Overview

The following management's discussion and analysis of financial condition and results of operations of International Textile Group, Inc. ("ITG" or the "Company") should be read in connection with the unaudited condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, as well as with the Company's 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission, which includes audited financial results of the Company as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006.

International Textile Group, Inc. ("ITG", the "Company", "we" or "us") is a global, diversified textile manufacturer headquartered in Greensboro, North Carolina, with operations principally in the United States, China, Germany, Poland, Romania, the Czech Republic, Mexico, Vietnam and South Africa through June 30, 2009. See below for a discussion of certain proceedings under chapter 11 of Title 11 of the U.S. bankruptcy code relating to certain of the Company's subsidiaries engaged in the automotive safety business. ITG's long-term focus includes the realization of the benefits of its global expansion, including completing construction and reaching full production at ITG facilities in China and Vietnam, as described below, and continuing to seek other strategic growth opportunities.

The Company considers its primary markets to be:

• Bottom-weight woven apparel fabrics-including denim, synthetic and worsted fabrics;

• Automotive safety-including airbag fabric and airbag cushions;

• Government uniform fabrics-including fabrics for military dress uniforms and battle dress uniforms;

• Interior furnishings fabrics; and

• Specialty fabrics and services-including commission printing and finishing, narrow fabrics for seat belts and for military and technical uses, and value added technical fabrics used in a variety of niche government, industrial and commercial applications.

Filings under Chapter 11 of Title 11 of the Bankruptcy Code by Certain Subsidiaries Engaged in the Automotive Safety Business

On June 30, 2009 (the "Petition Date"), Global Safety Textiles Holdings LLC ("GST Holdings"), all of its direct and indirect U.S. subsidiaries, including, but not limited to, Global Safety Textiles LLC and GST Automotive Safety Components International, Inc., and Global Safety Textiles Acquisition GmbH ("GST Acquisition GmbH") and GST Widefabric International GmbH ("GST Widefabric") (GST Holdings and such subsidiaries collectively referred to as the "Debtors") filed voluntary petitions for relief (collectively, the "Bankruptcy Filing") under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). With the exception of GST Acquisition GmbH and GST Widefabric, GST Holdings' subsidiaries and operations outside the United States were not included in the Bankruptcy Filing. The ability of the lenders under the Automotive Safety Facility (as defined below) to seek remedies to enforce their rights thereunder is automatically stayed as a result of the Bankruptcy Filing, and the lenders' rights of enforcement are subject to the applicable provisions of the Bankruptcy Code. The automatic stay invoked by the Bankruptcy Filing effectively precludes any action against the Debtors resulting from such maturity. In addition, the Debtors, and certain of their non-Debtor subsidiaries, have obtained a temporary restraining order that prevents the lenders from taking action, or initiating involuntary insolvency proceedings, with respect to those non-Debtor entities. The Debtors expect to pay all pre-petition secured trade liabilities and plan to continue to manage their properties and operate their businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Company is not a Debtor in the Bankruptcy Filing and the operations of its four other primary markets: bottom-weight woven apparel fabrics, government uniform fabrics, interior furnishings fabrics and specialty fabrics and services, are expected to continue to operate in the ordinary course of business outside the chapter 11 cases and process.

On August 12, 2009, the Debtors in the Bankruptcy Filing, all of which are direct or indirect wholly owned subsidiaries of ITG, announced that they had reached an agreement with a majority of the senior lenders under the Automotive Safety Facility to restructure the Debtors' obligations, and had filed a proposed plan of reorganization (the "Plan") with the Bankruptcy Court. Under the proposed Plan, upon the Debtors' emergence from reorganization, those senior lenders would receive 100% of the equity interests, and would hold 100% of the long term debt, of the reorganized Debtors. The proposed Plan is subject to approval of, and confirmation by, the Bankruptcy Court. There can be no assurances as to whether or when the proposed Plan, or any other plan of reorganization, will be confirmed by the Bankruptcy Court, the final terms thereof or whether any such plan would be successfully implemented.

