M.Y. MaMr. Ma has been a Director of the Company since 1992 and
the Treasurer of the Company since 1997. From 1992 to 2003 he served as a
director of Tommy Hilfiger. Mr. Ma has also served as an Executive Director and
Group Chief Accountant of NEL for more than five years.

Mei-Ling LiuMs. Liu was promoted to Senior Vice PresidentOperations of
the Company in September 1998, having served as Vice PresidentOperations since
1993, prior to which she was the Production Manager at one of the Companys
subsidiaries. Prior to joining Novel Denim, Ms. Liu was first a technical
manager and later general manager for ten years at a cotton mill in Shanghai
where her responsibilities included product design. She is a national of the
Republic of Mauritius.

Isaacs C.C. LamMr. Lam was promoted to Senior Vice PresidentSales and
Marketing of the Company in April 2000, having served as Vice President and
General Merchandising Manager for the Companys garment division since January
2000. Mr. Lam has almost 20 years of sales experience in the garment
manufacturing, and served most recently as General Merchandising Manager for a
leading Hong Kong-based manufacturer of trousers and knitwear for branded
customers in the United States and Europe.

Ronald K.Y. ChaoMr. Chao was a Director of the Company from 1989 to 1990
and from 1997 to present. From 1992 to 2003 he served as a director of Tommy
Hilfiger. In 1996, Mr. Chao resigned as Managing Director of NEL, a position he
held for more than five years prior thereto, and was appointed as Vice Chairman
of NEL.

Susana ChouMs. Chou has been a Director of the Company since 1997. In
1996, she was appointed as Vice Chairman of NEL, and for more than five years
prior thereto she was an Executive Director of NEL. Ms. Chou also serves as the
President of H. Nolasco and Company Limited, a diversified trading company
based in Macau. In addition to her business activities, Ms. Chou is President
of the Legislative Assembly of Macau and a member of Chinas National Committee
of the Chinese Peoples Political Consultative Conference.

Noel JervisMr. Jervis has been a Director of the Company since 1997. From
1993 to 1996, he served as the Chief Executive Officer of Courtaulds Textiles
plc (Courtaulds), Europes second largest textile manufacturer. For more
than 25 years prior thereto, Mr. Jervis held various senior finance positions
at Courtaulds, followed by an appointment as Chairman of its International
Fabrics Group from 1988 to 1993. Mr. Jervis also serves as Chairman of
Interfloor Group Ltd, Europes largest manufacturer of carpet underlays,
specialist rubber flooring and carpet fitting accessories, Chairman of Sherwood
Group plc, a UK based and quoted textiles and clothing company and Chairman of
the Music Group Ltd. a manufacturer and distributor of internationally renowned
branded musical instruments.

Leavitt B. Ahrens, Jr.Mr. Ahrens has been a Director of the Company
since 1997. Mr. Ahrens served as Senior Vice President, International at
Rubbermaid Incorporated, a leading brand manufacturer and marketer of consumer
and commercial products, where he was responsible for the companys global
growth strategy from April
30Table of Contents1996 to April 1999. Prior to joining Rubbermaid, Mr. Ahrens was with VF
Corporation for over 10 years, where he most recently served as President-VF
Asia-Pacific after serving as President-VF Europe: Jeanswear, where he managed
the Lee®, Wrangler® and Maverick® brands.Lawrence T.S. LokMr. Lok has been the Secretary of Novel Denim since
1997. He has also been the Secretary of Tommy Hilfiger and NEL since 1994. In
addition, Mr. Lok also has been Deputy Financial Controller of NEL since 1998
and for more than five years prior thereto was Deputy Group Chief Accountant of
NEL. He is a fellow of the Chartered Association of Certified Accountants.Messrs. Silas K.F. Chou, K.C. Chao, Ronald K.Y. Chao and Ms. Susana Chou
are siblings.CompensationIn fiscal 2003, the aggregate salary and bonus compensation paid by the
Company and its subsidiaries to all directors and officers of the Company as a
group (8 persons) for services in all capacities was $1,177,403, including nil
pursuant to an informal bonus arrangement. Under the informal bonus
arrangement, the Company distributes up to 5% of Novel Denims income before
bonuses and minority interests each year as bonuses to executive officers and
employees. In addition, under a deferred employee benefit plan, the aggregate
amount accrued in fiscal 2003 by the Company for all of Novel Denims directors
and officers for long service benefits, which the Company is obligated by
statute to provide, was $43,267.Certain Employment AgreementsNovel Denim has employment agreements with K.C. Chao, Alain Rey, Mei-Ling
Liu and Isaacs Lam.The employment agreement with Mr. Chao provides for his employment as
Chief Executive Officer and President of Novel Denim. The term of his
employment agreement is until March 31, 2004.The employment agreement with Mr. Rey provides for his employment as Chief
Financial Officer and Senior Vice President of Novel Denim. The term of his
employment agreement is until March 31, 2004.The employment agreement with Ms. Liu provides for her employment as
Senior Vice PresidentOperations of Novel Denim. The term of her employment
agreement is until March 31, 2004.The employment agreement with Mr. Lam provides for his employment as Vice
President of Novel Denim and General Merchandising Manager of the Companys
garment division. The term of his employment agreement is until March 31, 2004.Each of the employment agreements provides that if the executive
terminates his or her employment with the Company, other than at the end of the
employment term or for good reason (as defined in the agreements), the
executive may not compete with the Company for a period of one year thereafter.Committees of the Board of DirectorsThe Companys Board of Directors has standing Audit and Compensation
committees which meet at least twice a year.The Audit Committee recommends to the Board of Directors an accounting
firm to serve as the Companys independent accountants, reviews the scope and
results of the annual audit of the Companys consolidated financial statements,
reviews non-audit services provided to the Company by the Companys independent
accountants, monitors transactions among the Company and its affiliates and
other similar and customary functions. The Audit Committee currently consists
of Messrs. Jervis, who serves as Chairman, and Ahrens.31Table of ContentsThe Compensation Committee is charged with supervising the Companys
compensation policies, administering the employee incentive plans, reviewing
officers salaries and bonuses, approving significant changes in employee
benefits and recommending to the Board of Directors such other forms of
remuneration as it deems appropriate. The Compensation Committee currently
consists of Messrs. Silas Chou, who serves as Chairman, Jervis and Ahrens.EmployeesAs of March 31, 2003, Novel Denim had approximately 7,700 full-time
employees compared to 14,300 at March 31, 2002 and 10,900 at March 31, 2001.
The reduction between 2003 and 2002, was associated with the closure of the
Companys Madagascar operations and the reduction in garment production in
Mauritius. Approximately 73% are located in Mauritius, 19% South Africa, 7%
China and 1% in other regions including Hong Kong. Because Mauritius is near
full employment, the country permits the importation of foreign labor.
Approximately 25% of the Companys work force in Mauritius now consists of
skilled workers from China. These non-Mauritian workers have three-year
employment contracts with the Company and are paid the same wages as Novel
Denims Mauritian labor force. In addition, Novel Denim has recruited highly
educated engineers and technicians from Hong Kong and Europe. With the
exception of approximately 1,200 employees in South Africa, none of the
Companys employees is a member of a union and the Company provides its workers
with a clean and modern working environment as well as job training. In fiscal
2003, Novel Denims employee turnover rate was less than 5% for its local
workers and de minimus for workers recruited from outside Mauritius. The
Company seeks to maintain excellent relations with its employees.Share OwnershipThe only directors and executive officers of Novel Denim who are deemed to
have beneficial ownership of more than 1% of Novel Denims outstanding Ordinary
Shares are Messrs. Silas Chou, Ronald Chou, K.C. Chao and Ms. Susana Chou, all
of whom are related to Novel Apparel, Novel Denims major shareholder. For
details please see Footnotes 1 and 3 to the share ownership table and the notes
thereto in Item 7. Major Shareholders and Related Party Transactions.As of August 31, 2003, Novel Denims directors and executive officers, in
the aggregate, held options under its stock option plans to purchase up to
326,000 Ordinary Shares. 304,000 of these, which were granted under the
Employee Plan (defined herein), have an average exercise price of $11.43 and
will expire 10 years from the date of grant. 22,000 of these, which were
granted under the Non-Employee Director Plan (defined herein), have an average
exercise price of $14.84 and will expire 10 years from the date of grant.Stock Option PlansEmployee PlanIn August 1997, the Company adopted a stock incentive plan (the Employee
Plan) authorizing the issuance of an aggregate of up to 450,000 Ordinary
Shares to directors, officers and employees of the Company and its
subsidiaries. In September 1999, the Company amended the Employee Plan to
increase the number of Ordinary Shares authorized for issuance thereunder to
900,000. Messrs. Silas K.F. Chou, K.C. Chao, Ronald K.Y. Chao and Ms. Susana
Chou are not eligible for grants under the Employee Plan.The Employee Plan is administered by the Compensation Committee of the
Board of Directors of the Company. The Compensation Committee determines the
persons to whom awards will be granted, the number of awards to be granted and
the specific terms and conditions of each grant, subject to the provisions of
the Employee Plan.32Table of ContentsNon-Employee Directors Stock Option PlanIn July 1997, the Company adopted a non-employee directors stock option
plan (the Non-Employee Directors Plan) authorizing the issuance of an
aggregate of up to 50,000 Ordinary Shares to directors who are not officers or
employees of the Company or any subsidiary of the Company. The Non-Employee
Directors Plan is administered by the Compensation Committee of the Company.
Adjustments in the aggregate number and kind of shares reserved for issuance
and subject to options granted under the Non-Employee Directors Plan are made
by the Compensation Committee in the event of a merger, consolidation,
recapitalization, reorganization, stock split, stock dividend, extraordinary
distribution with respect to the Ordinary Shares or other change in corporate
structure affecting the shares.Under the Non-Employee Directors Plan, subject to adjustment as described
above, each non-employee director (other than Mr. Ronald Chao and Ms. Susana
Chou who are not eligible for grants under this plan) will receive an initial
grant of options to purchase 6,000 Ordinary Shares and subsequent annual grants
of options to purchase 1,000 Ordinary Shares. All grants will have an exercise
price equal to the fair market value of the Ordinary Shares at the date of
grant.Outstanding OptionsAs of August 31, 2003, 553,160 options, net of cancellations, have been
granted and remain unexercised under the Employee Plan. The average exercise
price of such options is $11.02 per share.As of August 31, 2003, 22,000 options, net of cancellations, have been
granted and remain unexercised under the Non-Employee Directors Plan. The
average exercise price of such options is $14.84 per share.The term, under both plans, of each stock option is 10 years, unless
terminated earlier in accordance with the terms of the relevant plan. Such
stock options have varied vesting schedules.33Table of Contents
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSAs of August 31, 2003, the Company was effectively controlled by its 56.7%
shareholder, Novel Apparel, an affiliate of NEL. All shareholders have the
same voting rights. As of August 31, 2003, there were 8,027,809 outstanding
Ordinary Shares and approximately 43.3% of the outstanding Ordinary Shares were
held by approximately 29 record holders (excluding Novel Apparel) in the United
States. The following table sets forth as of August 31, 2003 (i) the persons
owning more than 5% of the Ordinary Shares and (ii) the share ownership and
exerciseable share options of all the directors and officers of the Company as
a group:

|                                                                                                                           |  |                     |           |         |  |  |      |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | --------- | ------- |  |  | ---- | -
|                                                                                                                           |  | Ordinary Shares (1)
|                                                                                                                           |  |                    
|                                                                                                                           |  | Number              |           | Percent
|                                                                                                                           |  |                     |           |        
|Novel Apparel (BVI) Limited (2)                                                                                            |  |                     | 4,550,000 |         |  |  | 56.7 | %
|FMR Corporation                                                                                                            |  |                     | 943,800   |         |  |  | 11.8 | %
|Abingdon Capital Management                                                                                                |  |                     | 428,600   |         |  |  | 5.3  | %
|K.C. Chao (3)                                                                                                              |  |                     | 505,000   |         |  |  | 6.3  | %
|All directors and officers as a group
(other than as set forth in relation to
Novel Apparel and K.C. Chao)
(9 persons) (4) |  |                     | 420,300   |         |  |  | 5.2  | %
|                                                                                                                           |  |                     |           |         |  |  |      |  



---

|(1) |  | Based upon 8,027,809 Ordinary Shares, net of treasury stock. Does not
reflect the dilution arising from the exercise of stock options.                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | NHL owns 80% of the Ordinary Shares of Novel Apparel with K.C. Chao, the
Companys Chief Executive Officer and President, owning the remaining 20%.
NHL is indirectly wholly owned by members of the Chao family (including
Messrs. Silas Chou, Ronald Chao and Ms. Susana Chou).                                                                                                                                                                                                                                                             
|   
|(3) |  | Not including Ordinary Shares held by Novel Apparel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(4) |  | Does not include 30,100 Ordinary Shares held by a spouse of a member of
the Board of Directors or 55,000 Ordinary Shares held by a director of
Novel Apparel. Includes options to purchase Ordinary Shares held by
certain officers and directors, exercisable within 60 days of the date of
this Annual Report and 8,500 - increased Ordinary Shares held by two
directors, and does not include Ordinary Shares held by Novel Apparel
which may be deemed beneficially owned by certain officers and directors
as described in note 2 above.

Transactions with Affiliates

As described below, the Company has engaged in certain related party
transactions with NEL and its affiliates in fiscal 2003.

Sales Agencies

In The Netherlands and France, Novel Denim employs the marketing and sales
services of two agencies which are affiliates of the Chao family. The sales
agencies receive a commission based on sales of Novel Denim products. The
Company incurred $616,028 of sales commissions under these agreements during
fiscal 2003. The agencies do not market any other denim manufacturers
products.

Sales of Products and Services

Novel Denims customers include Tommy Hilfiger, Pepe Europe and certain
other affiliates of NEL. The Chao family has an approximately 11% indirect
ownership interest in Pepe Europe and until June 2003, a small indirect
ownership interest in Tommy Hilfiger. In addition, Mr. Silas K.F. Chou, the
Companys Chairman of the Board, was also Co-Chairman of the Board of Tommy
Hilfiger until October 2002. Messrs. Ronald Chao, Lester Ma and Lawrence Lok,
directors and/or officers of the Company, were also directors and/or officers
of Tommy Hilfiger until February 2003, Pepe Europe and/or NEL and its
affiliates. See Item 6. Directors, Senior Management and

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Employees. Tommy Hilfiger and Pepe Europe purchased $16.6 million and less
than $50,000, respectively of products from the Company during fiscal 2003
Novel Denim intends to continue to sell products to Tommy Hilfiger and Pepe
Europe. See Item 3. Key InformationRisk FactorsControl by Principal
Shareholder; Conflicts of Interest.

Purchases of Materials and Services

The Company receives certain services from NEL and its affiliates,
including information systems, staff resources, office space and related
overheads. The Company paid $138,525 in fiscal 2003 for such services. The cost
of such services is apportioned based on usage.

Leases of Office Space and Land

Novel Denim leases office space from an affiliate of NEL. The Company paid
rent of $159,272 in fiscal 2003, under leases covering approximately 14,500
square feet. In addition, the Company leases 422,830 square feet of land, which
includes a 380,000 square foot factory and laundry facility, in Mauritius from
an NEL affiliate under a 50-year arrangement which began in 1989. Annual rental
payments under this lease arrangement are not material.

Each of the transactions undertaken with related parties has been
negotiated on an arms-length basis and the Company believes that the terms of
such transactions are no less favorable to the Company than could be obtained
from unaffiliated parties. The Audit Committee of the Board of Directors, which
is comprised of two non-employee directors who are not affiliated with NEL or
Novel Apparel, reviews transactions between the Company and its affiliates to
provide that such transactions are on terms which are no less favorable as a
whole to the Company than could be obtained from unaffiliated parties and that
such transactions are properly reported. See Item 6. Directors, Senior
Management and Employees.

Acquisition of Novel Spinners and Novel Weavers

On August 9, 1998, Novel Denim entered into a Share Purchase Agreement
with Novel Apparel to purchase all the outstanding shares of Novel Spinners
(S.A.) (Pty) Ltd. and Novel Weavers (S.A.) (Pty) Ltd. Novel Spinners owns and
operates an existing 215,000 square foot state-of-the-art spinning facility in
Cape Town, South Africa. Novel Weavers was a dormant company. On August 31,
1998, the Company acquired Novel Spinners and Novel Weavers for approximately
$8.8 million in cash and the assumption of debt. The transaction was negotiated
and approved by an independent committee of the Companys Board of Directors.
Messrs. Silas Chou, Ronald Chao, K.C. Chao, Lester Ma and Ms. Susana Chou are
directors and/or officers of Novel Apparel and Novel Denim.

Acquisition of NDP Holdings Limited

On August 7, 2001, the Company entered into an agreement to acquire NDP
for $18.97 million in cash from a subsidiary of Novel Enterprises Limited, an
affiliate of Novel Apparel. NDP, through its subsidiaries, owns and operates
an integrated fabric dyeing, printing and finishing facility in the Shenzhen
region of the PRC, close to Hong Kong, capable of processing 40 million meters
of fabric annually. The transaction closed on October 1, 2001. The
transaction was negotiated and approved by an independent committee of the
Companys Board of Directors. Messrs. Silas Chou, Ronald Chao, K.C. Chao,
Lester Ma and Ms. Susana Chou are directors and/or officers of Novel Apparel
and Novel Denim.

Registration Rights Agreement

Under a registration rights agreement between Novel Apparel and the
Company entered into prior to the Companys initial public offering, Novel
Apparel has the right, subject to certain conditions, to require the Company

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to register under the Securities Act of 1933, as amended, Ordinary Shares held
by it. Pursuant to the registration rights agreement, Novel Apparel was granted
unlimited demand and piggy-back registration rights. The Company has agreed to
pay all expenses incurred in connection with all piggy-back registrations and
with the first four demand registrations, and will share expenses ratably with
Novel Apparel in connection with any additional such demand registrations. The
registration rights agreement provides for indemnities between the Company and
Novel Apparel for certain liabilities under the Securities Act of 1933.




ITEM 8. FINANCIAL INFORMATION

Consolidated Statements and Other Financial Information

See Item 17. Financial Statements and pages F-1 through F-29.

Legal Proceedings

There are no material legal proceedings pending against the Company.

Dividend Distributions

The Company does not have a stated dividend policy and has not declared or
paid any dividends since the Companys Initial Public Offering in 1997.

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ITEM 9. THE OFFER AND LISTING

The Companys Ordinary Shares, par value U.S. $1.00, are listed and traded
on the National Market Tier of the Nasdaq Stock Market (Nasdaq) under the
symbol NVLD.

On July 23, 2003, the Company received a delisting warning letter from
NASDAQ because the market value of its publicly held shares was less than $5.0
million for 30 consecutive trading days. If the market value of the Companys
publicly held shares does not exceed $5.0 million for 10 consecutive trading
days prior to October 21, 2003, the Company may have to delist its shares. The
Company is currently considering its options, including transferring its
Ordinary Shares to The NASDAQ SmallCap Market.

The following table sets forth, for each of the periods indicated, the
reported high and low sales prices per Ordinary Share as reported on Nasdaq:

|                                 |                |   |        |        |     |   |       |       | 
|-------------------------------- | -------------- | - | ------ | ------ | --- | - | ----- | ----- | 
|                                 |                |   | High   |        | Low
|                                 |                |   |        |        |    
|Annual Information               |                |   |        |        |     |   |       |      
|Fiscal Year ended March 31, 2003 |                | $ | 10.000 |        |     | $ | 2.050 |      
|Fiscal Year ended March 31, 2002 |                | $ | 15.500 |        |     | $ | 6.250 |      
|Fiscal Year ended March 31, 2001 |                | $ | 10.625 |        |     | $ | 3.250 |      
|Fiscal Year ended March 31, 2000 |                | $ | 10.625 |        |     | $ | 2.750 |      
|Quarterly Information            |                |   |        |        |     |   |       |      
|Fiscal Year ended March 31, 2004 |                |   |        |        |     |   |       |      
|                                 | First quarter  |   | $      | 3.750  |     |   | $     | 2.200 | 
|Fiscal Year ended March 31, 2003 |                |   |        |        |     |   |       |      
|                                 | Fourth quarter |   | $      | 3.300  |     |   | $     | 2.300 | 
|                                 | Third quarter  |   | $      | 4.600  |     |   | $     | 2.050 | 
|                                 | Second quarter |   | $      | 7.390  |     |   | $     | 4.650 | 
|                                 | First quarter  |   | $      | 10.000 |     |   | $     | 7.150 | 
|Fiscal Year ended March 31, 2002 |                |   |        |        |     |   |       |      
|                                 | Fourth quarter |   | $      | 12.000 |     |   | $     | 9.250 | 
|                                 | Third quarter  |   | $      | 12.890 |     |   | $     | 7.300 | 
|                                 | Second quarter |   | $      | 15.500 |     |   | $     | 6.260 | 
|                                 | First quarter  |   | $      | 15.500 |     |   | $     | 8.760 | 
|Monthly Information              |                |   |        |        |     |   |       |      
|August 2003                      |                | $ | 2.220  |        |     | $ | 1.650 |      
|July 2003                        |                | $ | 2.200  |        |     | $ | 1.950 |      
|June 2003                        |                | $ | 2.630  |        |     | $ | 2.200 |      
|May 2003                         |                | $ | 3.250  |        |     | $ | 2.240 |      
|April 2003                       |                | $ | 3.750  |        |     | $ | 2.250 |      
|March 2003                       |                | $ | 2.980  |        |     | $ | 2.300 |      

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ITEM 10. ADDITIONAL INFORMATION

Objects and Purposes

The objects and powers of the Company are set forth in clause 4 of its
Memorandum and Articles of Association. The Company has a broad range of
corporate powers and the powers of the Company may be exercised irrespective of
whether it derives corporate benefit from its actions. The Company may borrow
money and mortgage or charge any of its property and undertakings as security
for such borrowings or the borrowings of a third party. It may also issue
debentures, debenture stock and other securities whenever money is borrowed.