The Company continues to supply certain products and services to the Debtors consistent with past practice. In connection with the filing of the proposed Plan, the Company and the Debtors are working to form a mutually acceptable transitional services agreement to provide support for GST, its customers, suppliers, and employees. There can be no assurances as to whether such an agreement will be reached, or the timing or terms thereof.

Strategy

ITG's strategy is to be the leading, globally diversified provider of textiles and related supply chain solutions for its customers. In pursuit of this strategy, the Company has expanded its global operations through acquisitions (mainly in 2006 and 2007), international greenfield initiatives and other strategic growth opportunities, while strategically reconfiguring its asset base through a series of restructurings. Through June 30, 2009, the Company's manufacturing footprint included 27 production facilities in 10 countries throughout 4 continents. However, as discussed herein, certain subsidiaries engaged in the automotive safety business have filed voluntary petitions for relief under the Bankruptcy Code, and the Company's Nicaraguan denim facility has been temporarily idled beginning in April 2009. No assurances can be provided as to the timing or ownership or capital structure of the Company's automotive safety business upon its emergence from bankruptcy. The international greenfield initiatives and the reconfiguration of the Company's operations were substantially completed in 2008 (with the exception of the Company's complex in Vietnam), and the Company believes it is positioned to begin realizing certain of the benefits of its investments.

Combined with capabilities in the U.S. and Mexico, the international greenfield initiatives are key parts of the Company's comprehensive global supply chain solution that is intended to allow the Company to seamlessly supply products and related services to customers worldwide. We believe aligning with ITG's customers is a critical component of our success. Notwithstanding our continued belief in the expected long-term benefits of our strategy and investments, the current downturn in economic conditions across the world has resulted in certain delays in the recognition of the benefits previously expected.

Current Global Economic Environment and Related Impact

The global economy is currently experiencing significant disruptions and generally unfavorable developments, which accelerated during the second half of 2008 and has continued into 2009. The disruptions in the global financial markets and related restrictions on liquidity have impacted and are expected to continue to impact the availability and cost of capital for many companies. These developments have also adversely affected consumer spending in significant markets, including in both the apparel and automotive industries. The Company's performance has been negatively impacted by this environment, including its impact on consumer spending mainly beginning in the third quarter of 2008 and continuing into 2009. As a result, apparel and automotive production and sales have deteriorated substantially during this period and are not expected to rebound significantly in the near term.

International Greenfield Initiatives

Cone Denim (Jiaxing) Limited is a joint venture 51% owned by the Company which operates a vertically integrated denim plant in the city of Jiaxing, Zhejiang Province, China. Cone Denim (Jiaxing) provides customers with an option for high quality, premium denims produced in China, an area which we believe is undersupplied despite the high level of capacity for basic denims in China. Cone Denim (Jiaxing) shipped its initial first quality production in October 2007, and has experienced increasing capacity utilization throughout 2008 and year to date in 2009.

The Company also has completed construction and equipment installation for a fabric dyeing and finishing plant in Jiaxing, China. This dyeing and finishing operation, Jiaxing Burlington Textile Company Limited, is wholly owned. Jiaxing Burlington Textile Company Limited started limited production in the third quarter of 2007 and has begun to see increased sales in the second quarter of 2009. This facility provides synthetic apparel fabrics, interior finishing fabrics and commission finishing services for other complementary products.