Directors

Regulation 77 of the Memorandum and Articles of Association allows the
directors to compensate themselves by way of a board resolution. No approval
by the member is required.

Where a conflict of interest exists on the part of a director of the
Company, that director is not prohibited from voting with respect to the matter
and the matter may be validly approved under BVI law if that director declares
his or her interest in the transaction to the other directors and the
transaction is then approved by the other disinterested directors. A director
may borrow from the Company, if the disinterested directors approve the
transaction in accordance with the provisions of this paragraph. Directors are
not required to own any of the Companys shares.

A director holds office until conclusion of office, death, removal or
resignation. Directors stand for reelection at staggered annual intervals. At
meetings at which directors are to be elected, the successors of the retiring
directors are elected by a plurality vote of all votes cast at the meeting.

Share Capital

The Company has an authorized share capital of US$28,000,000 which
consists of 23,000,000 Ordinary Shares, US$1.00 par value (Ordinary
Shares), and 5,000,000 preference shares, par value US$1.00 (Preference
Shares). At March 31, 2003, the Company had 9,437,500 ordinary shares issued
and outstanding, of which 1,409,691 Ordinary Shares were repurchased by the
Company and held at cost as treasury shares, all of which were fully paid.
Share rights may be varied with the written consent of the holders of a
majority of each class or series of shares to be affected by the variation.
Dividends which remain unclaimed three years after having been declared may be
forfeited at the option of the directors for the benefit of the Company. No
Preference Shares have been issued.

The Ordinary Shares have one vote each, are subject to redemption,
purchase or acquisition by the Company for fair value and have the right to
receive dividends and distributions upon the liquidation of the Company. The
rights of the Preference Shares are to be determined by the directors of the
Company by way of a duly passed resolution of directors prior to the Companys
issuance of any preference shares. Neither the Ordinary Shares nor the
Preference Shares have pre-emption rights or restrictions on their transfer.

Meeting of Members

The directors of the Company are required to convene an annual meeting of
members to consider the election of directors and any other matters which the
directors propose to be considered. The directors may also convene such other
meetings of members at such times as the directors consider necessary or
desirable. The directors are also required to convene a meeting of members on
the request of the members holding 50% or more of the outstanding voting
shares in the Company. The affirmative vote of more than 50% of all the votes
of the shares at the members meeting entitled to vote is required to pass any
resolution.

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Material Contracts

The Company believes it has no material contracts which occurred outside
of its normal course of business during the past two fiscal years. All material
contracts which occurred in the ordinary course of business are attached to
this registration statement as exhibits.

Exchange Controls and Other Limitations Affecting Security Holders

Exchange Controls

There are currently no exchange control restrictions on remittances of
dividends on the Companys Ordinary Shares or on the conduct of the Companys
operations either in Hong Kong, where the Companys principal executive office
is located, Mauritius, where its principal manufacturing operations are
located, or the British Virgin Islands, where it is incorporated. There are
currently no limitations imposed by British Virgin Islands law or by the
Companys Memorandum of Association and Articles of Association on the right of
non-resident or foreign owners to hold or vote the Companys Ordinary Shares.

Comparison of United States and British Virgin Islands Corporate Laws

Under the laws of most jurisdictions in the United States, majority and
controlling shareholders generally have certain fiduciary responsibilities
to the minority shareholders. Shareholder action must be taken in good faith
and actions by controlling shareholders which are obviously unreasonable may be
declared null and void. British Virgin Islands law protecting the interests of
minority shareholders may not be as protective in all circumstances as the law
protecting minority shareholders in United States jurisdictions. Under
applicable British Virgin Islands law, majority shareholders do not owe direct
fiduciary duties to minority shareholders.

While British Virgin Islands law does permit a shareholder of a British
Virgin Islands company to sue its directors derivatively (i.e., in the name of
and for the benefit of the company) and to sue the company and its directors
for his benefit and for the benefit of others similarly situated, the
circumstances in which any such action may be brought, and the procedures and
defenses that may be available in respect of any such action, may result in the
rights of shareholders of a British Virgin Islands international business
company being more limited than those of shareholders of a company organized in
the United States.

Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment of the Companys Memorandum of
Association or Articles of Association, an increase or reduction in the
Companys authorized capital or a change in the Companys name, which would
require shareholder approval under the laws of most United States
jurisdictions. In addition, the directors of a British Virgin Islands
international business company may, without shareholder approval among other
things, implement a sale, transfer, exchange or disposition of less than 50% of
any assets, property, part of the business, or securities of the international
business company, the winding up or dissolution of the company, or any
combination thereof, if they determine it is in the best interests of the
corporation, its creditors, or its shareholders.

As in most United States jurisdictions, the board of directors of a
British Virgin Islands international business company is charged with the
management of the affairs of the company. In most United States jurisdictions,
directors owe a fiduciary duty to the corporation and its shareholders,
including a duty of care, pursuant to which directors must properly apprise
themselves of all reasonably available information, and a duty of loyalty,
pursuant to which they must protect the interest of the company and refrain
from conduct that injures the corporation or its stockholders or that deprives
the corporation or its stockholders of any profit or advantage. Many United
States jurisdictions have enacted various statutory provisions which permit the
monetary liability of directors to be eliminated or limited. Under British
Virgin Islands law, a director owes a fiduciary duty to the company, but
liability of a director to the company is primarily limited to cases of willful
malfeasance in the performance of his duties or to cases where the director has
not acted honestly and in good faith and with a view to the best interest of
the corporation. However,

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under its Articles of Association, the Company is authorized to indemnify any
person who is made or threatened to be made a party to a legal, administrative
or investigative proceeding by virtue of being a director, officer or
liquidator of the Company, provided such person acted honestly and in good
faith and with a view to the best interest of the Company and, in the case of a
criminal proceeding, such person had no reasonable cause to believe that his
conduct was unlawful. The Companys Articles of Association also obligate the
Company to indemnify any director, officer or liquidator of the Company who was
successful in any such proceedings against expenses and judgments, fines and
amounts paid in settlement and reasonably incurred in connection with the
proceedings, where such person met the standard of conduct described in the
preceding sentence.

The foregoing description of certain differences between British Virgin
Islands and United States corporate laws is only a summary and does not purport
to be complete or to address every applicable aspect of such laws. See Item 3.
Key InformationRisk FactorsEnforceability of Civil Liabilities and
Rights of Shareholders under British Virgin Islands Law may be Less than in
U.S. Jurisdictions.

Taxation

The following section does not deal with all possible tax consequences
relating to an investment in the Ordinary Shares and does not purport to deal
with the tax consequences applicable to all categories of investors, some of
which (such as dealers in securities or currencies, insurance companies and
tax-exempt entities) may be subject to special rules. In particular, the
discussion does not address the tax consequences under state, local and other
national (e.g., non-United States, non-British Virgin Islands and non-Hong
Kong) tax laws. Accordingly, each prospective investor should consult its own
tax advisor regarding the particular tax consequences to it of an investment in
the Ordinary Shares. The following discussion is based upon laws, regulations
and relevant interpretations thereof in effect as of the date of this Annual
Report, all of which are subject to change, possibly retroactively.

United States Federal Income Taxation

The following presents the material United States federal income tax
consequences of the acquisition, ownership and disposition of Ordinary Shares
and does not purport to be a complete analysis or listing of all possible tax
considerations. The discussion deals only with Ordinary Shares held as capital
assets and does not address any special United States tax consequences that may
be applicable to U.S. Holders (as defined below) that are subject to special
treatment under the United States Internal Revenue Code of 1986, as amended
(the Code), such as dealers in securities or currencies, traders in
securities that elect to use a mark-to-market method for their securities
holdings, financial institutions, tax exempt entities, regulated investment
companies, real estate investment trusts, insurance companies, investors liable
for alternative minimum tax, persons holding Ordinary Shares as part of a
hedging, conversion, constructive sale or integrated transaction or a straddle,
persons owning directly or indirectly 10% or more of the total combined voting
power of all classes of voting stock of the Company, investors in pass-through
entities or persons whose functional currency is not the United States dollar.
Furthermore, the discussion below is based upon the provisions of the Code, and
regulations, rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
United States federal income tax consequences different from those described
below. Prospective purchasers who are U.S. Holders are urged to satisfy
themselves as to the overall United States federal, state and local tax
consequences of their ownership of the Ordinary Shares by consulting their own
tax advisors.

As used herein, a U.S. Holder of an Ordinary Share means a holder that
is for United States federal income tax purposes, a citizen or resident of the
United States, a corporation or partnership created or organized in or under
the laws of the United States or any political subdivision thereof, an estate
the income of which is subject to United States federal income taxation
regardless of its source, or a trust if a court within the United States is
able to exercise primary supervision over the administration of such trust and
one or more United States persons have the authority to control all substantial
decisions of such trust or the trust has a valid election in effect under
applicable U.S. Treasury regulations to be treated as a United States person.

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If a partnership holds Ordinary Shares, the tax treatment of a partner
will generally depend upon the status of the partner and the activities of the
partnership. Prospective purchasers who are partners of a partnership holding
Ordinary Shares should consult their own tax advisors.

Taxation of Dividends

The gross amount of dividends paid to U.S. Holders of Ordinary Shares will
be treated as dividend income to such Holders, to the extent paid out of
current or accumulated earnings and profits, as determined under United States
federal income tax principles. Such income will generally be includable in the
gross income of a U.S. Holder as ordinary income on the day received by the
U.S. Holder. Such dividends will not be eligible for the dividends received
deduction allowed to corporations under the Code.

With respect to U.S. Holders who are individuals, certain dividends
received before January 1, 2009 from a foreign corporation whose shares are
readily tradable on an established securities market in the United States will
be eligible for reduced rates of taxation if such dividends constitute
qualified dividend income, provided holding period and other requirements are
met. If, however, the Company is classified as a foreign personal holding
company or a passive foreign investment company during a given taxable year,
dividends paid by the Company to individual U.S. Holders during such year (or
the following year) will not constitute qualified dividend income (see
Foreign Personal Holding Company Status and Passive Foreign Investment
Company Status below). U.S. Holders who are individuals should consult their
own tax advisors regarding the application of these rules to their particular
circumstances.

For purposes of calculating the foreign tax credit, dividends paid on the
Ordinary Shares will be treated as income from sources outside the United
States and will generally constitute passive income or, in the case of
certain U.S. Holders, financial services income.

To the extent that the amount of any distribution exceeds the Companys
current and accumulated earnings and profits for a taxable year, the
distribution will first be treated as a tax-free return of capital, causing a
reduction in the adjusted basis of the Ordinary Shares (thereby increasing the
amount of gain, or decreasing the amount of loss, to be recognized by the
investor on a subsequent disposition of the Ordinary Shares), and the balance
in excess of adjusted basis will be taxed as capital gain recognized on a sale
or exchange.

Foreign Personal Holding Company Status

A foreign corporation will be classified as a foreign personal holding
company (an FPHC) if (i) at any time during the Companys taxable year,
five or fewer individuals, who are United States citizens or residents,
directly or indirectly own more than 50% of the corporations stock (by either
voting power or value) (the shareholder test) and (ii) the corporation
receives at least 60% of its gross income (regardless of source), as adjusted,
from certain passive sources (the income test). After its initial year of
qualification as an FPHC, a corporation may remain an FPHC even if only 50% of
its gross income is FPHC income (i.e., passive income such as interest,
dividends, etc.).

Because the Company will derive most of its income from dividends paid by
its subsidiaries, the Company believes that it satisfies, and expects that it
will continue to satisfy, the income test. The Company believes that the
shareholder test was not met prior to the Companys initial public offering and
has not been met at any time after such offering. However, due to a number of
factors (including the FPHC stock attribution rules, possible change in
residence by current indirect shareholders and possible acquisition of Ordinary
Shares by purchase, gift, or bequest by individuals related to or partners of
current indirect shareholders), there can be no assurance that the Company will
not become an FPHC in the future.

If the Company were classified as an FPHC, U.S. Holders (including certain
indirect holders) would be required to include in income their pro rata share
of the Companys undistributed FPHC income if they were holders on the last day
of the Companys taxable year (or if earlier, the last day on which the Company
satisfies the shareholder test). Such income would be taxable to such persons
as a dividend, even if no cash dividend were actually paid. In

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such a case, a U.S. Holder would be entitled to increase its tax basis in the
Ordinary Shares by the amount of such deemed FPHC dividend. U.S. Holders who
dispose of their Ordinary Shares prior to the date discussed above would not be
subject to these rules. Moreover, if the Company became an FPHC, United States
persons who acquire Ordinary Shares from decedents would not receive a
stepped-up basis in such Ordinary Shares. Instead, such a holder would have
a tax basis equal to the lower of fair market value or the decedents basis.

The Company will notify U.S. Holders in the event that it concludes that
it is classified as an FPHC for any taxable year.

Personal Holding Company Tax

A corporation will be classified as a personal holding company (a PHC)
if (i) at any time during the last half of the Companys taxable year, five or
fewer individuals own more than 50% of the corporations stock (by value)
directly or indirectly and (ii) the corporation receives at least 60% of its
gross income, as adjusted, from certain passive sources. However, if a
corporation is an FPHC (see above) it cannot be a PHC. A corporation classified
as a PHC is subject to a 15% tax on its undistributed personal holding company
income. Foreign corporations (such as the Company) determine their liability
for PHC tax by considering only (a) gross income derived from United States
sources and (b) gross income which is effectively connected with a United
States trade or business (collectively, U.S. Taxable Income).

While more than 50% of the Ordinary Shares is currently owned, directly or
indirectly, by five or fewer individuals, the Company does not currently have,
or expect to have in the future, any U.S. Taxable Income. Accordingly, the
Company does not expect to have any PHC tax liability.

Passive Foreign Investment Company Status

The Company does not believe that it is, for United States federal tax
purposes, a passive foreign investment company (a PFIC), and expects to
continue its operations in such a manner that it will not be a PFIC. If,
however, the Company is or does become a PFIC, U.S. Holders could be subject to
additional federal income taxes on certain distributions or gains with respect
to Ordinary Shares plus an interest charge on certain taxes treated as having
been deferred by the U.S. Holder under the PFIC rules of the United States
federal income tax laws.

Taxation of Capital Gains

For United States federal income tax purposes, a U.S. Holder will
recognize taxable gain or loss on any sale or exchange of an Ordinary Share in
an amount equal to the difference between the amount realized for the Ordinary
Share and the U.S. Holders basis in the Ordinary Share. Such gain or loss will
be capital gain or loss. Capital gains of individuals derived with respect to
capital assets held for more than one year are eligible for reduced rates of
taxation. The deductibility of capital losses is subject to limitations. Any
gain or loss recognized by a U.S. Holder will generally be treated as United
States source gain or loss.

Information Reporting and Backup Withholding

In general, information reporting requirements will apply to dividends
paid in respect of the Ordinary Shares or the proceeds received on the sale,
exchange, or redemption of the Ordinary Shares paid within the United States
(and, in certain cases, outside the United States) by U.S. Holders other than
certain exempt recipients (such as corporations) and backup withholding may
apply to such amounts if the U.S. Holder fails to provide an accurate taxpayer
identification number or to report interest and dividends required to be shown
on its federal income tax returns. A U.S. Holder who does not provide a correct
taxpayer identification number may be subject to penalties imposed by the
Internal Revenue Service. Backup withholding will not apply with respect to
payments made to certain exempt recipients, such as corporations and tax-exempt
organizations. The amount of any backup withholding from a payment to a U.S.
Holder will be allowed as a credit against the U.S. Holders United States

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federal income tax liability and may entitle such U.S. Holder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.

British Virgin Islands Taxation

Under the laws of the British Virgin Islands as currently in effect, a
holder of Ordinary Shares who is not a resident of the British Virgin Islands
is exempt from British Virgin Islands income tax on dividends paid with respect
to the Ordinary Shares and no holder of Ordinary Shares is liable for British
Virgin Islands income tax on gains realized on sale or disposition of such
Ordinary Shares. In addition, the British Virgin Islands does not impose a
withholding tax on dividends paid by the Company. A company incorporated under
the International Business Companies Act is deemed not to be a resident for
this purpose.

There are no capital gains, gift or inheritance taxes levied by the
British Virgin Islands with respect to the Company. In addition, the Ordinary
Shares are not subject to any transfer taxes, stamp duties or similar charges.

There is no income tax treaty or convention currently in effect between
the United States and the British Virgin Islands.

Hong Kong Taxation

Under the laws of Hong Kong, as currently in effect, a holder of Ordinary
Shares who is not a resident of Hong Kong is exempt from Hong Kong income tax
on dividends paid with respect to such shares and no holder of Ordinary Shares
is liable for Hong Kong income tax on gains realized on sale or other
disposition of such Ordinary Shares. Hong Kong does not impose a withholding
tax on dividends paid by the Company or its subsidiaries. In addition, the
Company will not be subject to Hong Kong taxes as a result of its receipt of
dividends from any of its subsidiaries.




ITEM 11. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risks relating to fluctuations in the
price of raw cotton, interest rates on its borrowings and exchange rates of
foreign currencies in which the Company transacts business.

Cotton Commodity Exposure

Commodity price risk relates to the fluctuations in world prices of raw
cotton. Cotton is the primary raw material used in the production of the
Companys products. The Company has a purchasing policy designed to ensure
uninterrupted supplies of cotton of appropriate quality for its fabric
production. The Company purchases cotton by way of forward contracts,
denominated in U.S. dollars, typically amounting to approximately six to eight
months of planned consumption. Price risk in this period is partially mitigated
by the Companys garment order backlog, where the Company enters into
agreements with its garment customers for deliveries which spread over a
corresponding period to the consumption of the cotton contracts. These
purchases are therefore not sensitive to changes in the market price of cotton.
However, increases or decreases in the market price of cotton may affect the
fair value of cotton commodity purchase contracts.

As of March 31, 2003, the Company had outstanding contracted commitments
to purchase cotton for delivery over the next six to eight months at a
contracted amount of $8.3 million. A 10% decline in the market price of cotton
would have a negative impact of approximately $0.83 million on the fair value
of the existing contracts.

43



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Interest Rate Exposure

The Company partially finances its working capital requirements by way of
short-term borrowings. The borrowings are made mainly in the Mauritian rupee
and the U.S. dollar. The interest rates on borrowings in these currencies are
traditionally more volatile than for U.S. dollar loans.

The table below represents the U.S. dollar equivalent of short-term
borrowings outstanding in each currency together with the Companys weighted
average rate of borrowings as of March 31, 2003.

|                     |                                |                |                |              | 
|-------------------- | ------------------------------ | -------------- | -------------- | ------------ | 
|                     |                                |                | Outstanding at
|Currency             |                                | March 31, 2003
|                     |                                |               
|Mauritian rupee      |                                | $              | 12.8 million   |             
|United States dollar |                                | $              | 27.0 million   |             
|Other currencies     |                                | $              | 12.5 million   |             
|                     |                                |                |                |             
|                     | Total short-term borrowings    |                | $              | 52.3 million | 
|                     |                                |                |                |             
|                     | Weighted-average interest rate |                |                | 4.85%        | 

During fiscal year 2003, the Companys weighted average short-term
borrowings were $49.89 million at a weighted average interest rate, computed
monthly, of 5.63%. A one percent increase in the Companys cost of borrowing
would have resulted in a $0.50 million decrease in earnings during fiscal year
2003.

The Company attempts to mitigate the risk associated with unfavorable
movements in interest rates by balancing its local requirements with overall
funding in U.S. dollars, while also taking into account foreign exchange rate
historical trends.

Foreign Currency Exposures

The U.S. dollar represents the functional currency of the Company,
including the subsidiaries incorporated in Mauritius, South Africa, Madagascar
and Jersey. However, the Companys earnings are affected by fluctuations in the
value of: (i) local currencies of the countries in which the subsidiaries
operate; (ii) the currencies in which the raw materials are purchased; and
(iii) the currencies in which its products are sold.

The Company attempts to mitigate the risks of adverse movements in foreign
exchange rates, by: (i) purchasing its raw materials in U.S. dollars whenever
possible (during fiscal 2003 approximately 90% of the Companys cotton
purchases were made in U.S. dollars); (ii) restricting its borrowings in local
currencies to the minimum levels required to finance its working capital and
leasing requirements in the relevant country; and (iii) entering into forward
foreign exchange contracts, with maturities of up to one year, to hedge certain
foreign currency denominated firm commitments, primarily consisting of sales to
customers invoiced in currencies other than the U.S. dollar.

As of March 31, 2003, the total value of forward contracts in hand were
valued at $4.48 million, hedging part of anticipated cash flows from sales.
Assuming a 10% adverse movement in each of the respective non-U.S. currencies,
the Companys earnings would be reduced by approximately $0.43 million,
representing reduced cash flows from anticipated sales less gains on forward
contracts hedging such sales.




ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not Applicable.

44



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##### Table of Contents






PART II




ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not Applicable.




|         |  |                                                                             
|-------- |  | ----------------------------------------------------------------------------
|ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not Applicable.




PART III




ITEM 15. CONTROL AND PROCEDURES

Disclosure Controls and Procedures

Within 90 days prior to the date of this report, Novel Denim, under the
supervision and with the participation of our management, including the Chief
Executive Officer and the Chief Financial Officer, performed an evaluation of
the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rule 13a-14(c)). Based on that evaluation, Novel Denims Chief
Executive Officer and Chief Financial Officer have concluded that its
disclosure controls and procedures are effective, as of the end of the period,
to ensure that material information relating to Novel Denim and its
consolidated subsidiaries is made known to such officers and by others within
these entities, particularly during the period this report was prepared, in
order to allow timely decisions regarding required disclosure.

Internal Controls

Novel Denims Chief Executive Officer and Chief Financial Officer also
conducted an evaluation of the internal control over financial reporting to
determine whether any changes occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect,
Novel Denims internal control over financial reporting. Based on that
evaluation, there has been no such change during the period covered by this
report.




PART IV




ITEM 17. FINANCIAL STATEMENTS

See pages F-1 through F-29, incorporated herein by reference.




ITEM 18. FINANCIAL STATEMENTS

Not Applicable.

45



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##### Table of Contents






ITEM 19. EXHIBITS




EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                  
|1       |  |  Amended and Restated Memorandum of Association and Articles of Association of the
Company (previously filed as Exhibit 3 to Registration No. 333-7184 and incorporated
herein by reference)                                                    
|        |  |                                                                                                                                                                                                                                                  
|4.1     |  | Employment Agreement dated as of April 1, 2002 between the Company and K.C. Chao
(previously filed as Exhibit 4.1 to Form 20-F for the fiscal year ended March 31, 2002
and incorporated herein by reference)                                   
|        |  |                                                                                                                                                                                                                                                  
|4.2     |  | Employment Agreement dated as of April 1, 2002 between the Company and Mei-Ling Liu
(previously filed as Exhibit 4.2 to Form 20-F for the fiscal year ended March 31, 2002
and incorporated herein by reference)                                
|        |  |                                                                                                                                                                                                                                                  
|4.3     |  | Employment Agreement dated as of April 1, 2002 between the Company and Alain Rey
(previously filed as Exhibit 4.3 to Form 20-F for the fiscal year ended March 31, 2002
and incorporated herein by reference)                                   
|        |  |                                                                                                                                                                                                                                                  
|4.4     |  | Employment Agreement dated as of December 21, 2002 between the Company and Isaacs Lam                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                  
|4.5     |  | Lease dated as of February 15, 1989 between Novel Textiles Limited (formerly known as
Union Textiles Limited) and Summit Textiles Limited (previously filed as Exhibit
10.5 to Registration No. 333-7184 and incorporated herein by reference)
|        |  |                                                                                                                                                                                                                                                  
|4.6     |  | Lease dated as of July 19, 1990 between Novel Garments (Mauritius) Limited and Fatvan
Industrial Ltd. (previously filed as Exhibit 10.6 to Registration No. 333-7184 and
incorporated herein by reference)                                      
|        |  |                                                                                                                                                                                                                                                  
|4.7     |  | Lease dated as of May 19, 1993 between Novel Garments (Mauritius) Limited and the
Mauritius Export Development and Investment Authority (previously filed as Exhibit 10.7
to Registration No. 333-7184 and incorporated herein by reference)    
|        |  |                                                                                                                                                                                                                                                  
|4.8     |  | Lease dated as of May 19, 1993 between Novel Garments (Mauritius) Limited and the
Mauritius Export Development and Investment Authority (previously filed as Exhibit 10.8
to Registration No. 333-7184 and incorporated herein by reference)    
|        |  |                                                                                                                                                                                                                                                  
|4.9     |  | Lease dated as of March 31, 1997 between Novel Denim (HK) Limited and Swanco Limited
(previously filed as Exhibit 10.9 to Registration No. 333-7184 and incorporated herein
by reference)                                                       
|        |  |                                                                                                                                                                                                                                                  
|4.10    |  | Lease dated as of March 31, 1997 between Novel Denim (HK) Limited and Swanco Limited
(previously filed as Exhibit 10.10 to Registration No. 333-7184 and incorporated herein
by reference)                                                      
|        |  |                                                                                                                                                                                                                                                  
|4.11    |  | Lease dated as of March 31, 1997 between Novel Denim (HK) Limited and Swanco Limited
(previously filed as Exhibit 10.11 to Registration No. 333-7184 and incorporated herein
by reference)                                                      

46



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|        |  |                                                                                                                                                                                                                                                                                                                 
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.12    |  | Lease dated as of March 31, 1997 between Novel Denim (HK) Limited and Swanco Limited
(previously filed as Exhibit 10.12 to Registration No. 333-7184 and incorporated herein
by reference)                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.13    |  | Lease dated as of January 30, 1996 between Novel Garments (Mauritius) Limited and
Development Bank of Mauritius Ltd. (previously filed as Exhibit 10.13 to Registration
No. 333-7184 and incorporated herein by reference)                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.14    |  | Lease dated as of October 29, 1996 between Novel Garments (Mauritius) Limited and
Development Bank of Mauritius Ltd. (previously filed as Exhibit 10.14 to Registration
No. 333-7184 and incorporated herein by reference)                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.15    |  | Lease dated as of January 1997 between Novel Garments (Mauritius) Limited and the
Mauritius Export Development and Investment Authority (previously filed as Exhibit 10.15
to Registration No. 333-7184 and incorporated herein by reference)                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.16    |  | Lease dated May 28, 1996 between Industrial Development Corporation of South Africa
Limited and Novel Spinners SA (Proprietary) Limited and Novel Weavers SA (Proprietary)
Limited (previously filed as Exhibit 2.3 to Form 20-F for the fiscal year ended March
31, 1999 and incorporated herein by reference)
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.17    |  | Lease dated as of October 19, 1999 between Byren Trading Limited and Cayuga Estates
Limited (previously filed as Exhibit 2.5 to Form 20-F for the fiscal year ended March
31, 2000 and incorporated herein by reference)                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.18    |  | Lease dated as of September 1, 1999 between Novel Garments (Mauritius) Ltd and Didi
Industrial Limited (previously filed as Exhibit 2.6 to Form 20-F for the fiscal year
ended March 31, 2000 and incorporated herein by reference)                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.19    |  | Amended Lease Agreement dated April 1, 1999 between Novel Denim (HKD) Ltd and Swanco
Limited (previously filed as Exhibit 2.7 to Form 20-F for the fiscal year ended March
31, 2000 and incorporated herein by reference)                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.20    |  | Lease Agreement dated April 13, 2000 between Novel Garments (Madagascar) S.A. and
Filatex S.A. (previously filed as Exhibit 4.20 to Form 20-F for the fiscal year ended
March 31, 2001 and incorporated herein by reference)                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.21    |  | Lease Agreement dated April 13, 2000 between Novel Garments (Madagascar) S.A. and
Filatex S.A. (previously filed as Exhibit 4.21 to Form 20-F for the fiscal year ended
March 31, 2001 and incorporated herein by reference)                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.22    |  | Amended and Restated Employee Stock Option Plan of the Company and its subsidiaries
(previously filed as Exhibit 4.1 to Form S-8 (Registration No. 333-10796), as filed on
September 14, 1999 and incorporated herein by reference)                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                 
|4.23    |  | Non-Employee Directors Stock Option Plan of the Company (previously filed as Exhibit
10.24 to Registration No. 333-7184 and incorporated herein by reference)                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                 
|8.1     |  | List of Subsidiaries                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                 
|10.1    |  | Land Purchase Agreement dated as of April 18, 1995 between Novel Textiles Limited and
Rajman Prayag (previously filed as Exhibit 10.16 to Registration No. 333-7184 and
incorporated herein by reference)                                                                                                      

47



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|        |  |                                                                                                                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                  
|10.2    |  | Credit Agreement dated as of March 18, 1996 between Novel Textiles Limited and Finlease
Company Limited (previously filed as Exhibit 10.17 to Registration No. 333-7184 and
incorporated herein by reference)                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                  
|10.3    |  | Credit Agreement dated as of May 13, 1996 between Novel Textiles Limited and The
Mauritius Commercial Bank Ltd. (previously filed as Exhibit 10.18 to Registration No.
333-7184 and incorporated herein by reference)                                                                           
|        |  |                                                                                                                                                                                                                                                                                                  
|10.4    |  | Credit Agreement dated as of August 6, 1996 between Novel Garments (Mauritius) Limited
and The Mauritius Commercial Bank Ltd. (previously filed as Exhibit 10.19 to
Registration No. 333-7184 and incorporated herein by reference)                                                             
|        |  |                                                                                                                                                                                                                                                                                                  
|10.5    |  | Credit Agreement dated as of August 6, 1996 between Novel Textiles Limited and The
Mauritius Commercial Bank Ltd. (previously filed as Exhibit 10.20 to Registration No.
333-7184 and incorporated herein by reference)                                                                         
|        |  |                                                                                                                                                                                                                                                                                                  
|10.6    |  | Credit Agreement dated as of October 7, 1996 between Novel Garments (Mauritius) Limited
and The Hongkong and Shanghai Banking Corporation Limited (previously filed as Exhibit
10.21 to Registration No. 333-7184 and incorporated herein by reference)                                         
|        |  |                                                                                                                                                                                                                                                                                                  
|10.7    |  | Credit Agreement dated as of February 28, 1997 between Novel Textiles Limited and
Banque Nationale De Paris Intercontinentale (previously filed as Exhibit 10.22 to
Registration No. 333-7184 and incorporated herein by reference)                                                             
|        |  |                                                                                                                                                                                                                                                                                                  
|10.8    |  | Credit Agreement dated as of May 21, 2001 between Novel Textiles Limited and Banque
Nationale De Paris Intercontinentale (previously filed as Exhibit 10.8 to Form 20-F for
the fiscal year ended March 31, 2002 and incorporated herein by reference)                                          
|        |  |                                                                                                                                                                                                                                                                                                  
|10.9    |  | Credit Agreement dated as of May 25, 2001 between Novel Spinners (SA)(Pty)Ltd, Novel
Weavers (SA)(Pty)Ltd, Seawind Investments 4 (Pty) Ltd and Nedcor Bank Limited
(previously filed as Exhibit 10.9 to Form 20-F for the fiscal year ended March 31, 2002
and incorporated herein by reference)
|        |  |                                                                                                                                                                                                                                                                                                  
|10.10   |  | Credit Agreement dated as of August 23, 2001 between Novel Spinners (SA)(Pty)Ltd and
Nedcor Bank Limited (previously filed as Exhibit 10.10 to Form 20-F for the fiscal year
ended March 31, 2002 and incorporated herein by reference)                                                         
|        |  |                                                                                                                                                                                                                                                                                                  
|10.11   |  | Credit Agreement dated as of March 27, 2002 between Novel Denim Holdings Limited and
The Hongkong and Shanghai Banking Corporation Limited (previously filed as Exhibit 10.11
to Form 20-F for the fiscal year ended March 31, 2002 and incorporated herein by
reference)                       
|        |  |                                                                                                                                                                                                                                                                                                  
|10.12   |  | Credit Agreement dated as of March 27, 2002 between Novel Denim (HK) Ltd and The
Hongkong and Shanghai Banking Corporation Limited (previously filed as Exhibit 10.12 to
Form 20-F for the fiscal year ended March 31, 2002 and incorporated herein by reference)                               
|        |  |                                                                                                                                                                                                                                                                                                  
|10.13   |  | Credit Agreement dated as of March 28, 2002 between Novel Garments International Ltd
and The Hongkong and Shanghai Banking Corporation Limited (previously filed as Exhibit
10.13 to Form 20-F for the fiscal year ended March 31, 2002 and incorporated herein by
reference)                   
|        |  |                                                                                                                                                                                                                                                                                                  
|10.14   |  | Credit Agreement dated as of January 18, 2002 between Novel Dyeing & Printing Mills
Ltd. and The Hongkong and Shanghai Banking Corporation
Limited                                                                                                                                              

48



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|        |  |                                                                                                                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                
|10.15   |  | Credit Agreement dated as of February 18, 2002 between Novel Denim (HK) Ltd. and The
Hongkong and Shanghai Banking Corporation Limited                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                
|10.16   |  | Credit Agreement dated as of March 27, 2002 between NDP Fabrics Ltd. and The Hongkong
and Shanghai Banking Corporation Limited                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                
|10.17   |  | Credit Agreement dated as of May 21, 2002 between Novel Spinners (SA)(Pty) Ltd., Novel
Weavers (SA)(Pty) Ltd. and Novel Dyers (SA)(Pty) Ltd. and Nedcor Bank                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                
|10.18   |  | Credit Agreement dated as of June 6, 2002 between Novel Denim Holdings Limited and The
Hongkong and Shanghai Banking Corporation Limited                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                
|10.19   |  | Credit Agreement dated as of July 16, 2002 between Novel Textiles Ltd. and The
Mauritius Commercial Bank Ltd.                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|10.20   |  | Credit Agreement dated as of July 16, 2002 between Novel Garments Ltd. and The
Mauritius Commercial Bank Ltd.                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|10.21   |  | Credit Agreement dated as of October 29, 2002 between NDP Fabrics Ltd and The Hongkong
and Shanghai Banking Corporation Limited                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                
|10.22   |  | Credit Agreement dated as of January 16, 2003 between Novel Garments (Mauritius) Ltd.
and The Hongkong and Shanghai Banking Corporation Limited                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                
|10.23   |  | Credit Agreement dated as of June 10, 2003 between Novel Garments International Ltd and
The Hongkong and Shanghai Banking Corporation Limited                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                
|10.24   |  | Registration Rights Agreement dated as of May 13, 1997 between the Company and Novel
Apparel (BVI) Limited (previously filed as Exhibit 10.25 to Registration No. 333-7184
and incorporated herein by reference)                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                
|10.25   |  | Redemption Agreement dated as of April 25, 1997 between the Company and Novel Apparel
(BVI) Limited (previously filed as Exhibit 10.26 to Registration No. 333-7184 and
incorporated herein by reference)                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                
|10.26   |  | Share Purchase Agreement dated August 9, 1998 by and among Novel Textiles (BVI)
Limited, Novel Denim Holdings Limited and Novel Enterprises Limited (previously filed as
Exhibit 2.1 to Form 20-F for the fiscal year ended March 31, 1999 and incorporated
herein by reference)                              
|        |  |                                                                                                                                                                                                                                                                                                                
|10.27   |  | Share Purchase Agreement dated August 7, 2001 by and among Novel Investment Holdings
Limited, Novel Denim Holdings Limited and Novel Enterprises Limited (previously filed as
Exhibit 10.17 to Form 20-F for the fiscal year ended March 31, 2002 and incorporated
herein by reference)                       
|        |  |                                                                                                                                                                                                                                                                                                                
|10.28   |  | Suspensive Sale Agreement dated May 6, 1996 between Findevco (Proprietary) Limited and
Novel Spinners SA (Proprietary) Limited and Novel Weavers SA (Proprietary) Limited
(previously filed as Exhibit 2.4 to Form 20-F for the fiscal year ended March 31, 1999
and incorporated herein by reference)        
|        |  |                                                                                                                                                                                                                                                                                                                
|10.29   |  | Credit Agreement and Guarantee dated June 23, 1999 between Novel Denim Holdings Limited
and Certain of its Subsidiaries and The Hongkong and Shanghai Banking Corporation
Limited (previously filed as Exhibit 2.9 to Form 20-F for the fiscal year ended March
31, 2000 and incorporated herein by reference)

49



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                   
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                   
|Number  |  | Description                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                   
|10.30   |  | Credit Agreement and Guarantee dated August 11, 1999 between Novel Denim Holdings
Limited and Certain of its Subsidiaries and The Hongkong and Shanghai Banking
Corporation Limited (previously filed as Exhibit 2.10 to Form 20-F for the fiscal year
ended March 31, 2000 and incorporated herein by
reference)
|        |  |                                                                                                                                                                                                                                                                                                                   
|10.31   |  | Credit Agreement dated May 25, 2000 between Novel Denim Holdings Limited and Certain of
its Subsidiaries and The Hongkong and Shanghai Banking Corporation Limited (previously
filed as Exhibit 10.15 to Form 20-F for the fiscal year ended March 31, 2001 and
incorporated herein by reference)                
|        |  |                                                                                                                                                                                                                                                                                                                   
|10.32   |  | Consent of PricewaterhouseCoopers                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                   
|31.1    |  | Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                   
|31.2    |  | Certification by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                   
|32      |  |  Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                             

50



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##### Table of Contents






SIGNATURES

The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that its has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.

|                         |  |                                       
|------------------------ |  | --------------------------------------
|                         |  | NOVEL DENIM HOLDINGS LIMITED          
|                         |  |                                       
|                         |  | /s/ Silas K.F. Chou                   
|                         |  |                                       
|                         |  | Silas K.F. Chou, Chairman of the Board
|Date: September 30, 2003 |  |                                       

51



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                             |  |            
|------------------------------------------------------------------------------------------------------------ |  | -----------
|                                                                                                             |  | Page       
|                                                                                                             |  |            
|Report of Independent Auditors                                                                               |  | F-2        
|Consolidated Statements of Income for the years ended March 31, 2001, 2002 and 2003                          |  | F-3        
|Consolidated Balance Sheets as of March 31, 2002 and 2003                                                    |  | F-4        
|Consolidated Statements of Cash Flows for the years ended March 31, 2001, 2002 and 2003                      |  | F-5        
|Consolidated Statements of Changes in Shareholders Equity for the years ended March 31, 2001,
2002 and 2003 |  | F-6        
|Notes to Consolidated Financial
Statements                                                                   |  | F-7 to F-29

$ = United States Dollars

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Novel Denim Holdings Limited

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders equity and of
cash flows present fairly, in all material respects, the financial position of
Novel Denim Holdings Limited and its subsidiaries (the Company) as of March
31, 2002 and 2003 and the results of their operations and their cash flows for
each of the three years ended March 31, 2001, 2002 and 2003 in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

As discussed in Notes 3(q) and 18 to the financial statements, on April 1,
2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities.

PricewaterhouseCoopers
Certified Public Accountants

Hong Kong,
August 8, 2003

F-2



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF INCOME

|                                                                              |         |   |                             |       |      |   |              |      |  |   |              |      | 
|----------------------------------------------------------------------------- | ------- | - | --------------------------- | ----- | ---- | - | ------------ | ---- |  | - | ------------ | ---- | 
|                                                                              |         |   | Fiscal Year Ended March 31,
|                                                                              |         |   |                            
|                                                                              |         |   | 2003                        |       | 2002 |   | 2001        
|                                                                              |         |   |                             |       |      |   |             
|Net sales to third parties                                                    |         | $ | 128,403,493                 |       |      | $ | 133,676,524  |      |  | $ | 113,788,208  |     
|Net sales to related parties                                                  |         |   | 16,582,363                  |       |      |   | 24,908,644   |      |  |   | 24,257,983   |     
|                                                                              |         |   |                             |       |      |   |              |      |  |   |              |     
|Total net sales                                                               |         |   | 144,985,856                 |       |      |   | 158,585,168  |      |  |   | 138,046,191  |     
|Cost of goods sold                                                            |         |   | (131,985,759                | )     |      |   | (132,201,378 | )    |  |   | (107,465,596 | )   
|                                                                              |         |   |                             |       |      |   |              |      |  |   |              |     
|Gross profit                                                                  |         |   | 13,000,097                  |       |      |   | 26,383,790   |      |  |   | 30,580,595   |     
|Other revenues                                                                |         |   | 1,459,452                   |       |      |   | 789,562      |      |  |   | 440,196      |     
|Selling, general and administrative expenses                                  |         |   | (31,614,961                 | )     |      |   | (18,693,399  | )    |  |   | (15,186,886  | )   
|Impairment loss                                                               |         |   | (2,787,578                  | )     |      |   | (2,375,295   | )    |  |   |             |     
|Other expenses                                                                |         |   | (1,222,354                  | )     |      |   |             |      |  |   | (588,709     | )   
|                                                                              |         |   |                             |       |      |   |              |      |  |   |              |     
|Operating (loss) / income                                                     |         |   | (21,165,344                 | )     |      |   | 6,104,658    |      |  |   | 15,245,196   |     
|Interest expense                                                              |         |   | (4,358,031                  | )     |      |   | (4,165,037   | )    |  |   | (3,240,373   | )   
|Interest income                                                               |         |   | 47,628                      |       |      |   | 209,916      |      |  |   | 71,623       |     
|                                                                              |         |   |                             |       |      |   |              |      |  |   |              |     
|(Loss) / Income before minority interest, tax and
effect of accounting change |         |   | (25,475,747                 | )     |      |   | 2,149,537    |      |  |   | 12,076,446   |     
|Taxation                                                                      |         |   | (753,131                    | )     |      |   | (298,205     | )    |  |   |             |     
|Minority interest                                                             |         |   | 49,670                      |       |      |   | (81,544      | )    |  |   | (47,653      | )   
|                                                                              |         |   |                             |       |      |   |              |      |  |   |              |     
|(Loss) / Income before effect of accounting change                            |         |   | (26,179,208                 | )     |      |   | 1,769,788    |      |  |   | 12,028,793   |     
|Cumulative effect of accounting change                                        |         |   |                            |       |      |   | 307,997      |      |  |   |             |     
|                                                                              |         |   |                             |       |      |   |              |      |  |   |              |     
|Net (loss) / income                                                           |         | $ | (26,179,208                 | )     |      | $ | 2,077,785    |      |  | $ | 12,028,793   |     
|                                                                              |         |   |                             |       |      |   |              |      |  |   |              |     
|Earnings / (loss) per share before accounting change                          |         |   |                             |       |      |   |              |      |  |   |              |     
|                                                                              | Basic   |   | $                           | (2.97 | )    |   | $            | 0.19 |  |   | $            | 1.30 | 
|                                                                              | Diluted |   | $                           | (2.96 | )    |   | $            | 0.19 |  |   | $            | 1.29 | 
|Earnings / (loss) per share after accounting change                           |         |   |                             |       |      |   |              |      |  |   |              |     
|                                                                              | Basic   |   | $                           | (2.97 | )    |   | $            | 0.23 |  |   | $            | 1.30 | 
|                                                                              | Diluted |   | $                           | (2.96 | )    |   | $            | 0.22 |  |   | $            | 1.29 | 

See accompanying notes to these Consolidated Financial Statements.