In April 2008, the Company opened a 28 million yard capacity vertical denim plant, Cone Denim de Nicaragua, in Nicaragua. The choice of Nicaragua reflected the Company's belief that Nicaragua, and Central America generally, would be long-term providers of apparel products to the U.S. market, given their regional proximity and competitive labor base. However, in December 2008 and February 2009, respectively, the Company was notified of the closing of the cut/sew/laundry operations owned by a significant customer of Cone Denim de Nicaragua in Central America, and the largest customer of Cone Denim de Nicaragua announced that it would be discontinuing production in certain of its facilities in the Central American region. These plant closures by our customers demonstrate the significant deterioration of the Central American supply chain which is critical to the long-term success of the Company's operations in that region. Accordingly, the Company is currently evaluating strategic alternatives for Cone Denim de Nicaragua and, beginning in April 2009, has temporarily idled the facility until further strategic alternatives are finalized. The idling of that facility is expected to, in the near term, have an adverse effect on the Company's net sales related to bottom-weight woven apparel fabrics.

The Company and Phong Phu Corporation have completed building a technologically advanced cotton-based fabrics and garment manufacturing complex in Da Nang, Vietnam. ITG-PP Joint Venture is 60% owned by the Company. Construction of these facilities commenced in March 2007 and was completed in December 2008 although production is not expected to reach full capacity levels until late 2010, depending on the effects of the current global economic recession. This venture offers apparel customers a total supply chain solution from fabric to finished garments. Capabilities include fabric dyeing and finishing operations in addition to sewing and laundering. Garment operations grew steadily through 2008 and have continued through 2009 utilizing a one shift operation. A second shift of garment processing operators is currently being added with full implementation anticipated by the first quarter of 2010. The textile facility is supporting the fabric needs of the garment operation as it continues to build confidence levels with targeted fabric customers.

Outlook

Recent restrictions on liquidity and disruptions in the global financial markets are adversely impacting the availability and cost of incremental credit for many companies. These disruptions are also adversely affecting consumer confidence and spending in significant markets thus negatively impacting all textile supply chains and markets.

The Company's apparel business is predominately affected by changes in retail sales, as well as inventory at the retail and the manufacturer level, which generally began to decline in 2007 and have continued to decline. Based on the current economic conditions, retail sales are expected to weaken even further through 2009, which is expected to have a continued negative impact on the Company's sales and operating results.

Based on continued news of a worsening financial crisis in the United States and Europe, and the expectation of significantly reduced apparel demand at retail, cotton and wool prices declined in the latter part of 2008 and through the first quarter of 2009. However, as the Company has firm purchase commitments for such materials that generally extend into 2009, higher raw material prices incurred in have placed a considerable operational and financial burden on the Company and are expected to negatively impact the Company into the third quarter of 2009 because of lower usage at the plants as a result of lower sales than planned. For a further discussion of the firm commitments and the accrued unrealized loss on such firm commitments during 2008 and 2009, see Note 9 to the accompanying unaudited condensed consolidated financial statements. It is unclear whether the recent decline of the spot price of certain commodities is sustainable, as cotton and wool prices showed increases in the latter part of the second quarter of 2009. The ultimate effect of these raw material cost changes on the Company's earnings cannot be quantified, as the effect of movements in cotton and wool prices on industry selling prices is still uncertain; however, any dramatic or unexpected additional increase in raw material prices could have a material adverse effect on the Company's results of operations.

Restructuring Charges and Asset Impairments

As a result of the macro-economic conditions discussed above and the continued financial challenges facing the Company, the Company is continuing to re-evaluate all aspects of its businesses and operations to determine the best approach to mitigate the impact on the Company. In response to the significant economic uncertainties and concomitant business downturn, the Company took certain actions during the fourth quarter of 2008 and the first quarter of 2009 designed to reduce operating costs, and further evaluation may result in additional plant rationalization, global capacity optimization across businesses, restructuring initiatives or other actions, to improve its cost structure in order to further improve the Company's competitive position. During the first quarter of 2009, the Company recognized impairment charges for goodwill and other intangible assets in the amount of $16.1 million, which consisted of impairment of goodwill of $15.1 million and $1.0 million related to other intangible assets related to customer contracts recorded in the automotive safety segment. Additional restructuring initiatives may be undertaken depending upon the timing and outcome of reorganization under the Bankruptcy Code of the Debtors, including the ownership or capital structure thereof.