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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

|                                                                                                    |  |   |                                            |   |                 |             |            |   |   |             | 
|--------------------------------------------------------------------------------------------------- |  | - | ------------------------------------------ | - | --------------- | ----------- | ---------- | - | - | ----------- | 
|                                                                                                    |  |   |                                            |   | As of March 31,
|                                                                                                    |  |   |                                            |   |                
|                                                                                                    |  |   |                                            |   | 2003            |             | 2002      
|                                                                                                    |  |   |                                            |   |                 |             |           
|ASSETS                                                                                              |  |   |                                            |   |                 |             |            |  
|Current assets:                                                                                     |  |   |                                            |   |                 |             |            |  
|Cash and cash equivalents                                                                           |  | $ | 5,938,110                                  |   |                 | $           | 12,995,472 |  
|Accounts receivable, net (Allowance for doubtful debts: nil)                                        |  |   | 17,471,087                                 |   |                 |             | 24,845,348 |  
|Due from related parties                                                                            |  |   | 1,218,589                                  |   |                 |             | 3,497,538  |  
|Inventories                                                                                         |  |   | 41,514,272                                 |   |                 |             | 50,885,767 |  
|Spare parts                                                                                         |  |   | 3,216,845                                  |   |                 |             | 3,651,802  |  
|Other current assets                                                                                |  |   | 3,858,444                                  |   |                 |             | 3,579,775  |  
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|                                                                                                    |  |   | Total current assets                       |   |                 | 73,217,347  |            |   |   | 99,455,702  | 
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|Property, plant and equipment, net                                                                  |  |   | 87,306,294                                 |   |                 |             | 89,924,400 |  
|Deferred tax assets                                                                                 |  |   | 410,970                                    |   |                 |             |           |  
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|                                                                                                    |  |   | Total Assets                               |   | $               | 160,934,611 |            |   | $ | 189,380,102 | 
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                |  |   |                                            |   |                 |             |            |  
|Current liabilities:                                                                                |  |   |                                            |   |                 |             |            |  
|Short-term borrowings and bank overdrafts                                                           |  | $ | 52,268,863                                 |   |                 | $           | 52,532,174 |  
|Current portion of long-term debt                                                                   |  |   | 3,526,911                                  |   |                 |             | 1,924,104  |  
|Current portion of capital leases                                                                   |  |   | 3,780,723                                  |   |                 |             | 506,275    |  
|Accounts payable                                                                                    |  |   | 2,178,300                                  |   |                 |             | 3,785,626  |  
|Accrued salaries and wages and other accrued liabilities                                            |  |   | 17,540,650                                 |   |                 |             | 14,558,394 |  
|Due to related parties                                                                              |  |   | 11,764                                     |   |                 |             | 23,539     |  
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|                                                                                                    |  |   | Total current liabilities                  |   |                 | 79,307,211  |            |   |   | 73,330,112  | 
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|Long-term debt                                                                                      |  |   | 9,061,179                                  |   |                 |             | 12,029,661 |  
|Long-term portion of capital leases                                                                 |  |   | 4,070,970                                  |   |                 |             | 5,512,814  |  
|Other liabilities                                                                                   |  |   | 686,480                                    |   |                 |             | 762,289    |  
|Minority interest                                                                                   |  |   | 486,517                                    |   |                 |             | 536,187    |  
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|                                                                                                    |  |   | Total liabilities                          |   |                 | 93,612,357  |            |   |   | 92,171,063  | 
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|Commitments and contingencies (note 13)                                                             |  |   |                                            |   |                 |             |            |  
|Shareholders equity:                                                                               |  |   |                                            |   |                 |             |            |  
|Preferred Shares, $1 par value, 5,000,000 shares authorized,
no shares issued and outstanding       |  |   |                                           |   |                 |             |           |  
|Ordinary Shares $1 par value, 23,000,000 shares authorized,
9,437,500 shares issued and outstanding |  |   | 9,437,500                                  |   |                 |             | 9,437,500  |  
|Additional paid-in capital                                                                          |  |   | 15,560,162                                 |   |                 |             | 15,568,016 |  
|Treasury stock, at cost (shares: 2003  1,409,691; 2002  298,600)                                  |  |   | (5,935,574                                 | ) |                 |             | (2,247,176 | )
|Legal Reserve                                                                                       |  |   | 195,958                                    |   |                 |             |           |  
|Retained Earnings                                                                                   |  |   | 48,056,149                                 |   |                 |             | 74,431,315 |  
|Other Comprehensive Income                                                                          |  |   | 8,059                                      |   |                 |             | 19,384     |  
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|                                                                                                    |  |   | Total shareholders equity                 |   |                 | 67,322,254  |            |   |   | 97,209,039  | 
|                                                                                                    |  |   |                                            |   |                 |             |            |  
|                                                                                                    |  |   | Total Liabilities and Shareholders Equity |   | $               | 160,934,611 |            |   | $ | 189,380,102 | 
|                                                                                                    |  |   |                                            |   |                 |             |            |  

See accompanying notes to these Consolidated Financial Statements.

F-4



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |           | 
|-------------------------------------------------------------------------------------- | ------------------------- | - | --------------------------- | --------- | ---- | - | ----------- | ---------- |  | - | ----------- | --------- | 
|                                                                                       |                           |   | Fiscal Year Ended March 31,
|                                                                                       |                           |   |                            
|                                                                                       |                           |   | 2003                        |           | 2002 |   | 2001       
|                                                                                       |                           |   |                             |           |      |   |            
|Operating activities                                                                   |                           |   |                             |           |      |   |             |            |  |   |             |          
|Net (loss) / income                                                                    |                           | $ | (26,179,208                 | )         |      | $ | 2,077,785   |            |  | $ | 12,028,793  |          
|Adjustments to reconcile net (loss) / income to cash
provided by operating activities: |                           |   |                             |           |      |   |             |            |  |   |             |          
|Depreciation                                                                           |                           |   | 11,285,978                  |           |      |   | 11,852,612  |            |  |   | 9,702,489   |          
|Loss / (gain) on disposition of fixed assets                                           |                           |   | 333,881                     |           |      |   | (68,649     | )          |  |   | (56,171     | )        
|Impairment loss                                                                        |                           |   | 2,787,578                   |           |      |   | 2,375,295   |            |  |   |            |          
|Foreign exchange loss / (gain)                                                         |                           |   | 5,144,160                   |           |      |   | (3,185,477  | )          |  |   | (1,745,099  | )        
|Other changes that provided / (used) cash:                                             |                           |   |                             |           |      |   |             |            |  |   |             |          
|Decrease / (increase) in accounts receivable                                           |                           |   | 7,374,261                   |           |      |   | (2,664,107  | )          |  |   | (3,129,462  | )        
|Decrease / (increase) in amount due from related parties                               |                           |   | 2,278,949                   |           |      |   | 3,371,318   |            |  |   | (4,096,189  | )        
|Decrease / (increase) in inventories                                                   |                           |   | 9,371,495                   |           |      |   | (5,217,638  | )          |  |   | (9,622,632  | )        
|Decrease / (increase) in spare parts                                                   |                           |   | 434,957                     |           |      |   | 311,954     |            |  |   | (429,956    | )        
|Increase in other current assets                                                       |                           |   | (967,699                    | )         |      |   | (1,597,303  | )          |  |   | (550,703    | )        
|(Decrease) / increase in accounts payable                                              |                           |   | (1,607,326                  | )         |      |   | (4,556,323  | )          |  |   | 1,985,681   |          
|Increase / (decrease) in accrued liabilities                                           |                           |   | 2,921,261                   |           |      |   | (2,268,591  | )          |  |   | 5,601,955   |          
|Increase / (decrease) in other long term liabilities                                   |                           |   | 202,251                     |           |      |   | (11,218     | )          |  |   | 95,000      |          
|Decrease in amount due to related parties                                              |                           |   | (11,775                     | )         |      |   | (47,427     | )          |  |   | (215,600    | )        
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Net cash provided by operating activities                                              |                           |   | 13,368,763                  |           |      |   | 372,231     |            |  |   | 9,568,106   |          
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Investing activities                                                                   |                           |   |                             |           |      |   |             |            |  |   |             |          
|Investment in property, plant and equipment                                            |                           |   | (10,681,626                 | )         |      |   | (10,983,278 | )          |  |   | (16,286,173 | )        
|Investment in subsidiaries                                                             |                           |   |                            |           |      |   | (16,158,489 | )          |  |   |            |          
|Proceeds from disposition of property, plant and
equipment                             |                           |   | 1,177,299                   |           |      |   | 192,913     |            |  |   | 402,128     |          
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Net cash used in investing activities                                                  |                           |   | (9,504,327                  | )         |      |   | (26,948,854 | )          |  |   | (15,884,045 | )        
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Financing activities                                                                   |                           |   |                             |           |      |   |             |            |  |   |             |          
|(Decrease) / increase in short term borrowings and bank
overdrafts                     |                           |   | (3,894,140                  | )         |      |   | 24,732,517  |            |  |   | 11,041,641  |          
|Proceeds from long-term debt                                                           |                           |   | 3,500,000                   |           |      |   | 14,431,533  |            |  |   |            |          
|Payment of long-term debt                                                              |                           |   | (5,874,233                  | )         |      |   | (383,790    | )          |  |   | (353,105    | )        
|Payment of current maturities of capital leases                                        |                           |   | (957,173                    | )         |      |   | (1,800,578  | )          |  |   | (1,130,609  | )        
|Payment of repurchase of ordinary shares                                               |                           |   | (3,703,376                  | )         |      |   | (178,410    | )          |  |   | (3,117,040  | )        
|Proceeds from exercise of share options                                                |                           |   | 7,124                       |           |      |   | 410,075     |            |  |   | 218,441     |          
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Net cash (used in) / provided by financing activities                                  |                           |   | (10,921,798                 | )         |      |   | 37,211,347  |            |  |   | 6,659,328   |          
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|(Decrease) / increase in cash and cash equivalents                                     |                           |   | (7,057,362                  | )         |      |   | 10,634,724  |            |  |   | 343,389     |          
|Cash and cash equivalents at beginning of year                                         |                           |   | 12,995,472                  |           |      |   | 2,360,748   |            |  |   | 2,017,359   |          
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Cash and cash equivalents at end of year                                               |                           | $ | 5,938,110                   |           |      | $ | 12,995,472  |            |  | $ | 2,360,748   |          
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Cash and cash equivalents are comprised of:                                            |                           |   |                             |           |      |   |             |            |  |   |             |          
|                                                                                       | Cash and cash equivalents |   | $                           | 5,938,110 |      |   | $           | 12,995,472 |  |   | $           | 2,360,748 | 
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Supplemental
cash flow disclosure                                                      |                           |   |                             |           |      |   |             |            |  |   |             |          
|Interest paid                                                                          |                           | $ | 4,445,455                   |           |      | $ | 4,165,037   |            |  | $ | 3,240,373   |          
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          
|Income tax paid                                                                        |                           | $ | 257,564                     |           |      | $ | 152,623     |            |  |   |            |          
|                                                                                       |                           |   |                             |           |      |   |             |            |  |   |             |          

See accompanying notes to these Consolidated Financial Statements.

F-5



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

|                                                            |  |          |           |          |  |         |             |          |  |            |            |               |  |               |             |   |  |   |         |       |  |       |         |   |  |   |             |  
|----------------------------------------------------------- |  | -------- | --------- | -------- |  | ------- | ----------- | -------- |  | ---------- | ---------- | ------------- |  | ------------- | ----------- | - |  | - | ------- | ----- |  | ----- | ------- | - |  | - | ----------- | -
|                                                            |  |          |           |          |  |         |             |          |  | Additional |            |               |  |               |             |   |  |   |         | Other |  | Total
|                                                            |  | Ordinary |           | Retained |  | Paid-in |             | Treasury |  | Legal      |            | Comprehensive |  | Shareholders
|                                                            |  | Shares   |           | Earnings |  | Capital |             | Stock    |  | Reserve    |            | Income        |  | Equity       
|                                                            |  |          |           |          |  |         |             |          |  |            |            |               |  |              
|Balance as of March 31, 2000                                |  | $        | 9,437,500 |          |  | $       | 60,324,737  |          |  | $          | 15,987,774 |               |  |               |            |   |  |   |        |       |  |       |        |   |  | $ | 85,750,011  |  
|Net income                                                  |  |          |          |          |  |         | 12,028,793  |          |  |            |           |               |  |               |            |   |  |   |        |       |  |       |        |   |  |   | 12,028,793  |  
|Share repurchase, not retired
(number of shares: 420,200)   |  |          |          |          |  |         |            |          |  |            |           |               |  |               | (3,117,040  | ) |  |   |        |       |  |       |        |   |  |   | (3,117,040  | )
|Exercise of share options
(number of shares: 52,500)        |  |          |          |          |  |         |            |          |  |            | (164,646   | )             |  |               | 383,087     |   |  |   |        |       |  |       |        |   |  |   | 218,441     |  
|                                                            |  |          |           |          |  |         |             |          |  |            |            |               |  |               |             |   |  |   |         |       |  |       |         |   |  |   |             |  
|Balance as of March 31, 2001                                |  |          | 9,437,500 |          |  |         | 72,353,530  |          |  |            | 15,823,128 |               |  |               | (2,733,953  | ) |  |   |        |       |  |       |        |   |  |   | 94,880,205  |  
|Net income                                                  |  |          |          |          |  |         | 2,077,785   |          |  |            |           |               |  |               |            |   |  |   |        |       |  |       |        |   |  |   | 2,077,785   |  
|Share repurchase, not retired
(number of shares: 20,100)    |  |          |          |          |  |         |            |          |  |            |           |               |  |               | (178,410    | ) |  |   |        |       |  |       |        |   |  |   | (178,410    | )
|Exercise of share options
(number of shares: 89,200)        |  |          |          |          |  |         |            |          |  |            | (255,112   | )             |  |               | 665,187     |   |  |   |        |       |  |       |        |   |  |   | 410,075     |  
|Derivatives qualifying as hedges                            |  |          |          |          |  |         |            |          |  |            |           |               |  |               |            |   |  |   |        |       |  |       | 19,384  |   |  |   | 19,384      |  
|                                                            |  |          |           |          |  |         |             |          |  |            |            |               |  |               |             |   |  |   |         |       |  |       |         |   |  |   |             |  
|Balance as of March 31, 2002                                |  |          | 9,437,500 |          |  |         | 74,431,315  |          |  |            | 15,568,016 |               |  |               | (2,247,176  | ) |  |   |        |       |  |       | 19,384  |   |  |   | 97,209,039  |  
|Net loss                                                    |  |          |          |          |  |         | (26,179,208 | )        |  |            |           |               |  |               |            |   |  |   |        |       |  |       |        |   |  |   | (26,179,208 | )
|Legal reserve transfer                                      |  |          |          |          |  |         | (195,958    | )        |  |            |           |               |  |               |            |   |  |   | 195,958 |       |  |       |        |   |  |   |            |  
|Share repurchase, not retired
(number of shares: 1,113,091) |  |          |          |          |  |         |            |          |  |            |           |               |  |               | (3,703,376  | ) |  |   |        |       |  |       |        |   |  |   | (3,703,376  | )
|Exercise of share options
(number of shares: 2,000)         |  |          |          |          |  |         |            |          |  |            | (7,854     | )             |  |               | 14,978      |   |  |   |        |       |  |       |        |   |  |   | 7,124       |  
|Derivatives qualifying as hedges                            |  |          |          |          |  |         |            |          |  |            |           |               |  |               |            |   |  |   |        |       |  |       | (11,325 | ) |  |   | (11,325     | )
|                                                            |  |          |           |          |  |         |             |          |  |            |            |               |  |               |             |   |  |   |         |       |  |       |         |   |  |   |             |  
|Balance as of March 31, 2003                                |  | $        | 9,437,500 |          |  | $       | 48,056,149  |          |  | $          | 15,560,162 |               |  |               | ($5,935,574 | ) |  | $ | 195,958 |       |  | $     | 8,059   |   |  | $ | 67,322,254  |  
|                                                            |  |          |           |          |  |         |             |          |  |            |            |               |  |               |             |   |  |   |         |       |  |       |         |   |  |   |             |  

See accompanying notes to these Consolidated Financial Statements.

F-6



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1.  |  | Organization and Business and Basis of Presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | Organization and business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Novel Denim Holdings Limited (hereinafter Novel Denim or the Company;
references include all subsidiaries unless the context otherwise
requires) was incorporated in the British Virgin Islands in November
1989. During the year ended March 31, 1996, the Company was reorganized
and acquired certain denim fabric production and related operations from
its then controlling shareholder, Novel Enterprises Limited (NEL).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | In December 1998, NEL sold its entire interest in Novel Denim to an
affiliate company. Further to this transaction, this affiliate company has an
indirect interest in NEL and Novel Denim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | The Company is a holding company with no independent operations. As of
March 31, 2003, the Company has twenty one subsidiaries, two of which are
incorporated in Mauritius, one of which is incorporated in Madagascar,
three of which are incorporated in the Channel Islands, four of which are
incorporated in South Africa, five of which are incorporated in the
British Virgin Islands, five of which are incorporated in Hong Kong, and
one of which is incorporated in Peoples Republic of China (China). The
Mauritius subsidiaries are Novel Textiles Limited (NTL) and Novel
Garments (Mauritius) Limited (NGML). NTL is mainly engaged in the
manufacture and sale of fabric while NGMLs main business is garment
production. The subsidiary incorporated in Madagascar is Novel Garments
(Madagascar) Limited (NGMAD). NGMADs main business is garment
production. The subsidiaries incorporated in the Channel Islands are
Nomacotex Limited (NL), Novel Garments International Limited (NGIL)
and Byren Trading Limited (BTL). NL and NGIL are involved in the
purchase and supply of raw cotton to NTL and the sale of garments
manufactured by NGML and NGMAD, respectively. BTL has a branch office in
London acting as a sales office for the European Market. The South Africa
subsidiaries are Novel Spinners (SA) (Pty) Limited (NSL), Novel Dyers
(SA) (Pty) Limited (NDL), Novel Weavers (SA) (Pty) Limited (NWL) and
Novel Garments (SA) (Pty) Ltd. (NGSAL). NSL is engaged in the
manufacture of cotton yarn, NDL is engaged in the dyeing process of
cotton yarn, NWL is engaged in the manufacture of fabrics and NGSAL is
engaged in garment production. The British Virgin Islands subsidiaries
are Kotten Limited (Kotten), Battel Limited (Battel), Good Port
Finance Limited (GPFL), NDP Holdings Limited (NDPHL) and NDP
Investment Limited (NDPIL). Kotten and Battel are engaged in marketing
activities for NGML and NGIL, GPFL is engaged in group internal funding
activities, NDPHL and NDPIL are investment holding companies. The
company incorporated in China is Novel Dyeing and Printing Mills Ltd
(NDPML) which is engaged in the dyeing and printing of fabrics. The
companies incorporated in Hong Kong are Novel Denim (HK) Limited
(ND-HK), NDP Fabrics Limited (NDPFL), Noveltex Trading Limited
(NTXL), NDP Trading Limited (NDPTL) and Income Pearl Limited (IPL).
ND-HK is engaged in the provision of sourcing, marketing and logistical
support to NGML and NGMAD as well as being a sales office in South East
Asia for fabrics manufactured by NTL and NWL, NTXL is engaged in the
sourcing activities for NDPML, NDPFL is engaged in sales and providing
logistical support to NDPML, NDPTL and IPL are both investment holding
companies.
|   
|    |  | With the exception of NTL, which is 98.65% owned by the Company, all
other subsidiaries are wholly owned by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | On July 23, 1997, the Company completed its initial public offering of
its Ordinary Shares (the Offering) pursuant to which the Company sold
937,500 shares at an offering price of $18.00 per share. The Companys
controlling shareholder also participated in the Offering by selling
3,950,000 shares of the Company (including 637,500 shares sold pursuant
to the exercise of the underwriters over allotment option). Proceeds to
the Company, net of associated costs amounting to $2,949,726, were
$13,925,274.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | On August 31, 1998, the Company completed its acquisition of NSL and NWL
from an affiliate of the Company for a consideration of $8,777,584 plus
the assumption of debt. The transaction was negotiated and approved by
the independent committee of the Companys Board of Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-7



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|1.  |  | Organization and Business and Basis of Presentation (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | Organization and business (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | On October 1, 2001, the Company completed its acquisition of
NDPHL from an affiliate of the Company for a consideration of
$16,158,489 plus the assumption of debt. The transaction was
negotiated and approved by the independent committee of the
Companys Board of Directors.                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | On March 28, 2002 the Company announced its intention to close its
Madagascar operations after more than three months of significant
political and social unrest in the country and severe disruption to the
business. A review was carried out for fixed assets located in
Madagascar in 2002 and 2003 to ensure that the carrying amount of fixed
assets does not exceed the fair value. As a result, an impairment loss
of $2,375,295 and $2,363,531 has been recorded in the year ended March
31, 2002 and 2003 respectively. Further information about the closure of
Madagascar operation is provided in note 9.
|   
|(b) |  | Basis of presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | The Consolidated Financial Statements include the accounts of Novel Denim
and all of its subsidiary companies and have been prepared in accordance
with principles generally accepted in the United States of America. All
significant intercompany balances and transactions have been eliminated
in consolidation.                                                                                                                                                                                                                                                                                                  
|   
|2.  |  | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | Certain reclassifications have been made to prior years consolidated
financial statements to conform to classifications used in the current
year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|3.  |  | Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(a) |  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | Cash includes cash equivalents. Highly liquid investments with
maturities of three months or less when purchased are considered to be
cash equivalents. Because of the short maturities of these instruments,
the carrying amount is a reasonable estimate of fair value.                                                                                                                                                                                                                                                                                                                                             
|   
|(b) |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Inventories and work in progress are stated at the lower of cost or net
realizable value. Cost, calculated on a weighted average basis,
comprises the cost of raw materials, direct labor and an appropriate
portion of production overheads.                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | The Company enters into commitments for the purchase of raw cotton which
is a component of the finished goods it manufactures. In determining the
net realizable value of such finished goods, the Company considers the
effect of changes in the price of raw cotton between the date it enters
into the purchase commitments and the balance sheet date. Where such
changes result in a reduction in the estimated net realizable value of
inventory to less than cost, appropriate provisions are made.                                                                                                            
|   
|(c) |  | Spare parts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Spare parts for property, plant and equipment are carried at the lower of
cost or net realizable value. The cost of spare parts is charged to
expense when the spare parts are placed into service.                                                                                                                                                                                                                                                                                                                                                                                                                   

F-8



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|3.  |  | Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(d) |  | Property, plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | Property, plant and equipment are carried at cost or at managements
estimate of fair market value if considered impaired under the provisions
of Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets less
accumulated depreciation. Expenditures for improvements that increase
asset values and extend usefulness are capitalized. Expenditures for
maintenance and repairs are expensed as incurred.
Construction-in-progress consists of factories and office buildings under
construction and machinery pending installation and includes the costs of
construction, machinery and equipment and interest charges arising from
borrowings used to finance these assets during the period of construction
or installation. No provision for depreciation is made on
construction-in-progress until such time as the relevant assets are
completed and ready for their intended use. Interest costs incurred
during the construction period of certain long term assets are
capitalized. No interest was capitalized in the years ended March 31,
2001, 2002 and 2003. Depreciation of property, plant and equipment is
calculated to write off the cost of individual assets in equal annual
installments over their estimated useful lives are as follows:

|                       |  |       |          | 
|---------------------- |  | ----- | -------- | 
|                       |  | Years
|                       |  |      
|Buildings              |  |       | 50       | 
|Leasehold improvements |  |       | 6 2/3    | 
|Furniture and fixtures |  |       | 6 2/3    | 
|Equipment and tools    |  |       | 6 2/3    | 
|Plant and machinery    |  |       | 6 2/3-10 | 
|Motor vehicles         |  |       | 3 1/3    | 
|Computer equipment     |  |       | 3 1/3    | 



|    |  | No depreciation is provided on construction in progress until it is
completed and becomes operational.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Long-lived assets are reviewed for impairment whenever events of
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Assets are grouped and evaluated at the lowest
level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. The Company
considers historical performance and future estimated results in its
evaluation of potential impairment. If such assets are considered
impaired, the impairment recognized is measured by the amount by which
the carrying amount of the assets exceeds its fair value. The Company
estimates fair value based on the best information available. The
estimation of fair value is generally measured by determining the net
selling price or by discounting expected future cash flows at appropriate
risk based discount rates. Prior to the adoption of SFAS No. 144, the
Company accounted for impairment of long-lived assets in accordance with
SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of.
|   
|(e) |  | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | Leases where substantially all the rewards and risks of ownership of
assets remain with the leasing company are accounted for as operating
leases. Rental payments applicable to such operating leases are
recognized on a straight line basis over the lease term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | Leases which meet the capital lease criteria specified in SFAS No. 13,
Accounting for Leases, are accounted for as capital leases.
Interest costs associated with such leases are recognized on an
effective yield basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-9



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|3.  |  | Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(f) |  | Income tax assets and liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The Company is subject to taxation on earnings derived from its
Mauritius, South African, Hong Kong and China operations, but is not
subject to taxation in other jurisdictions in which it operates (note 6).
Income taxes are accounted for using the liability method in which
deferred income taxes are recognized for temporary differences between
the tax and financial statement bases of assets and liabilities. In
establishing its deferred income tax assets and liabilities, the Company
makes judgments and interpretations based on the enacted tax laws and
published tax guidance that are applicable to its operations. The Company
records deferred tax assets and liabilities and evaluates the need for
valuation allowances to reduce the deferred tax assets to realizable
amounts. The likelihood of a material change in the Companys expected
realization of these assets is dependent on future taxable income, its
ability to use foreign tax credit carryforwards and carrybacks, and the
effectiveness of its tax planning strategies in the various relevant
jurisdictions. The Company is also subject to examination of its income
tax returns for multiple years by the tax authorities in its various
relevant jurisdictions. The Company periodically assesses the likelihood
of adverse outcomes resulting from these examinations to determine the
adequacy of its provision for income taxes.
|   
|(g) |  | Foreign currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The U.S. dollar represents the functional currency of Novel Denim,
including the subsidiaries incorporated in Mauritius, South Africa, the
Channel Islands, the British Virgin Islands and Madagascar. The
functional currency of ND-HK, NDPML, NTXL and NDPFL is the Hong Kong
dollar. The effect on the Companys equity of translating the accounts
of these companies into U.S. dollars is not material. Transactions in
currencies other than the functional currency are translated into U.S.
dollars at exchange rates in effect at the transaction dates. All
monetary assets and liabilities expressed in foreign currencies are
translated at exchange rates at the balance sheet date. All such
exchange differences are dealt with in the income statement. Net foreign
currency translation gains/(losses) included in net income for the years
ended March 31, 2001, 2002 and 2003 were $1,948,100, $2,997,020 and
$(6,492,783), respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | For subsidiary companies which U.S. dollars is not their
functional currency, translation of their foreign currency accounts
is accounted for as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



| | (i)  |  | Property, plant and equipment and related depreciation and
inventories are translated into U.S. dollars at amounts which
approximate historical rates of exchange.                                                 
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | Other assets and liabilities, representing monetary items,
are translated at exchange rates at the balance sheet date and
income and expense items at amounts which approximate weighted
average rates of exchange.



|    |  | All translation gains and losses are included in a separate component of
equity.                                                                                                                                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(h) |  | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The Company recognizes revenue when the goods are shipped and title
passes to the customer provided that: there are no uncertainties
regarding customer acceptance; persuasive evidence of an arrangement
exists; the sales price is fixed or determinable; and collectibility is
probable. Revenue is recognized net of an allowance for estimated
returns, discounts and incentives when the sale is recorded.
|   
|    |  | The Company recognizes allowances for estimated returns, discounts and
incentives when the sale is recorded. Actual allowances may differ from
estimates due primarily to changes in sales volume based on consumer
demand. Actual allowances have not materially differed from estimates.                                                                                                                      

F-10



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|3.  |  | Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(i) |  | Earnings / (loss) per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | Basic earnings/(loss) per share is computed by dividing net income/(loss)
available to holders of Ordinary Shares by the weighted average number of
Ordinary Shares outstanding during the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | Diluted earnings/(loss) per share gives effect to all dilutive potential
Ordinary Shares outstanding during the period. The weighted average
number of Ordinary Shares outstanding is adjusted to include the number
of additional Ordinary Shares that would have been outstanding if the
dilutive potential Ordinary Shares had been issued in the beginning of
the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | In computing the dilutive effect of potential Ordinary Shares, the
average stock price for the period is used in determining the number of
shares assumed to be purchased with the proceeds from the exercise of
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(j) |  | Employee Stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | SFAS No. 123, Accounting for Stock-based Compensation, allows companies
which have stock-based compensation arrangements with employees to adopt
a fair-value basis of accounting for stock options and other equity
instruments, or to continue to apply the existing accounting rules under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, but with additional financial statement disclosure.
The Company accounts for stock-based compensation arrangements under APB
Opinion No. 25 and provides additional disclosure as required by SFAS No.
123, and related amendments under provisions of SFAS No. 148, Accounting
for Stock-based Compensation - Transition and Disclosure. Accordingly,
the Company records expenses in an amount equal to the excess of the
quoted market price over the exercise price of the option over the
vesting period.
|   
|    |  | Had compensation cost for the Companys stock options granted been
determined based on the fair value of the stock options at the grant
date, consistent with the provisions of SFAS No. 123 and SFAS No. 148,
the Companys net income and earnings per share would have been adjusted
to the pro forma amounts indicated below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

|                                   |             |   |             |       |      |   |            |      |  |   |            |      | 
|---------------------------------- | ----------- | - | ----------- | ----- | ---- | - | ---------- | ---- |  | - | ---------- | ---- | 
|                                   |             |   | 2003        |       | 2002 |   | 2001      
|                                   |             |   |             |       |      |   |           
|Net (loss)/income as reported      |             | $ | (26,179,208 | )     |      | $ | 2,077,785  |      |  | $ | 12,028,793 |     
|Less: Fair value of stock options  |             |   | (2,659,113  | )     |      |   | (2,097,459 | )    |  |   | (652,421   | )   
|Pro forma net (loss)/income        |             |   | (28,838,321 | )     |      |   | (19,674    | )    |  |   | 11,376,372 |     
|Basic earnings/(loss) per share:   |             |   |             |       |      |   |            |      |  |   |            |     
|                                   | As reported |   | $           | (2.97 | )    |   | $          | 0.23 |  |   | $          | 1.30 | 
|                                   | Pro forma   |   | $           | (3.27 | )    |   |            |     |  |   | $          | 1.23 | 
|Diluted earnings/(loss) per share: |             |   |             |       |      |   |            |      |  |   |            |     
|                                   | As reported |   | $           | (2.96 | )    |   | $          | 0.22 |  |   | $          | 1.29 | 
|                                   | Pro forma   |   | $           | (3.26 | )    |   |            |     |  |   | $          | 1.22 | 



| |  | The weighted average fair value of options granted was estimated
at $4.7539, $5.2892 and $5.2234 in the fiscal years 2001, 2002 and
2003, respectively. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 2001, 2002 and 2003,
respectively: risk-free interest rate of 5.69%, 5.59% and 5.59%;
dividend yields of 0%; volatility factors of the expected market
price of the Company Ordinary Shares of 39%, 40% and 40%; and a
weighted-average expected lives of the options of 6 years, 6 years
and 5.8 years.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|3.  |  | Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Because compensation expense associated with an option is recognized over
the vesting period, the current year impact on pro forma net
(loss)/income may not be representative of compensation expense in future
years, when the effect of the amortization of multiple awards would be
reflected in the income statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(k) |  | Treasury Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | Treasury stock is accounted for using the cost method. When treasury
stock is reissued, the value is computed and recorded using a
weighted-average basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(l) |  | Transfers of accounts receivable with recourse                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The Company has entered into an agreement with a financial institution
pursuant to which the financial institution has agreed to make advances
to it which are secured by accounts receivable. The advances are made
with recourse to the Company and are accounted for as financing
transactions in accordance with the provisions of SFAS No.140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, since the Company has not effectively
surrendered control of the receivables.                                                                                                                                                                                                                                                                                                                                                                
|   
|(m) |  | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates that affect
the reported amount of assets, liabilities, sales and expenses. Actual
results could differ from those estimates. On an on-going basis, the
Company evaluates its estimates, including those related to cash
equivalents, inventories, income taxes, financing operations, claims,
impairment cost, and contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
|   
|(n) |  | Comprehensive Income / (Loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | Comprehensive income/(loss) consists of revenue, expenses, gains and
losses that under accounting principles generally accepted in the United
States are included in comprehensive income/(loss) but are excluded from
net income as these amounts are recorded directly as an adjustment to
shareholders equity, net of tax. The Companys other comprehensive
income/(loss) is composed of unrealized gains and losses on cash flow
hedge adjustments.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | SFAS No. 130, Reporting Comprehensive Income, requires unrealized gains
or losses on the Companys foreign currency translation adjustments to be
included in comprehensive income. However, as noted in note 3 (g), the
effect on the Companys equity of translating the accounts of ND-HK,
NDPML, NTXL and NDPFL into US dollars is not material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(o) |  | Segment and Geographic Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | The Company reports operating segments and related disclosures under SFAS
No. 131, Disclosure about Segment of an Enterprise and Related
Information. The Company has two reportable segments: the manufacturing
and sales of garments and fabric products. The information for these
segments is the information used by the Companys chief operating
decision-maker to evaluate operating performance. Information regarding
these segments is summarized in note 12.                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(p) |  | Costs of Start-Up Activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|    |  | The Company recognizes the costs of start-up activities and organization
costs, as incurred. For the years ended March 31, 2001, 2002 and 2003,
the Company recognized the cost of start-up activities and organization
costs of $588,709, nil and $1,222,354, respectively. This charge is
included in other expenses in the consolidated statement of income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-12



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|3.  |  | Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(q) |  | Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | On April 1, 2001, the company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended by SFAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities. Under SFAS No. 133, all derivative instruments (including
certain derivative instruments embedded in other contracts) are
recognized in the balance sheet at their fair values and changes in fair
value are recognized immediately in earnings, unless the derivatives
qualifies as hedges of future cash flows. For derivatives qualifying as
hedges of future cash flows, the effective portion of changes in fair
value is recorded temporarily in equity, then recognized in earnings
along with the related effects of the hedged items. Any ineffective
portion of hedges is reported in earnings as it occurs. Further
information about derivatives and hedging is provided in note 18.                                                  
|   
|    |  | The cumulative effect of adopting this accounting change at April
1, 2001, was the recognition in the consolidated statement of income
of an unrealized gain amounting to $307,997.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(r) |  | Fair value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | The carrying amount of the Companys financial instruments, which
principally included cash, trade receivables, accounts payable and
accrued expenses, do not materially differ from their carrying
value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(s) |  | Advertising Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | The Company expenses the cost of advertising as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(t) |  | Shipping Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The Company expenses the cost of shipping as incurred. Shipping costs
for the years ended March 31, 2001, 2002, and 2003 were $4,077,000,
$4,832,000 and $7,132,600, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(u) |  | New Accounting Pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The Financial Accounting Standards Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, dated June 2001. SFAS No. 143
changes the way companies recognize and measure retirement obligations that are
legal obligations and result from the acquisition, construction, development,
or normal operation of a long-lived asset. The Company will adopt the
provisions of SFAS No. 143 on the first day of fiscal year 2004. The Company
does not believe that the adoption of SFAS No. 143 will have a material impact
on its financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | The FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, dated April
2002. SFAS No. 145 states that gains and losses from extinguishment of debt
that do not meet the criteria for classification as extraordinary items in APB
Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, should not be classified as
extraordinary items. Accordingly, SFAS No. 145 rescinds SFAS No. 4 Reporting
Gains and Losses from Extinguishment of Debt, and SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No.
145 is effective for the Company on the first day of fiscal year 2004. The
Company does not believe SFAS No. 145 will have a material impact on its
financial position or results of operations.
|   
|    |  | The FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, dated June 2002. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities.
In summary, SFAS No. 146 requires that the liability and cost shall be
recognized and measured initially at its fair value in the period in which the
liability is incurred, except for one-time termination benefits that meet
certain requirements. SFAS No. 146 is effective prospectively for exit or
disposal activities initiated after December 31, 2002. The Company does not
believe that the adoption of SFAS No. 146 will have a material impact on its
financial position or results of operations.                                                                                                                                                                                                                               

F-13



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|3.  |  | Significant Accounting Policies (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(u) |  | New Accounting Pronouncements (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The FASB issued FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others in November 2002. This interpretation elaborates on
the disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements in this Interpretation are effective for financial statements of
interim or annual period ending after December 15, 2002. The Company does not
anticipate the Interpretation will have a material impact on its consolidated
financial statements.                                                  
|   
|    |  | The FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest
Entities in January 2003. This interpretation clarifies the application of
Accounting Research Bulletin No. 51 (ARB 51), Consolidated Financial
Statements, and requires companies to evaluate variable interest entities for
specific characteristics to determine whether additional consolidation and
disclosure requirements apply. This interpretation is immediately applicable
for variable interest entities created after January 31, 2003, and applies to
fiscal periods beginning after June 15, 2003 for variable interest entities
acquired prior to February 1, 2003. This interpretation also requires
extensive disclosures, including disclosure that are applicable to December 31,
2002 financial statements. The Company does not expect that the adoption of
this interpretation will have any material impact on its financial position or
results of operations because the Company has no variable interest entities.                                                            
|   
|    |  | The FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, dated December 2002. SFAS 148 provides
alternative methods for a transition to the fair value method of accounting for
stock based compensation. The statement also amends the disclosure provision of
SFAS No. 123. Accounting for Stock Based Compensation by requiring disclosure
in the summary of significant accounting policies of the entitys accounting
policy, and additional disclosure of the impact on net income of the Companys
existing method and fair value method of accounting for stock based
compensation. While the Company has not elected to adopt the transition
provisions and use the fair value accounting for its stock based compensation,
it has complied with the new disclosure requirements under SFAS No. 148. As
adopted, this statement does not have any impact on the Companys results of
operations or financial position.                                                                                                                   
|   
|    |  | The FASB issued SFAS No. 149 Amendment of Statement 133 on Derivative
Instruments and Hedging Activities dated June 2003. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities. It is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. All provisions of SFAS No. 149 should be applied prospectively.
Management does not expect that the adoption of SFAS No. 149 will have a
material effect on Companys financial position or results of operations.                                                                                                                                                                                                                                                                                                                   
|   
|    |  | The FASB issued SFAS No. 150 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity dated June 2003. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or as an asset in some circumstances). It is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial instruments created
before the issuance date of SFAS No. 150 and still existing at the beginning of
the interim period of adoption. Restatement is not permitted. Management does
not expect that the adoption of SFAS No. 150 will have a material effect on
Companys financial position or results of operations.

F-14



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|4. |  | Inventories                          
|-- |  | -------------------------------------
|  
|   |  | Inventories consist of the following:

|                                     |  |                 |            |      |  |   |            |  
|------------------------------------ |  | --------------- | ---------- | ---- |  | - | ---------- | -
|                                     |  | As of March 31,
|                                     |  |                
|                                     |  | 2003            |            | 2002
|                                     |  |                 |            |     
|Raw materials                        |  | $               | 13,787,083 |      |  | $ | 20,816,918 |  
|Work in progress                     |  |                 | 21,104,799 |      |  |   | 22,694,893 |  
|Finished goods                       |  |                 | 8,939,120  |      |  |   | 8,442,107  |  
|Less: net realizable value provision |  |                 | (2,316,730 | )    |  |   | (1,068,151 | )
|                                     |  |                 |            |      |  |   |            |  
|                                     |  | $               | 41,514,272 |      |  | $ | 50,885,767 |  
|                                     |  |                 |            |      |  |   |            |  



|5. |  | Property, Plant and Equipment                          
|-- |  | -------------------------------------------------------
|  
|   |  | Property, plant and equipment consist of the following:

|                               |  |                 |             |      |  |   |             | 
|------------------------------ |  | --------------- | ----------- | ---- |  | - | ----------- | 
|                               |  | As of March 31,
|                               |  |                
|                               |  | 2003            |             | 2002
|                               |  |                 |             |     
|Land and buildings             |  | $               | 39,908,051  |      |  | $ | 37,820,882  | 
|Land use rights                |  |                 | 1,185,621   |      |  |   | 1,187,549   | 
|Leasehold improvements         |  |                 | 1,193,430   |      |  |   | 1,507,555   | 
|Plant and machinery            |  |                 | 106,978,425 |      |  |   | 104,029,974 | 
|Equipment and tools            |  |                 | 16,283,755  |      |  |   | 16,488,533  | 
|Furniture and fixtures         |  |                 | 1,874,571   |      |  |   | 1,791,997   | 
|Computer equipment             |  |                 | 1,627,016   |      |  |   | 1,422,163   | 
|Motor vehicles                 |  |                 | 2,441,558   |      |  |   | 2,598,776   | 
|Construction in progress       |  |                 | 7,092,480   |      |  |   | 5,195,848   | 
|                               |  |                 |             |      |  |   |             | 
|                               |  |                 | 178,584,907 |      |  |   | 172,043,277 | 
|Less: Accumulated depreciation |  |                 | 91,278,613  |      |  |   | 82,118,877  | 
|                               |  |                 |             |      |  |   |             | 
|                               |  | $               | 87,306,294  |      |  | $ | 89,924,400  | 
|                               |  |                 |             |      |  |   |             | 



| |  | Plant and machinery includes leased equipment under capital leases
with a cost of $11,711,984 and $9,830,882 at March 31, 2002 and
2003. Depreciation charge for those leased plant and machinery
during the years ended March 31, 2002 and 2003 amounted to $977,780
and $983,264, respectively. Accumulated depreciation in respect of
such equipment amounted to $3,756,078 and $2,919,867 at March 31,
2002 and 2003, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Land and buildings includes leased buildings with a cost of $4,100,848
and $4,230,375 at March 31, 2002 and 2003, respectively. Depreciation
charge for those buildings during the year ended March 31, 2002 and 2003
amounted to $82,671 and $95,902, respectively. Accumulated depreciation
in respect of such buildings amounted to $355,752 and $444,536 at March
31, 2002 and 2003, respectively.                                 
|
| |  | Land use rights are amortized on a straight-line basis over the
term of the lease, which is 50 years.                                                                                                                                                                                                                                                                                                                                  
|
| |  | Property, plant and equipment with a net book value of $45,483,003 as of
March 31, 2003 has been pledged as collateral for certain bank borrowings
(notes 7 and 8).                                                                                                                                                                                                                                                                    

F-15



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|6. |  | Income Taxes                                                                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Novel Denim has in place various tax strategies to minimize tax
liabilities in the jurisdictions in which it operates. The company is
not taxed on income in the British Virgin Islands where it is
incorporated.                                                                                     
|  
|   |  | The subsidiaries which are incorporated in the Channel Islands are not
subject to income tax because they are non-resident in the Channel
Islands.                                                                                                                                                    
|  
|   |  | The subsidiary which is incorporated in Madagascar was exempt from income
tax for a period of 5 years starting in calendar year 1998. The
subsidiary ceased operations prior to the expiry of the tax holiday.                                                                                        
|  
|   |  | Effective from April 1, 2000 the Mauritius subsidiaries are subject to
tax at a rate of 15%.                                                                                                                                                                                                          
|  
|   |  | The subsidiaries which are incorporated in Hong Kong were subject to tax
at a rate of 16% on income arising in Hong Kong during the years ended
March 31, 2001, 2002 and 2003 or have unutilised tax losses to offset
against the assessable profit during the years.                                 
|  
|   |  | The subsidiaries which are incorporated in South Africa were
subject to tax at a rate of 30% on income during the year ended
March 31, 2001, 2002 and 2003. The subsidiaries, however, had no
taxable income or have unutilised tax losses to offset against the
assessable profit during these years.
|  
|   |  | The subsidiaries which are incorporated in the British Virgin Islands are
not subject to income tax because they are non-resident in the British
Virgin Islands.                                                                                                                                      
|  
|   |  | The subsidiary which is incorporated in China is subject to tax
at a rate of 15%.                                                                                                                                                                                                                     

|                                               |  |                             |            |      |  |      |           |   |  |   |            |  
|---------------------------------------------- |  | --------------------------- | ---------- | ---- |  | ---- | --------- | - |  | - | ---------- | -
|                                               |  | Fiscal Year Ended March 31,
|                                               |  |                            
|                                               |  | 2003                        |            | 2002 |  | 2001
|                                               |  |                             |            |      |  |     
|Reconciliation of Effective Income Tax Charge  |  |                             |            |      |  |      |           |   |  |   |            |  
|Income tax (benefit)/charge at applicable rate |  | $                           | (5,360,866 | )    |  | $    | 734,004   |   |  | $ | 1,061,441  |  
|Valuation allowance                            |  |                             | 2,368,226  |      |  |      | 1,279,803 |   |  |   | 298,334    |  
|Utilization of previously unrecognized losses  |  |                             | (695,150   | )    |  |      | (680,626  | ) |  |   | (1,022,781 | )
|Income not subject to tax                      |  |                             | (1,599,970 | )    |  |      | (195,740  | ) |  |   | (104,926   | )
|Expenses not deductible for tax purposes       |  |                             | 2,907,622  |      |  |      | 159,757   |   |  |   | 55,182     |  
|Effect of exchange rate changes                |  |                             | 3,133,269  |      |  |      | (998,993  | ) |  |   | (287,250   | )
|                                               |  |                             |            |      |  |      |           |   |  |   |            |  
|Effective income tax                           |  | $                           | 753,131    |      |  | $    | 298,205   |   |  |   |           |  
|                                               |  |                             |            |      |  |      |           |   |  |   |            |  



| |  | The applicable tax rate represents the weighted average of the rates of
taxation prevailing in the territories in which the Company operates.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------