In the first half of 2009, the Company recognized $2.1 million of restructuring charges consisting primarily of: $0.7 million related to manufacturing workforce reductions at two of its apparel plants and one automotive safety plant in Mexico, $0.5 million for severance and COBRA benefits related to additional capacity reductions at the Company's White Oak plant, $0.3 million for severance and other associated costs to close and consolidate certain automotive safety facilities, $0.3 million for severance related to the Company's multi-segment selling and administrative and other cost reduction plans, and $0.3 million related to severance benefits associated with the decision to temporarily idle the Cone Denim de Nicaragua facility as discussed in Note 4 to the accompanying unaudited condensed consolidated financial statements. To the extent there is continued decline in general economic or business conditions, and/or further plant consolidation or restructuring initiatives are undertaken, such actions could result in the occurrence of additional cash restructuring charges and/or asset impairment charges, and such charges could be material.

Results of Operations

Results for the three and six months ended June 30, 2009 are largely reflective of the continued effects of the worldwide economic downturn. The overall slowdown in business activity has reduced demand for the Company's products. Total revenue of $202.1 million and $387.8 million for the three and six months ended June 30, 2009 declined by 48% in both periods from the prior year. The benefits from restructuring and operational improvements are helping to reduce the impact of the revenue declines. Gross margin of 7.5% for the three months ended June 30, 2009 increased 3.9 percentage points from the prior year comparable period, but declined from 5.9% to 4.2% for the six month periods then ended, despite the continued effect of significantly lower sales volumes.

The unaudited condensed consolidated financial statements of ITG for the three and six months ended June 30, 2009 and 2008 have been presented on a consolidated basis including the Debtors and their subsidiaries, as the Bankruptcy Filing was not completed until June 30, 2009 and ITG controlled the operations of the Debtors and their subsidiaries prior to and as of such date. However, after consideration of the guidance available in Statement of Financial Accounting Standards ("SFAS") No. 160, "Non-controlling Interests in Consolidated Financial Statements", SFAS No. 94, "Consolidation of All Majority-Owned Subsidiaries", Accounting Research Bulletin ("ARB") No. 51 (As Amended), "Consolidated Financial Statements", Accounting Principles Board Opinion ("APB") No. 18 (As Amended), "The Equity Method of Accounting for Investments in Common Stock", and American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), ITG has deconsolidated the Debtors and their subsidiaries in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2009 as a result of the Bankruptcy Filing. The Company currently expects that it will not regain control of the Debtors following the reorganization and that loss of such control is, therefore, not temporary. In addition, in accordance with SOP 90-7, the propriety of the carrying amounts of intercompany receivables from the Debtor entities in bankruptcy was evaluated as of June 30, 2009. Based on this evaluation, ITG and its non-debtor subsidiaries established allowances for potentially uncollectible intercompany notes and accounts receivable in the amount of $87.8 million. In addition, ITG recorded a reserve of $14.4 million against its investment in GST Holdings since ITG is an unsecured equity holder and does not expect to recover any of this investment. Based on these evaluations, a noncash loss on deconsolidation of the Debtors of $102.2 million was recorded in non-operating income in the unaudited condensed consolidated statement of operations for the three and six months ended June 30, 2009.

Through June 30, 2009, the Company reported its financial results in four reportable segments: bottom-weight woven apparel fabrics, automotive safety, narrow fabrics and all other. The reporting of the Company's operations in four reportable segments is consistent with how the Company is managed and how resources are allocated by the CODM. In the quarter ended March 31, 2009, operations related to government dress uniform fabrics began to be reported to the CODM in the bottom-weight woven apparel fabrics segment rather than the all other segment. Segment data for all periods presented in the accompanying unaudited condensed consolidated financial statements have been recast to conform to the current presentation.