F-16



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|6. |  | Income Taxes (continued)                      
|-- |  | ----------------------------------------------
|  
|   |  | (Loss)/income before income taxes consists of:

|                       |  |                      |             |      |  |      |           |  |  |   |            | 
|---------------------- |  | -------------------- | ----------- | ---- |  | ---- | --------- |  |  | - | ---------- | 
|                       |  | Year Ended March 31,
|                       |  |                     
|                       |  | 2003                 |             | 2002 |  | 2001
|                       |  |                      |             |      |  |     
|British Virgin Islands |  | $                    | (1,068,449  | )    |  | $    | 2,006,527 |  |  | $ | 259,743    | 
|Foreign                |  |                      | (24,407,298 | )    |  |      | 143,010   |  |  |   | 11,816,703 | 
|                       |  |                      |             |      |  |      |           |  |  |   |            | 
|                       |  | $                    | (25,475,747 | )    |  | $    | 2,149,537 |  |  | $ | 12,076,446 | 
|                       |  |                      |             |      |  |      |           |  |  |   |            | 



| |  | The provision for income taxes consists of:
| |  | -------------------------------------------

|                                  |                        |   |                      |           |      |   |         |         |  |  |   |   | 
|--------------------------------- | ---------------------- | - | -------------------- | --------- | ---- | - | ------- | ------- |  |  | - | - | 
|                                  |                        |   | Year Ended March 31,
|                                  |                        |   |                     
|                                  |                        |   | 2003                 |           | 2002 |   | 2001   
|                                  |                        |   |                      |           |      |   |        
|Current tax expenses :            |                        |   |                      |           |      |   |         |         |  |  |   |  
|                                  | British Virgin Islands |   |                      |          |      |   |         |        |  |  |   |  | 
|                                  | Foreign                |   |                      | 1,418,525 |      |   |         | 186,947 |  |  |   |  | 
|                                  |                        |   |                      |           |      |   |         |         |  |  |   |   | 
|Total current provision           |                        |   | 1,418,525            |           |      |   | 186,947 |         |  |  |  |  
|                                  |                        |   |                      |           |      |   |         |         |  |  |   |   | 
|Deferred tax (benefit) / expense: |                        |   |                      |           |      |   |         |         |  |  |   |  
|                                  | British Virgin Islands |   |                      |          |      |   |         |        |  |  |   |  | 
|                                  | Foreign                |   |                      | (665,394  | )    |   |         | 111,258 |  |  |   |  | 
|                                  |                        |   |                      |           |      |   |         |         |  |  |   |   | 
|Total deferred provision          |                        |   | (665,394             | )         |      |   | 111,258 |         |  |  |  |  
|                                  |                        |   |                      |           |      |   |         |         |  |  |   |   | 
|Total provision                   |                        | $ | 753,131              |           |      | $ | 298,205 |         |  |  |  |  
|                                  |                        |   |                      |           |      |   |         |         |  |  |   |   | 



| |  | Deferred tax assets / (liabilities) comprises the following:
| |  | ------------------------------------------------------------

|                                        |                            |   |                 |            |      |   |            |            |  
|--------------------------------------- | -------------------------- | - | --------------- | ---------- | ---- | - | ---------- | ---------- | -
|                                        |                            |   | As of March 31,
|                                        |                            |   |                
|                                        |                            |   | 2003            |            | 2002
|                                        |                            |   |                 |            |     
|Deferred tax assets :                   |                            |   |                 |            |      |   |            |           
|                                        | Loss carry forward         |   | $               | 8,935,018  |      |   | $          | 3,311,170  |  
|                                        | Other temporary difference |   |                 | 2,478,905  |      |   |            | 1,919,650  |  
|                                        |                            |   |                 |            |      |   |            |            |  
|Total deferred tax assets               |                            |   | 11,413,923      |            |      |   | 5,230,820  |           
|                                        |                            |   |                 |            |      |   |            |            |  
|Deferred tax liabilities                |                            |   |                 |            |      |   |            |           
|                                        | Fixed assets               |   |                 | (5,490,687 | )    |   |            | (2,535,902 | )
|                                        |                            |   |                 |            |      |   |            |            |  
|Total deferred tax liabilities          |                            |   | (5,490,687      | )          |      |   | (2,535,902 | )         
|                                        |                            |   |                 |            |      |   |            |            |  
|Valuation allowance                     |                            |   | (5,512,266      | )          |      |   | (2,806,176 | )         
|                                        |                            |   |                 |            |      |   |            |            |  
|Net deferred tax assets / (liabilities) |                            | $ | 410,970         |            |      | $ | (111,258   | )         
|                                        |                            |   |                 |            |      |   |            |            |  



| |  | At March 31, 2003, the Company has a loss carried forward of
$49,925,877 which is available to reduce future taxable income. At March
31, 2003, other temporary differences mainly arose from temporary timing
differences on leased property, plant and equipment which were not fully
deductible during the year ended March 31, 2003 but will be available for
deduction in future years. The Company recorded a valuation allowance for
the deferred tax assets based on the uncertainty as to their ultimate
realization.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|7. |  | Short-Term Borrowings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company maintains working capital, overdraft and other credit
facilities with various commercial bank groups in Mauritius, South
Africa, Madagascar, Hong Kong and China. Such facilities bear interest
at rates based on the Mauritius, South Africa and Madagascar base rate,
the Hong Kong prime rate and lending rates on other non-U.S. dollar
currencies and ranged from 1.68% to 17.00% during the year ended March
31, 2003. Information relating to the Companys short-term credit
facilities is summarized as follows:

|                                           |                                         |   |                 |      |      |   |            |      |  
|------------------------------------------ | --------------------------------------- | - | --------------- | ---- | ---- | - | ---------- | ---- | -
|                                           |                                         |   | As of March 31,
|                                           |                                         |   |                
|                                           |                                         |   | 2003            |      | 2002
|                                           |                                         |   |                 |      |     
|Total credit facilities available          |                                         | $ | 79,625,120      |      |      | $ | 71,272,542 |     
|Balance at end of the year                 |                                         |   | 52,268,863      |      |      |   | 52,532,174 |     
|Maximum amount outstanding during the year |                                         |   | 56,104,472      |      |      |   | 52,532,174 |     
|Average borrowings during the year         |                                         |   | 49,886,222      |      |      |   | 40,984,608 |     
|Weighted average interest rate:            |                                         |   |                 |      |      |   |            |     
|                                           | On average borrowings, computed monthly |   |                 | 5.63 | %    |   |            | 7.24 | %
|                                           | At year end                             |   |                 | 4.85 | %    |   |            | 6.56 | %



|    |  | The balance at the end of the year and maximum amount outstanding during
the year include amounts in respect of receivables discounted with banks
(note 3(l)).                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Interest expense on short-term credit facilities amounted to $2,506,597,
$2,857,009 and $2,811,828 for the years ended March 31, 2001, 2002 and
2003, respectively. The Companys credit facilities are subject to
periodic review by the lenders and are payable on demand. A portion of
the Companys short-term facilities is secured by liens on the assets of
NTL and NGML.
|   
|8.  |  | Long-Term Debt                                                                                                                                                                                                                                                                                                                                                                  
|   
|(a) |  | Long-term debt                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | Long-term borrowing arrangements comprise of three loans which were
arranged by NDHL, NTL Mauritius and NGML Mauritius with various
commercial bank groups. Information relating to the Companys long-term
debt facilities is summarized as follows:                                                                                                                           

|                                           |                                                     |   |                 |      |        |   |           |      |       |   |           |      |   |   |            |      |   |   |            |      |  
|------------------------------------------ | --------------------------------------------------- | - | --------------- | ---- | ------ | - | --------- | ---- | ----- | - | --------- | ---- | - | - | ---------- | ---- | - | - | ---------- | ---- | -
|                                           |                                                     |   | As of March 31,
|                                           |                                                     |   |                
|                                           |                                                     |   | 2003            |      | 2002  
|                                           |                                                     |   |                 |      |       
|                                           |                                                     |   | Loan 1          |      | Loan 2 |   | Loan 3    |      | Total |   | Total    
|                                           |                                                     |   |                 |      |        |   |           |      |       |   |          
|Total credit facilities
available          |                                                     | $ | 9,000,000       |      |        | $ | 1,832,250 |      |       | $ | 3,500,000 |      |   | $ | 14,332,850 |      |   | $ | 13,978,427 |     
|Balance at end of the
year                 |                                                     |   | 7,875,000       |      |        |   | 1,563,094 |      |       |   | 3,149,996 |      |   |   | 12,588,090 |      |   |   | 13,953,765 |     
|Maximum amount
outstanding during
the year |                                                     |   | 9,000,000       |      |        |   | 3,326,583 |      |       |   | 3,150,000 |      |   |   | 15,476,583 |      |   |   | 13,978,427 |     
|Average borrowings
during the year         |                                                     |   | 8,783,654       |      |        |   | 3,310,081 |      |       |   | 1,763,476 |      |   |   | 13,857,211 |      |   |   | 7,441,550  |     
|Weighted average
variable interest rate:   |                                                     |   | 2.40            | %    |        |   | 8.82      | %    |       |   | 2.46      | %    |   |   | 4.35       | %    |   |   | 5.63       | %   
|                                           | On average borrowings,
computed monthly
At year end |   |                 | 2.62 | %      |   |           | 9.50 | %     |   |           | 2.00 | % |   |            | 3.32 | % |   |            | 5.51 | %



| |  | Interest expense on long-term debt amounted to $69,436, $530,134 and
$602,831 for the years ended March 31, 2001, 2002 and 2003, respectively.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------

F-18



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|8.  |  | Long-Term Debt (continued)                                                                                                                                                                                                                                                      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | Long-term debt (continued)                                                                                                                                                                                                                                                      
|   
|    |  | Loan 1 was arranged with The Hongkong & Shanghai Banking Corporation Ltd
in Hong Kong. The loan period is for five years from October 2001 with
no principal repayment during the first year and then followed by equal
quarterly repayments during the rest of the loan period.
|   
|    |  | Loan 2 was arranged with Barclays Bank plc in Mauritius amounting to
Mauritian Rupees (Rs) Rs50,000,000. The loan period is for five years
from October 2002 with equal monthly principal repayment during the loan
period.                                                   
|   
|    |  | Loan 3 was arranged with Mauritius Commercial Bank Ltd in Mauritius. The
loan period is for five years from October 2002 with equal monthly
principal repayment during the loan period.                                                                                         
|   
|(b) |  | Scheduled maturities                                                                                                                                                                                                                                                            
|   
|    |  | The aggregate amounts of long-term debt maturing in the next five years
and thereafter are as follows:                                                                                                                                                                          

|                                                                        |  |                      |            |  
|----------------------------------------------------------------------- |  | -------------------- | ---------- | -
|Fiscal Year Ending March 31,                                            |  | As of March 31, 2003
|                                                                        |  |                     
|2004                                                                    |  | $                    | 3,526,911  |  
|2005                                                                    |  |                      | 3,592,077  |  
|2006                                                                    |  |                      | 3,294,106  |  
|2007                                                                    |  |                      | 1,825,000  |  
|2008                                                                    |  |                      | 349,996    |  
|                                                                        |  |                      |            |  
|                                                                        |  |                      | 12,588,090 |  
|Less: Amounts repayable within one year included in current liabilities |  |                      | (3,526,911 | )
|                                                                        |  |                      |            |  
|                                                                        |  | $                    | 9,061,179  |  
|                                                                        |  |                      |            |  



|9.  |  | Closure of Madagascar Operation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On March 28, 2002 the Company announced its intention to close
its Madagascar operations after more than three months of
significant political and social unrest in the country and severe
disruption to the business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(a) |  | Impairment of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | A review of the long-lived assets located in Madagascar has
been carried out to ensure that the carrying amount of the assets
does not exceed their fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | In 2002, for the woven and laundry machinery and computer
equipment, no provision was made based on the Companys expectation
and assumption that the machinery and equipment could be
successfully relocated, notwithstanding the ongoing political and
social instability within Madagascar, to the Companys other
operations in Mauritius, South Africa and China, as the Company
could fully utilize the capacity transferred, and the transferred
assets could generate sufficient cash flows to support the assets
carrying value. During 2003, certain assets which were not fully
utilized as expected, were impaired by the Company by a further
$1,985,531. All the remaining assets were successfully relocated to
the Companys other operations in Mauritius, South Africa and China.
|   
|    |  | For the knit plant, machinery and equipment, an impairment loss
of $577,295 and $378,000 was recorded for the years ended March 31,
2002 and 2003 respectively, based on the Companys estimate of the
net selling price of the assets. All the remaining assets were
successfully relocated to the Companys other operations in
Mauritius, South Africa and China.                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | For other equipment and tools, leasehold improvement and
furniture and fixtures, the Company estimated that the fair value of
these assets for the year ended March 31, 2002 was nil, since these
assets were not be relocated out of Madagascar and could not
generate any future benefit to the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | As a result a total impairment loss of $2,375,295 and $2,363,531
have been recorded for the years ended March 31, 2002 and 2003
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-19



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|9.  |  | Closure of Madagascar Operation (continued)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Provisions for inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | A review was carried out in respect of inventories located in Madagascar
and provisions were made based on the full physical inventory count and
the Companys estimate of the inventories net realizable value after the
inclusion of future freight, transportation, packing and related costs,
to ensure that the carrying amount of inventories does not exceed their
net realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | As a result, an inventory provision of $3,824,000 and nil was recorded in
the cost of goods sold for the year ended March 31, 2002 and 2003
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(c) |  | Redundancy costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | A redundancy cost of $405,000 was provided for the year ended March 31,
2002, based on the minimum amount required by local Madagascar
regulation. Such costs were paid in April 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | All the costs related to the closure of the Companys Madagascar
operation were attributable to the results of the garments division in
the segment information (note 12) and has been fully settled as of March
31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|10. |  | Related Party Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | At March 31, 2003, an affiliate of Novel Enterprises Ltd. (NEL) held
56.70% of the issued and outstanding ordinary shares of the Company
(based on 8,027,809 Ordinary Shares, net of treasury shares).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Amounts due from related parties comprised trade receivables, management
and service fees and commissions due from affiliates of NEL to which
denim fabric was sold (see (a) and (c) below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | Amounts due to related parties comprise balances with affiliates of NEL.
The balances relate to purchases of raw materials and other inventory
items, general and administrative expenses (including commissions) and
leases (see (b) and (d) below).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(a) |  | Sales to related parties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | The Companys customers include Tommy Hilfiger U.S.A., Inc., Pepe Jeans
Europe B.V., Tommy Hilfiger Wholesale, Inc., Tommy Hilfiger Europe B.V.
and certain other affiliates of NEL. Tommy Hilfiger U.S.A., Inc.
(THUSA) and Tommy Hilfiger Europe B.V are subsidiaries of Tommy
Hilfiger Corporation (Tommy Hilfiger). Tommy Hilfiger Wholesale, Inc.
(THWS) is a subsidiary of THUSA. Pepe Jeans Europe B.V. is a
subsidiary of Pepe Holdings Limited (Pepe Holdings). Affiliates of the
Company have indirect interests in Tommy Hilfiger and Pepe Holdings.
Additionally, the Companys Chairman was the Co-Chairman of Tommy
Hilfiger until his resignation in October 2002. As of April 2003, none
of the Companys directors or senior officers held similar position in
Tommy Hilfigers management.
|   
|    |  | Sales to these related companies are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                               |  |                             |            |      |  |      |            |  |  |   |            | 
|------------------------------ |  | --------------------------- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                               |  | Fiscal Year Ended March 31,
|                               |  |                            
|                               |  | 2003                        |            | 2002 |  | 2001
|                               |  |                             |            |      |  |     
|Tommy Hilfiger U.S.A., Inc.    |  | $                           | 2,055,238  |      |  | $    | 5,517,983  |  |  | $ | 1,620,085  | 
|Tommy Hilfiger Wholesale, Inc. |  |                             | 14,493,487 |      |  |      | 18,318,967 |  |  |   | 20,490,742 | 
|Pepe Jeans Europe B.V.         |  |                             | 33,638     |      |  |      | 1,013,366  |  |  |   | 2,079,043  | 
|Tommy Hilfiger Europe B.V.     |  |                             |           |      |  |      | 58,328     |  |  |   | 68,113     | 
|                               |  |                             |            |      |  |      |            |  |  |   |            | 
|                               |  | $                           | 16,582,363 |      |  | $    | 24,908,644 |  |  | $ | 24,257,983 | 
|                               |  |                             |            |      |  |      |            |  |  |   |            | 

F-20



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|10. |  | Related Party Transactions (continued)                                                           
|--- |  | -------------------------------------------------------------------------------------------------
|   
|(a) |  | Sales to related parties (Continued)                                                             
|   
|    |  | Amounts receivable from these companies which are included in accounts
receivable are as follows:

|                               |  |                 |           |      |  |   |           | 
|------------------------------ |  | --------------- | --------- | ---- |  | - | --------- | 
|                               |  | As of March 31,
|                               |  |                
|                               |  | 2003            |           | 2002
|                               |  |                 |           |     
|Tommy Hilfiger U.S.A., Inc.    |  | $               | 181,403   |      |  | $ | 708,010   | 
|Tommy Hilfiger Wholesale, Inc. |  |                 | 1,037,186 |      |  |   | 2,659,319 | 
|Pepe Jeans Europe B.V.         |  |                 |          |      |  |   | 92,621    | 
|Tommy Hilfiger Europe B.V.     |  |                 |          |      |  |   | 37,588    | 
|                               |  |                 |           |      |  |   |           | 
|                               |  | $               | 1,218,589 |      |  | $ | 3,497,538 | 
|                               |  |                 |           |      |  |   |           | 



|(b) |  | Purchases from related parties                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company purchases certain raw materials and other inventory items
from affiliates of NEL. Purchases from these companies amounted to
$993,993, $24,608 and nil for the years ended March 31, 2001, 2002 and
2003, respectively. Amount due to these related parties amounted to
$23,539 and $11,764 as of March 31, 2002 and 2003, respectively.                                                                                                     
|   
|(c) |  | Selling, general and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | In fiscal 2001, 2002 and 2003, the Company received certain company
secretarial services from NEL and its affiliates. Charges to the Company
for these services amounted to $132,029, $134,783 and $138,525 for the
years ended March 31, 2001, 2002 and 2003, respectively. The charges are
based on apportionment of services provided based on estimated or actual
usage. Management believes this apportionment to be a reasonable
allocation method.
|   
|    |  | The Company pays commissions to companies affiliated with NEL which act
as selling agents on the Companys behalf. Total commission expense
amounted to $629,205, $512,692 and $616,028 for the years ended March 31,
2001, 2002 and 2003, respectively.                                                                                                                                                                                                 
|   
|    |  | Had the Company operated on a stand-alone basis, management believes that
selling, general and administrative expenses would not have varied
materially from amounts recognized in the years presented.                                                                                                                                                                                                                                                  
|   
|(d) |  | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | The Company leases office space from a company which is a subsidiary of
NEL. Rental charges to the Company for the years ended March 31, 2001,
2002 and 2003 amounted to $136,543, $173,432 and $159,272 respectively.                                                                                                                                                                                                                                   
|   
|    |  | In addition, the Company leases land in Mauritius from a subsidiary of
NEL under a long term arrangement. The lease commenced in 1989 and has a
term of 50 years. Annual rental charges under the lease arrangement are
not material.                                                                                                                                                                                                                    

F-21



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|11. |  | Acquisition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On October 1, 2001 the Company acquired 100% of the share capital of NDP
Holdings Ltd. from a subsidiary of NEL. NDPHL, through its subsidiaries,
owns and operates an integrated fabric dyeing, printing and finishing
facility in the Shenzhen region of China. Accordingly, the operating
results of NDP Holdings Ltd have been included in the Companys
consolidated financial statement since the date of acquisition. In
addition to significantly expanding the Companys overall fabric
capacity, the acquisition brings the Company: (i) a much broader and more
sophisticated range of fabric products to offer existing and new
customers; (ii) a highly experienced and well trained technical fabric
management team; and (iii) a platform for future growth within Asia. The
acquired business contributed revenues of $14,088,680 and operating
profit of $1,779,645 to the Company for the period from October 1, 2001
to March 31, 2002.
|   
|    |  | The fair value of assets and liabilities arising from the acquisition
are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                         |  |                       |            |  
|-------------------------------------------------------- |  | --------------------- | ---------- | -
|                                                         |  | As of October 1, 2001
|                                                         |  |                      
|Cash and cash equivalents                                |  | $                     | 3,278,511  |  
|Accounts receivable                                      |  |                       | 3,468,484  |  
|Inventories                                              |  |                       | 4,195,564  |  
|Spare Parts                                              |  |                       | 670,074    |  
|Other current assets                                     |  |                       | 803,132    |  
|Property, plant and equipment, net                       |  |                       | 20,768,597 |  
|Short-term borrowing and bank overdrafts                 |  |                       | (2,564,103 | )
|Accounts payable                                         |  |                       | (2,204,604 | )
|Accrued salaries and wages and other accrued liabilities |  |                       | (1,555,737 | )
|Due to related parties                                   |  |                       | (61,844    | )
|Long-term liabilities                                    |  |                       | (443,507   | )
|                                                         |  |                       |            |  
|Fair value of net assets acquired                        |  |                       | 26,354,567 |  
|Negative goodwill arising on acquisition                 |  |                       | (6,917,567 | )
|                                                         |  |                       |            |  
|Total purchase consideration                             |  |                       | 19,437,000 |  
|Less: Cash and cash equivalents in subsidiary acquired   |  |                       | (3,278,511 | )
|                                                         |  |                       |            |  
|Cash outflow on acquisition                              |  | $                     | 16,158,489 |  
|                                                         |  |                       |            |  



| |  | The acquisition has been accounted for using purchase accounting,
negative goodwill arising on acquisition was primarily derived from the
fair value of NDPHLs property, plant and equipment, at the time of the
acquisition, being higher than the purchase price. The negative goodwill
has been allocated to reduce proportionately the values assigned to
noncurrent assets.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following unaudited pro forma consolidated results of operations
for the years ended March 31, 2001 and 2002 assume the NDP Holdings Ltd
acquisition occurred as of April 1, 2000:                                                                                                                                                                                           

|                    |                 |   |                             |      |      |   |             |      | 
|------------------- | --------------- | - | --------------------------- | ---- | ---- | - | ----------- | ---- | 
|                    |                 |   | Fiscal Year Ended March 31,
|                    |                 |   |                            
|                    |                 |   | 2002                        |      | 2001
|                    |                 |   |                             |      |     
|Net sales           |                 | $ | 170,029,958                 |      |      | $ | 168,388,821 |     
|Net earnings        |                 | $ | 1,875,918                   |      |      | $ | 15,296,085  |     
|Earnings per share: |                 |   |                             |      |      |   |             |     
|                    | - Primary       |   | $                           | 0.21 |      |   | $           | 1.68 | 
|                    | - Fully-diluted |   | $                           | 0.20 |      |   | $           | 1.65 | 



| |  | There were no acquisitions in fiscal 2000 or 2001.
| |  | --------------------------------------------------

F-22



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|12. |  | Segment Information and Sales to Major Customers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company generates substantially all of its operating income through
the export of garments and fabric from Mauritius, Madagascar, South
Africa and China to its customers in Europe, U.S. and elsewhere.                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | The Company has two business segments, the manufacture and sale of
garments and the manufacture and sale of fabric. The fabric division
sells both to third parties and to the garments division. Overheads in
respect of common services provided to these segments but not directly
attributable to either segment are allocated on the basis of an estimate
of the benefit received by each segment. Overheads not allocated to
either of these segments are included within Corporate and other in the
analysis of operating income by segment presented below.
|   
|(a) |  | Segment Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | The following sets out sales by business segment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                           |  |                             |             |      |  |      |             |   |  |   |             |  
|------------------------------------------ |  | --------------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                           |  | Fiscal Year Ended March 31,
|                                           |  |                            
|                                           |  | 2003                        |             | 2002 |  | 2001
|                                           |  |                             |             |      |  |     
|Garmentsthird parties                     |  | $                           | 81,236,480  |      |  | $    | 118,459,721 |   |  | $ | 109,971,378 |  
|Fabricgarments division and third parties |  |                             | 92,501,949  |      |  |      | 84,273,576  |   |  |   | 63,307,713  |  
|Inter-divisional sales                     |  |                             | (28,752,573 | )    |  |      | (44,148,129 | ) |  |   | (35,232,900 | )
|                                           |  |                             |             |      |  |      |             |   |  |   |             |  
|                                           |  | $                           | 144,985,856 |      |  | $    | 158,585,168 |   |  | $ | 138,046,191 |  
|                                           |  |                             |             |      |  |      |             |   |  |   |             |  



| |  | The following sets out operating (loss)/income by business segment and a
reconciliation to (loss)/income before minority interest:
| |  | ----------------------------------------------------------------------------------------------------------------------------------

|                                                    |  |                             |             |      |  |      |            |   |  |   |            |  
|--------------------------------------------------- |  | --------------------------- | ----------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                    |  | Fiscal Year Ended March 31,
|                                                    |  |                            
|                                                    |  | 2003                        |             | 2002 |  | 2001
|                                                    |  |                             |             |      |  |     
|Garments                                            |  | $                           | (19,630,035 | )    |  | $    | (7,808,978 | ) |  | $ | 11,641,050 |  
|Fabric                                              |  |                             | (1,564,294  | )    |  |      | 13,339,339 |   |  |   | 6,416,910  |  
|Corporate and other                                 |  |                             | (755,690    | )    |  |      | (478,275   | ) |  |   | (926,921   | )
|Elimination of unrealized profit                    |  |                             | 784,675     |      |  |      | 1,052,573  |   |  |   | (1,885,843 | )
|                                                    |  |                             |             |      |  |      |            |   |  |   |            |  
|Operating (loss)/income                             |  | $                           | (21,165,344 | )    |  | $    | 6,104,659  |   |  | $ | 15,245,196 |  
|Interest expense                                    |  |                             | (4,358,031  | )    |  |      | (4,165,037 | ) |  |   | (3,240,373 | )
|Interest income                                     |  |                             | 47,628      |      |  |      | 209,916    |   |  |   | 71,623     |  
|                                                    |  |                             |             |      |  |      |            |   |  |   |            |  
|(Loss)/income before minority interest and
taxation |  | $                           | (25,475,747 | )    |  | $    | 2,149,538  |   |  | $ | 12,076,446 |  
|                                                    |  |                             |             |      |  |      |            |   |  |   |            |  



| |  | Eliminations comprise elimination of unrealized (profit) / loss on
inter-divisional sales of inventory.
| |  | -------------------------------------------------------------------------------------------------------
|
| |  | The following sets out capital expenditure and depreciation expense by
segment:                        

|                     |          |   |                             |           |      |   |            |           |  |   |            |            | 
|-------------------- | -------- | - | --------------------------- | --------- | ---- | - | ---------- | --------- |  | - | ---------- | ---------- | 
|                     |          |   | Fiscal Year Ended March 31,
|                     |          |   |                            
|                     |          |   | 2003                        |           | 2002 |   | 2001      
|                     |          |   |                             |           |      |   |           
|Capital expenditure: |          |   |                             |           |      |   |            |           |  |   |            |           
|                     | Garments |   | $                           | 2,536,749 |      |   | $          | 3,754,706 |  |   | $          | 10,824,021 | 
|                     | Fabric   |   |                             | 8,144,877 |      |   |            | 7,228,572 |  |   |            | 5,462,152  | 
|                     |          |   |                             |           |      |   |            |           |  |   |            |            | 
|                     |          | $ | 10,681,626                  |           |      | $ | 10,983,278 |           |  | $ | 16,286,173 |           
|                     |          |   |                             |           |      |   |            |           |  |   |            |            | 
|Depreciation:        |          |   |                             |           |      |   |            |           |  |   |            |           
|                     | Garments |   | $                           | 2,763,393 |      |   | $          | 4,708,208 |  |   | $          | 3,769,577  | 
|                     | Fabric   |   |                             | 8,522,585 |      |   |            | 7,144,404 |  |   |            | 5,932,915  | 
|                     |          |   |                             |           |      |   |            |           |  |   |            |            | 
|                     |          | $ | 11,285,978                  |           |      | $ | 11,852,612 |           |  | $ | 9,702,492  |           
|                     |          |   |                             |           |      |   |            |           |  |   |            |            | 

F-23



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|12. |  | Segment Information and Sales to Major Customers (continued)
|--- |  | ------------------------------------------------------------
|   
|(a) |  | Segment Information (continued)                             
|   
|    |  | The following sets out identifiable assets between segments:

|                    |  |                 |             |      |  |   |             | 
|------------------- |  | --------------- | ----------- | ---- |  | - | ----------- | 
|                    |  | As of March 31,
|                    |  |                
|                    |  | 2003            |             | 2002
|                    |  |                 |             |     
|Garments            |  | $               | 40,103,591  |      |  | $ | 63,186,358  | 
|Fabric              |  |                 | 120,510,806 |      |  |   | 123,670,758 | 
|Corporate and other |  |                 | 320,214     |      |  |   | 2,522,986   | 
|                    |  |                 |             |      |  |   |             | 
|                    |  | $               | 160,934,611 |      |  | $ | 189,380,102 | 
|                    |  |                 |             |      |  |   |             | 



| |  | Included in corporate and other identifiable assets are certain cash and
cash equivalents, and certain related party balances.
| |  | ------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following sets out long-lived assets by country:                                                                          

|             |  |                 |            |      |  |   |            | 
|------------ |  | --------------- | ---------- | ---- |  | - | ---------- | 
|             |  | As of March 31,
|             |  |                
|             |  | 2003            |            | 2002
|             |  |                 |            |     
|Mauritius    |  | $               | 46,830,877 |      |  | $ | 50,942,526 | 
|Madagascar   |  |                 |           |      |  |   | 5,783,708  | 
|South Africa |  |                 | 25,584,980 |      |  |   | 18,198,109 | 
|China        |  |                 | 14,398,392 |      |  |   | 14,342,303 | 
|Others       |  |                 | 492,045    |      |  |   | 657,729    | 
|             |  |                 |            |      |  |   |            | 
|             |  | $               | 87,306,294 |      |  | $ | 89,924,395 | 
|             |  |                 |            |      |  |   |            | 



|(b) |  | Major customers                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company sells garments to THWS and The Gap Inc., which individually
comprises 10% and 7.7% of the Companys sales for the year ended March
31, 2003 respectively. Sales to the two companies comprised more than
10% of the Companys sales during the year ended March 31, 2001 and 2002.
Sales to THWS are disclosed in note 10 above. Sales to The Gap Inc.
amounted to $31,604,398, $48,926,829 and $11,140,252 for the years ended
March 31, 2001, 2002 and 2003, respectively.
|   
|(c) |  | Export sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | The following sets out sales by country:                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                  |               |   |                             |            |      |   |             |            |  |   |             |            | 
|----------------- | ------------- | - | --------------------------- | ---------- | ---- | - | ----------- | ---------- |  | - | ----------- | ---------- | 
|                  |               |   | Fiscal Year Ended March 31,
|                  |               |   |                            
|                  |               |   | 2003                        |            | 2002 |   | 2001       
|                  |               |   |                             |            |      |   |            
|Europe            |               |   |                             |            |      |   |             |            |  |   |             |           
|                  | - France      |   | $                           | 12,550,892 |      |   | $           | 10,947,979 |  |   | $           | 12,763,386 | 
|                  | - Britain     |   |                             | 14,057,821 |      |   |             | 19,573,500 |  |   |             | 29,875,202 | 
|                  | - Netherlands |   |                             | 438,533    |      |   |             | 2,455,742  |  |   |             | 5,701,237  | 
|                  | - Belgium     |   |                             | 2,146,156  |      |   |             | 2,191,667  |  |   |             | 103,035    | 
|Africa            |               |   |                             |            |      |   |             |            |  |   |             |           
|                  | - Mauritius   |   |                             | 12,234,806 |      |   |             | 9,615,116  |  |   |             | 8,256,374  | 
|                  | - Madagascar  |   |                             | 935,928    |      |   |             | 1,682,411  |  |   |             | 2,282,400  | 
|                  | - Zimbabwe    |   |                             | 1,467,241  |      |   |             | 2,475,932  |  |   |             | 2,093,033  | 
|USA               |               |   | 50,265,035                  |            |      |   | 80,403,837  |            |  |   | 56,191,891  |           
|PRC and Hong Kong |               |   | 23,421,591                  |            |      |   | 11,617,108  |            |  |   | 4,860       |           
|Others            |               |   | 27,467,853                  |            |      |   | 17,621,876  |            |  |   | 20,774,773  |           
|                  |               |   |                             |            |      |   |             |            |  |   |             |            | 
|                  |               | $ | 144,985,856                 |            |      | $ | 158,585,168 |            |  | $ | 138,046,191 |           
|                  |               |   |                             |            |      |   |             |            |  |   |             |            | 

F-24



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|13. |  | Commitments and Contingencies                                                                                                                                                                                        
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | Operating leases                                                                                                                                                                                                     
|   
|    |  | The Company enters into noncancellable lease agreements for premises and
equipment used in the normal course of business. The following table
shows the future minimum obligations under operating lease commitments:

|                             |  |                      |           | 
|---------------------------- |  | -------------------- | --------- | 
|Fiscal Year Ending March 31, |  | As of March 31, 2003
|                             |  |                     
|2004                         |  | $                    | 979,730   | 
|2005                         |  |                      | 225,290   | 
|2006                         |  |                      | 13,002    | 
|2007                         |  |                      | 45,065    | 
|2008                         |  |                      | 733       | 
|Thereafter                   |  |                      | 22,723    | 
|                             |  |                      |           | 
|                             |  | $                    | 1,286,543 | 
|                             |  |                      |           | 



|(b) |  | Capital leases                                                                             
|--- |  | -------------------------------------------------------------------------------------------
|   
|    |  | Future minimum obligations for assets held under capital lease
arrangements are as follows:

|                             |  |                      |            |  
|---------------------------- |  | -------------------- | ---------- | -
|Fiscal Year Ending March 31, |  | As of March 31, 2003
|                             |  |                     
|2004                         |  | $                    | 4,394,646  |  
|2005                         |  |                      | 1,281,915  |  
|2006                         |  |                      | 1,161,792  |  
|2007                         |  |                      | 1,161,792  |  
|2008                         |  |                      | 1,161,792  |  
|Thereafter                   |  |                      | 772,609    |  
|                             |  |                      |            |  
|                             |  |                      | 9,934,546  |  
|Less: interest costs         |  |                      | (2,082,853 | )
|                             |  |                      |            |  
|                             |  | $                    | 7,851,693  |  
|                             |  |                      |            |  



|(c) |  | Letters of credit                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As of March 31, 2003, the Company has unexpired bank letters of credit
related to commitments for the purchase of inventories, spare parts and
machinery in the amount of $5,663,670.                                                                                                                                                                                                                                              
|   
|(d) |  | Purchase commitments                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | In the normal course of business the Company enters into contractual
arrangements for future purchases of raw cotton to ensure availability
and timely delivery. As of March 31, 2003, the Company had outstanding
purchase commitments for inventory of $8,249,517. The amount the Company
was required to pay in respect of these commitments was less than the
spot price, as at March 31, 2003, for such inventory by $794,955.
|   
|    |  | No provision is required in respect of this amount since the
estimated net realizable value of the related finished goods
inventory exceeds estimated cost.                                                                                                                                                                                                                                                                        
|   
|    |  | The Company also enters into contractual arrangements for the purchase of
plant and machinery and factory premises construction. As of March 31,
2003, the Company had such outstanding commitments of $55,320.                                                                                                                                                                                                                    

F-25



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|14. |  | Employee Benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Other liabilities comprise a provision for deferred employee benefits
amounting to $651,031 and $686,480 as of March 31, 2002 and 2003,
respectively. The provision represents an estimate of long service
payments payable to employees in Hong Kong in the future and is
calculated based on the applicable laws of Hong Kong.                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The Company also distributes up to 5% of its income before bonuses and
minority interest each year as bonuses to executives and other employees
under an informal arrangement. All amounts payable under this
arrangement up to March 31, 2003 have been provided for in the financial
statements.                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | As stipulated by the regulations of the PRC government, the Companys
subsidiaries in the PRC have defined contribution retirement plans for
their employees. The PRC government is responsible for the pension
liability to these retired employees. The Companys subsidiaries are
required to make contributions to the state-sponsored retirement plan at
8.0% of employees salaries for the fiscal years 2001, 2002 and 2003.                                                                                                                                                                                                                 
|   
|    |  | The retirement plan contributions for the year ended March 31, 2001, 2002
and 2003 were approximately nil, $37,719 and $79,288, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | In addition to the pension contributions pursuant to the relevant laws
and regulations of the PRC, the Companys subsidiaries are required to
provide benefits such as housing funds, medical insurance and
unemployment insurance for their PRC employees. These provisions, which
were approximately nil, $10,106 and $19,231 for the years ended March 31,
2001, 2002 and 2003, respectively, were calculated at 1.0% in the fiscal
years 2001, 2002 and 2003 of the employees actual salaries.                                                                                                                                                 
|   
|    |  | The Companys Hong Kong employees are covered by the mandatory provident
fund which is managed by an independent trustee. The Company and its
Hong Kong employees each makes monthly contribution to the scheme at 5%
of the employees cash income with maximum contribution by each of the
Company and the employees limited to HK$1,000 per month. The retirement
benefits scheme cost charged to the income statement represents
contributions payable by the Company to the fund. During the years ended
March 31, 2001, 2002, and 2003, contributions amounting to approximately
$88,186, $150,074 and $107,516, respectively.                
|   
|15. |  | Stock Repurchases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | From time to time, the Board of Directors authorizes the company to
repurchase the ordinary shares of Novel Denim Holdings Limited. The
Company repurchased 1,113,091 common shares at a cost of $3,703,376 in
2003 (2002: 20,100 common shares at a cost of $178,410). In 2003, the
Company did not retire the shares it repurchased. In 2003, the Company
issued 2,000 treasury shares, as a result of exercises of stock options
by employees. At March 31, 2003, 1,409,691 (2002: 298,600) of treasury
stock is retained. The Company plans to continue to purchase shares on
the open market from time to time, depending on market conditions.

F-26



---



##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|16. |  | Stock-based Compensation Plans                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In August 1997, the Company adopted an Employee Stock Incentive Plan and
a Non-Employee Directors Stock Option Plan (collectively, the Plans),
which made available for grant, until December 31, 2007, up to 950,000
common shares. The Plans permit the granting of incentive stock options,
restricted stock and stock appreciation rights.                                                 
|   
|    |  | Stock options are granted to purchase stock at a price not less than the
fair market value on the date of grant, vest over a period of five years,
and may be outstanding for any period up to 15 years from the date of
grant. Generally, no stock option may be exercised until the employee
has remained in the continuous employment of the Company for one year
after the option is granted.
|   
|    |  | The following is a summary of stock option transactions which occurred
during the year ended March 31, 2003:                                                                                                                                                                                                                                                                                     

|                           |  |         |         |           |  |                |       |           |  |  |         |                |  |   |       | 
|-------------------------- |  | ------- | ------- | --------- |  | -------------- | ----- | --------- |  |  | ------- | -------------- |  | - | ----- | 
|                           |  | 2003    |         | 2002     
|                           |  |         |         |          
|                           |  |         |         |           |  | Weighted       |       |           |  |  |         | Weighted      
|                           |  |         |         |           |  | Average        |       |           |  |  |         | Average       
|                           |  |         |         |           |  | Exercise Price |       |           |  |  |         | Exercise Price
|                           |  | Options |         | Per Share |  | Options        |       | Per Share
|                           |  |         |         |           |  |                |       |          
|Outstanding as of April 1  |  |         | 697,960 |           |  | $              | 11.28 |           |  |  | 728,160 |                |  | $ | 10.34 | 
|Granted                    |  |         | 2,000   |           |  |                | 6.65  |           |  |  | 75,000  |                |  |   | 11.03 | 
|Cancelled                  |  |         | (57,400 | )         |  |                | 11.31 |           |  |  | (16,000 | )              |  |   | 4.75  | 
|Exercised                  |  |         | (2,000  | )         |  |                | 3.56  |           |  |  | (89,200 | )              |  |   | 4.60  | 
|                           |  |         |         |           |  |                |       |           |  |  |         |                |  |   |       | 
|Outstanding as of March 31 |  |         | 640,560 |           |  | $              | 11.28 |           |  |  | 697,960 |                |  | $ | 11.28 | 
|                           |  |         |         |           |  |                |       |           |  |  |         |                |  |   |       | 



| |  | The following table summarizes information concerning currently
outstanding and exercisable options:
| |  | ----------------------------------------------------------------------------------------------------

|         |        |             |         |             |                     |                |                     |             |          |                |          |  |   |         |  |  |          |         |  |  |   |       | 
|-------- | ------ | ----------- | ------- | ----------- | ------------------- | -------------- | ------------------- | ----------- | -------- | -------------- | -------- |  | - | ------- |  |  | -------- | ------- |  |  | - | ----- | 
|         |        |             |         |             | Options Outstanding |                | Options Exercisable
|         |        |             |         |             |                     |                |                    
|         |        |             |         |             |                     |                |                     |             | Weighted |                |          |  |   |         | 
|         |        |             |         |             |                     |                |                     |             | Average  |                | Weighted |  |   |         |  |  | Weighted
|Range of |        |             |         |             |                     | Remaining      |                     | Average     |          |                |          |  |   | Average
|exercise |        | Number      |         | Contractual |                     | Exercise Price |                     | Number      |          | Exercise Price
|prices   |        | Outstanding |         | Life        |                     | Per Share      |                     | Exercisable |          | Per Share     
|         |        |             |         |             |                     |                |                     |             |          |               
|$        | 3.5625 | -  $        | 5.0313  |             |                     | 87,360         |                     |             |          | 7.00           |          |  | $ | 3.77    |  |  |          | 61,360  |  |  | $ | 3.72  | 
|$        | 7.50   | -  $        | 10.8125 |             |                     | 262,200        |                     |             |          | 6.28           |          |  | $ | 7.76    |  |  |          | 201,320 |  |  | $ | 7.76  | 
|$        | 12.64  | -  $        | 20.25   |             |                     | 291,000        |                     |             |          | 4.99           |          |  | $ | 16.71   |  |  |          | 227,520 |  |  | $ | 17.57 | 



| |  | The Company accounts for stock-based compensation arrangements under APB
Opinion No. 25. Under APB Opinion No. 25, because the exercise price of
the Company stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-27



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##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|17. |  | Earnings / (Loss) Per Share                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Basic earnings/(loss) per share and diluted earnings/(loss) per share
have been calculated in accordance with SFAS No. 128, as follows:

|                                                                                                                                    |  |      |             |      |  |      |           |  |  |   |            | 
|----------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | --------- |  |  | - | ---------- | 
|                                                                                                                                    |  | 2003 |             | 2002 |  | 2001
|                                                                                                                                    |  |      |             |      |  |     
|Net (loss)/income (Numerator for basic
and diluted earnings/(loss) per
share-income available to holders of
Ordinary Shares)        |  | $    | (26,179,208 | )    |  | $    | 2,077,785 |  |  | $ | 12,028,793 | 
|                                                                                                                                    |  |      |             |      |  |      |           |  |  |   |            | 
|Denominator for basic earnings/(loss)
per share-weighted-average shares                                                             |  |      | 8,807,898   |      |  |      | 9,110,485 |  |  |   | 9,220,684  | 
|Effect of dilutive securities                                                                                                       |  |      | 28,821      |      |  |      | 145,966   |  |  |   | 95,257     | 
|                                                                                                                                    |  |      |             |      |  |      |           |  |  |   |            | 
|Denominator for diluted earnings/(loss)
per share-weighted-average number of
Ordinary Shares
and dilutive potential Ordinary Shares |  |      | 8,836,719   |      |  |      | 9,256,451 |  |  |   | 9,315,941  | 
|                                                                                                                                    |  |      |             |      |  |      |           |  |  |   |            | 
|Basic earnings/(loss) per share                                                                                                     |  | $    | (2.97       | )    |  | $    | 0.23      |  |  | $ | 1.30       | 
|Diluted earnings/(loss) per share                                                                                                   |  | $    | (2.96       | )    |  | $    | 0.22      |  |  | $ | 1.29       | 



| |  | Stock options to purchase 640,560 common share in 2003 and 329,000 common
shares in 2002 were outstanding, but were not included in the computation
of diluted earnings/(loss) per share because the exercise price of the
options was greater than the average market price of the common shares
and, therefore, the effect would have been antidilutive.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-28



---



##### Table of Contents



NOVEL DENIM HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|18. |  | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | Concentrations of credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist primarily of cash on
deposit with financial institutions and accounts receivable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The Company maintains cash and cash equivalents and certain other
financial instruments with various financial institutions in Hong Kong,
China, Singapore, Madagascar, South Africa and Mauritius and the
Companys exposure to any one institution is limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | Concentrations of credit risk with respect to accounts receivable arise
due to a significant portion of the Companys sales deriving from
relatively few customers. As of March 31, 2003, accounts receivable
included $9,979,250 attributable to the Companys ten largest receivables
balances. The Company manages its risk by securing letters of credit for
the majority of its sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(b) |  | Forward foreign exchange contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | The Company conducts certain transactions in various non-U.S. dollar
currencies. As a result, it is subject to the transaction exposures that
arise from foreign exchange rate movements between the dates that foreign
currency transactions are entered into and the date they are consummated.
In response to this exposure, the Company enters into forward foreign
exchange contracts to hedge certain foreign currency denominated firm
commitments, primarily sales to customers invoiced in currencies other
than the U.S. dollar. The primary purpose of the Companys foreign
currency hedging activities is to manage the volatility associated with
foreign currency revenues and the other assets and liabilities created in
the normal course of business. The Company does not hold or issue
financial instruments for trading purposes.
|   
|    |  | Principal currencies hedged include the Euro and British pound. At March
31, 2003 such forward exchange contracts were recorded at their fair
value with gains of $27,502. The maturity dates of the forward exchange
contracts outstanding at March 31, 2003 ranged from 1 month to 3 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | For forward exchange contracts designated as cash flow hedges, gains and
losses are recorded in other comprehensive income until the foreign
currency denominated sales transactions are recognized in earnings. For
the year ended March 31, 2003 forward exchange contracts with contract
values amounting to $4,479,010 were de-designated from cash flow hedge
and a net gain on these derivatives of $19,443 was reclassified to net
revenues. Hedge ineffectiveness had no material impact on earnings for
the year ended March 31, 2003. The Company estimates that net derivative
gains of $8,059 included in accumulated other comprehensive income at
March 31, 2003 will be reclassified into earnings during the next twelve
months.                                                                                                       
|   
|    |  | The Company enters into various other types of financial instruments in
the normal course of business. Fair values for these financial
instruments are based on quoted market price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(c) |  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | The carrying value of cash and cash equivalents, accounts receivable and
accounts payable approximates fair value because of the relatively short
maturities of these assets and liabilities. The carrying value of
short-term borrowings approximates fair value as the loans have variable
interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-29



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##### Table of Contents



EXHIBIT INDEX

|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|------- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|Exhibit |  |             |  |                                                                                                                                                                                                                                                  |  | Page
|Number  |  | Description |  | Number                                                                                                                                                                                                                                          
|        |  |             |  |                                                                                                                                                                                                                                                 
|1       |  |            |  | Amended and Restated Memorandum of Association and
Articles of Association of the Company (previously
filed as Exhibit 3 to Registration No. 333-7184 and
incorporated herein by reference)                                                      |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.1     |  |            |  | Employment Agreement dated as of April 1, 2002
between the Company and K.C. Chao (previously filed
as Exhibit 4.1 to Form 20-F for the fiscal year ended
March 31, 2002 and incorporated herein by reference)                                    |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.2     |  |            |  | Employment Agreement dated as of April 1, 2002
between the Company and Mei-Ling Liu (previously filed
as Exhibit 4.2 to Form 20-F for the fiscal year ended
March 31, 2002 and incorporated herein by reference)                                 |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.3     |  |            |  | Employment Agreement dated as of April 1, 2002
between the Company and Alain Rey (previously filed as
Exhibit 4.3 to Form 20-F for the fiscal year ended
March 31, 2002 and incorporated herein by reference)                                    |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.4     |  |            |  | Employment Agreement dated as of December 21, 2002
between the Company and Isaacs Lam                                                                                                                                                            |  | 86  
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.5     |  |            |  | Lease dated as of February 15, 1989 between Novel
Textiles Limited (formerly known as Union Textiles
Limited) and Summit Textiles Limited (previously
filed as Exhibit 10.5 to Registration No. 333-7184 and
incorporated herein by reference) |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.6     |  |            |  | Lease dated as of July 19, 1990 between Novel
Garments (Mauritius) Limited and Fatvan Industrial
Ltd. (previously filed as Exhibit 10.6 to Registration
No. 333-7184 and incorporated herein by reference)                                       |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.7     |  |            |  | Lease dated as of May 19, 1993 between Novel Garments
(Mauritius) Limited and the Mauritius Export
Development and Investment Authority (previously filed
as Exhibit 10.7 to Registration No. 333-7184 and
incorporated herein by reference)     |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.8     |  |            |  | Lease dated as of May 19, 1993 between Novel Garments
(Mauritius) Limited and the Mauritius Export
Development and Investment Authority (previously filed
as Exhibit 10.8 to Registration No. 333-7184 and
incorporated herein by reference)     |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.9     |  |            |  | Lease dated as of March 31, 1997 between Novel Denim
(HK) Limited and Swanco Limited (previously filed as
Exhibit 10.9 to Registration No. 333-7184 and
incorporated herein by reference)                                                        |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.10    |  |            |  | Lease dated as of March 31, 1997 between Novel Denim
(HK) Limited and Swanco Limited (previously filed as
Exhibit 10.10 to Registration No. 333-7184 and
incorporated herein by reference)                                                       |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.11    |  |            |  | Lease dated as of March 31, 1997 between Novel Denim
(HK) Limited and Swanco Limited (previously filed as
Exhibit 10.11 to Registration No. 333-7184 and
incorporated herein by reference)                                                       |  |     
|        |  |             |  |                                                                                                                                                                                                                                                  |  |     
|4.12    |  |            |  | Lease dated as of March 31, 1997 between Novel Denim
(HK) Limited and Swanco Limited (previously filed as
Exhibit 10.12 to Registration No. 333-7184 and
incorporated herein by reference)                                                       |  |     





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##### Table of Contents



|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|------- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Exhibit |  |             |  |                                                                                                                                                                                                                                                                                                                 |  | Page
|Number  |  | Description |  | Number                                                                                                                                                                                                                                                                                                         
|        |  |             |  |                                                                                                                                                                                                                                                                                                                
|4.13    |  |            |  | Lease dated as of January 30, 1996 between Novel
Garments (Mauritius) Limited and Development Bank of
Mauritius Ltd. (previously filed as Exhibit 10.13 to
Registration No. 333-7184 and incorporated herein by
reference)                                                                                      |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.14    |  |            |  | Lease dated as of October 29, 1996 between Novel
Garments (Mauritius) Limited and Development Bank of
Mauritius Ltd. (previously filed as Exhibit 10.14 to
Registration No. 333-7184 and incorporated herein by
reference)                                                                                      |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.15    |  |            |  | Lease dated as of January 1997 between Novel Garments
(Mauritius) Limited and the Mauritius Export
Development and Investment Authority (previously filed
as Exhibit 10.15 to Registration No. 333-7184 and
incorporated herein by reference)                                                                   |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.16    |  |            |  | Lease dated May 28, 1996 between Industrial
Development Corporation of South Africa Limited and
Novel Spinners SA (Proprietary) Limited and Novel
Weavers SA (Proprietary) Limited (previously filed as
Exhibit 2.3 to Form 20-F for the fiscal year ended
March 31, 1999 and incorporated herein by reference) |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.17    |  |            |  | Lease dated as of October 19, 1999 between Byren
Trading Limited and Cayuga Estates Limited (previously
filed as Exhibit 2.5 to Form 20-F for the fiscal year
ended March 31, 2000 and incorporated herein by
reference)                                                                                        |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.18    |  |            |  | Lease dated as of September 1, 1999 between Novel
Garments (Mauritius) Ltd and Didi Industrial Limited
(previously filed as Exhibit 2.6 to Form 20-F for the
fiscal year ended March 31, 2000 and incorporated
herein by reference)                                                                             |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.19    |  |            |  | Amended Lease Agreement dated April 1, 1999 between
Novel Denim (HKD) Ltd and Swanco Limited (previously
filed as Exhibit 2.7 to Form 20-F for the fiscal year
ended March 31, 2000 and incorporated herein by
reference)                                                                                       |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.20    |  |            |  | Lease Agreement dated April 13, 2000 between Novel
Garments (Madagascar) S.A. and Filatex S.A.
(previously filed as Exhibit 4.20 to Form 20-F for the
fiscal year ended March 31, 2001 and incorporated
herein by reference)                                                                                    |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.21    |  |            |  | Lease Agreement dated April 13, 2000 between Novel
Garments (Madagascar) S.A. and Filatex S.A.
(previously filed as Exhibit 4.21 to Form 20-F for the
fiscal year ended March 31, 2001 and incorporated
herein by reference)                                                                                    |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.22    |  |            |  | Amended and Restated Employee Stock Option Plan of
the Company and its subsidiaries (previously filed as
Exhibit 4.1 to Form S-8 (Registration No. 333-10796),
as filed on September 14, 1999 and incorporated herein
by reference)                                                                             |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|4.23    |  |            |  | Non-Employee Directors Stock Option Plan of the
Company (previously filed as Exhibit 10.24 to
Registration No. 333-7184 and incorporated herein by
reference)                                                                                                                                                   |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|8.1     |  |            |  | List of Subsidiaries                                                                                                                                                                                                                                                                                            |  | 92  
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|10.1    |  |            |  | Land Purchase Agreement dated as of April 18, 1995
between Novel Textiles Limited and Rajman Prayag
(previously filed as Exhibit 10.16 to Registration No.
333-7184 and incorporated herein by reference)                                                                                                       |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                 |  |     
|10.2    |  |            |  | Credit Agreement dated as of March 18, 1996 between
Novel Textiles Limited and Finlease Company Limited
(previously filed as Exhibit 10.17 to Registration No.
333-7184 and incorporated herein by reference)                                                                                                   |  |     





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##### Table of Contents



|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|------- |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|Exhibit |  |             |  |                                                                                                                                                                                                                                                                                                  |  | Page
|Number  |  | Description |  | Number                                                                                                                                                                                                                                                                                          
|        |  |             |  |                                                                                                                                                                                                                                                                                                 
|10.3    |  |            |  | Credit Agreement dated as of May 13, 1996 between
Novel Textiles Limited and The Mauritius Commercial
Bank Ltd. (previously filed as Exhibit 10.18 to
Registration No. 333-7184 and incorporated herein by
reference)                                                                            |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.4    |  |            |  | Credit Agreement dated as of August 6, 1996 between
Novel Garments (Mauritius) Limited and The Mauritius
Commercial Bank Ltd. (previously filed as Exhibit
10.19 to Registration No. 333-7184 and incorporated
herein by reference)                                                              |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.5    |  |            |  | Credit Agreement dated as of August 6, 1996 between
Novel Textiles Limited and The Mauritius Commercial
Bank Ltd. (previously filed as Exhibit 10.20 to
Registration No. 333-7184 and incorporated herein by
reference)                                                                          |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.6    |  |            |  | Credit Agreement dated as of October 7, 1996 between
Novel Garments (Mauritius) Limited and The Hongkong
and Shanghai Banking Corporation Limited (previously
filed as Exhibit 10.21 to Registration No. 333-7184
and incorporated herein by reference)                                          |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.7    |  |            |  | Credit Agreement dated as of February 28, 1997
between Novel Textiles Limited and Banque Nationale De
Paris Intercontinentale (previously filed as Exhibit
10.22 to Registration No. 333-7184 and incorporated
herein by reference)                                                              |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.8    |  |            |  | Credit Agreement dated as of May 21, 2001 between
Novel Textiles Limited and Banque Nationale De Paris
Intercontinentale (previously filed as Exhibit 10.8 to
Form 20-F for the fiscal year ended March 31, 2002 and
incorporated herein by reference)                                           |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.9    |  |            |  | Credit Agreement dated as of May 25, 2001 between
Novel Spinners (SA)(Pty)Ltd, Novel Weavers
(SA)(Pty)Ltd, Seawind Investments 4 (Pty) Ltd and
Nedcor Bank Limited (previously filed as Exhibit 10.9
to Form 20-F for the fiscal year ended March 31, 2002
and incorporated herein by reference) |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.10   |  |            |  | Credit Agreement dated as of August 23, 2001 between
Novel Spinners (SA)(Pty)Ltd and Nedcor Bank Limited
(previously filed as Exhibit 10.10 to Form 20-F for
the fiscal year ended March 31, 2002 and incorporated
herein by reference)                                                          |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.11   |  |            |  | Credit Agreement dated as of March 27, 2002 between
Novel Denim Holdings Limited and The Hongkong and
Shanghai Banking Corporation Limited (previously filed
as Exhibit 10.11 to Form 20-F for the fiscal year
ended March 31, 2002 and incorporated herein by
reference)                        |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.12   |  |            |  | Credit Agreement dated as of March 27, 2002 between
Novel Denim (HK) Ltd and The Hongkong and Shanghai
Banking Corporation Limited (previously filed as
Exhibit 10.12 to Form 20-F for the fiscal year ended
March 31, 2002 and incorporated herein by reference)                                |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.13   |  |            |  | Credit Agreement dated as of March 28, 2002 between
Novel Garments International Ltd and The Hongkong and
Shanghai Banking Corporation Limited (previously filed
as Exhibit 10.13 to Form 20-F for the fiscal year
ended March 31, 2002 and incorporated herein by
reference)                    |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.14   |  |            |  | Credit Agreement dated as of January 18, 2002 between
Novel Dyeing & Printing Mills Ltd. and The Hongkong
and Shanghai Banking Corporation Limited                                                                                                                                               |  | 94  
|        |  |             |  |                                                                                                                                                                                                                                                                                                  |  |     
|10.15   |  |            |  | Credit Agreement dated as of February 18, 2002
between Novel Denim (HK) Ltd. and The Hongkong and
Shanghai Banking Corporation Limited                                                                                                                                                           |  | 101 





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##### Table of Contents



|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|------- |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Exhibit |  |             |  |                                                                                                                                                                                                                                                                                                                |  | Page
|Number  |  | Description |  | Number                                                                                                                                                                                                                                                                                                        
|        |  |             |  |                                                                                                                                                                                                                                                                                                               
|10.16   |  |            |  | Credit Agreement dated as of March 27, 2002 between
NDP Fabrics Ltd. and The Hongkong and Shanghai Banking
Corporation Limited                                                                                                                                                                                 |  | 105 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.17   |  |            |  | Credit Agreement dated as of May 21, 2002 between
Novel Spinners (SA)(Pty) Ltd., Novel Weavers (SA)(Pty)
Ltd. and Novel Dyers (SA)(Pty) Ltd. and Nedcor Bank                                                                                                                                                   |  | 110 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.18   |  |            |  | Credit Agreement dated as of June 6, 2002 between
Novel Denim Holdings Limited and The Hongkong and
Shanghai Banking Corporation Limited                                                                                                                                                                       |  | 116 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.19   |  |            |  | Credit Agreement dated as of July 16, 2002 between
Novel Textiles Ltd. and The Mauritius Commercial Bank
Ltd.                                                                                                                                                                                                  |  | 120 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.20   |  |            |  | Credit Agreement dated as of July 16, 2002 between
Novel Garments Ltd. and The Mauritius Commercial Bank
Ltd.                                                                                                                                                                                                  |  | 122 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.21   |  |            |  | Credit Agreement dated as of October 29, 2002 between
NDP Fabrics Ltd and The Hongkong and Shanghai Banking
Corporation Limited                                                                                                                                                                                |  | 124 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.22   |  |            |  | Credit Agreement dated as of January 16, 2003 between
Novel Garments (Mauritius) Ltd. and The Hongkong and
Shanghai Banking Corporation Limited                                                                                                                                                                |  | 126 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.23   |  |            |  | Credit Agreement dated as of June 10, 2003 between
Novel Garments International Ltd and The Hongkong and
Shanghai Banking Corporation Limited                                                                                                                                                                  |  | 134 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.24   |  |            |  | Registration Rights Agreement dated as of May 13,
1997 between the Company and Novel Apparel (BVI)
Limited (previously filed as Exhibit 10.25 to
Registration No. 333-7184 and incorporated herein by
reference)                                                                                               |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.25   |  |            |  | Redemption Agreement dated as of April 25, 1997
between the Company and Novel Apparel (BVI) Limited
(previously filed as Exhibit 10.26 to Registration No.
333-7184 and incorporated herein by reference)                                                                                                      |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.26   |  |            |  | Share Purchase Agreement dated August 9, 1998 by and
among Novel Textiles (BVI) Limited, Novel Denim
Holdings Limited and Novel Enterprises Limited
(previously filed as Exhibit 2.1 to Form 20-F for the
fiscal year ended March 31, 1999 and incorporated
herein by reference)                               |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.27   |  |            |  | Share Purchase Agreement dated August 7, 2001 by and
among Novel Investment Holdings Limited, Novel Denim
Holdings Limited and Novel Enterprises Limited
(previously filed as Exhibit 10.17 to Form 20-F for
the fiscal year ended March 31, 2002 and incorporated
herein by reference)                        |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.28   |  |            |  | Suspensive Sale Agreement dated May 6, 1996 between
Findevco (Proprietary) Limited and Novel Spinners SA
(Proprietary) Limited and Novel Weavers SA
(Proprietary) Limited (previously filed as Exhibit 2.4
to Form 20-F for the fiscal year ended March 31, 1999
and incorporated herein by reference)         |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                |  |     
|10.29   |  |            |  | Credit Agreement and Guarantee dated June 23, 1999
between Novel Denim Holdings Limited and Certain of
its Subsidiaries and The Hongkong and Shanghai Banking
Corporation Limited (previously filed as Exhibit 2.9
to Form 20-F for the fiscal year ended March 31, 2000
and incorporated herein by reference) |  |     





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##### Table of Contents



|        |  |             |  |                                                                                                                                                                                                                                                                                                                   |  |     
|------- |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Exhibit |  |             |  |                                                                                                                                                                                                                                                                                                                   |  | Page
|Number  |  | Description |  | Number                                                                                                                                                                                                                                                                                                           
|        |  |             |  |                                                                                                                                                                                                                                                                                                                  
|10.30   |  |            |  | Credit Agreement and Guarantee dated August 11, 1999
between Novel Denim Holdings Limited and Certain of
its Subsidiaries and The Hongkong and Shanghai Banking
Corporation Limited (previously filed as Exhibit 2.10
to Form 20-F for the fiscal year ended March 31, 2000
and incorporated herein by reference) |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                   |  |     
|10.31   |  |            |  | Credit Agreement dated May 25, 2000 between Novel
Denim Holdings Limited and Certain of its Subsidiaries
and The Hongkong and Shanghai Banking Corporation
Limited (previously filed as Exhibit 10.15 to Form
20-F for the fiscal year ended March 31, 2001 and
incorporated herein by reference)                 |  |     
|        |  |             |  |                                                                                                                                                                                                                                                                                                                   |  |     
|10.32   |  |            |  | Consent of PricewaterhouseCoopers                                                                                                                                                                                                                                                                                 |  | 138 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                   |  |     
|31.1    |  |            |  | Certification by the Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            |  | 140 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                   |  |     
|31.2    |  |            |  | Certification by the Chief Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                            |  | 142 
|        |  |             |  |                                                                                                                                                                                                                                                                                                                   |  |     
|32      |  |            |  | Certifications of the Chief Executive Officer and
Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                                                                                                                                                               |  | 144