The bottom-weight woven apparel fabrics segment includes woven denim fabrics, synthetic fabrics, worsted and worsted wool blend fabrics, including government uniform fabrics for dress U.S. military uniforms, and cotton twill garment production. The automotive safety segment consists of airbag fabrics, curtains and cushions used in the automotive industry. The narrow fabrics segment includes narrow fabrics for seat belts and military and technical uses. The all other segment consists of the following operating segments that are permitted to be aggregated under segment reporting guidelines and thresholds: government uniform cotton fabrics primarily for battle fatigue U.S. military uniforms; interior furnishings, including contract fabrics and upholstery for the residential and commercial markets; commission textile printing and finishing services for customers primarily focusing on decorative interior furnishings and specialty prints; technical and value added fabrics used in a variety of niche industrial and commercial applications including highly engineered materials used in numerous applications and a broad range of industries such as fire service apparel, ballistics materials, filtration, military fabrics and outdoor awnings and covers; transportation services; and other miscellaneous items.

Sales, loss from continuing operations before income taxes and total assets for the Company's reportable segments are presented below (in thousands). The Company evaluates performance and allocates resources based on profit or loss before interest, income taxes, expenses associated with refinancing and corporate realignment activities, restructuring and impairment charges, certain unallocated corporate expenses, and other income (expense). Intersegment sales and transfers are recorded at cost or at arms' length when required by certain transfer pricing rules. Intersegment net sales for the three months ended June 30, 2009 and June 30, 2008 were primarily attributable to bottom-weight woven apparel fabrics segment sales of $1.5 million and $2.1 million, respectively. Intersegment net sales for the six months ended June 30, 2009 and June 30, 2008 were primarily attributable to bottom-weight woven apparel fabrics segment sales of $2.8 million and $4.6 million, respectively.

The following table presents certain results of operations by reportable segment (in thousands):

                                        Three Months          Three Months             Six Months            Six Months
                                            Ended                 Ended                   Ended                 Ended
                                        June 30, 2009         June 30, 2008           June 30, 2009         June 30, 2008
Net Sales:
Bottom-weight Woven Apparel Fabrics    $        95,632       $       116,569         $       189,158       $       220,892
Automotive Safety                               74,328               124,091                 132,143               240,401
Narrow Fabrics                                  10,126                12,512                  20,849                27,575
All Other                                       23,523                28,640                  48,579                58,831

                                               203,609               281,812                 390,729               547,699
Intersegment sales                              (1,475 )              (2,108 )                (2,842 )              (4,636 )

                                       $       202,134       $       279,704         $       387,887       $       543,063

(Loss) Income From Operations
Before Income Taxes:
Bottom-weight Woven Apparel Fabrics    $          (911 )     $       (13,427 )       $        (8,237 )     $       (20,769 )
Automotive Safety                                1,549                 2,930                  (3,604 )              11,187
Narrow Fabrics                                     490                (2,212 )                   421                (3,238 )
All Other                                         (606 )                (607 )                  (895 )                (471 )

Total reportable segments                          522               (13,316 )               (12,315 )             (13,291 )
Corporate expenses                              (5,946 )              (4,504 )               (11,398 )              (9,897 )
Expenses associated with
refinancing activities                         (10,494 )                  -                  (12,781 )                  -
Expenses associated with corporate
realignments                                        -                   (943 )                    -                 (6,614 )
Other operating income - net                     5,387                27,524 (1)               7,145                27,527 (1)
Restructuring and impairment
charges                                           (174 )                  92                 (18,165 )              (1,095 )
Interest expense                               (18,554 )             (15,500 )               (36,265 )             (27,169 )
Loss on deconsolidation of debtors            (102,235 )                  -                 (102,235 )                  -
Other income (expense)                           8,459                 3,197                   6,695                 4,400

                                              (123,035 )              (3,450 )              (179,319 )             (26,139 )
Income tax benefit (expense)                    (3,565 )                 126                  (2,429 )              (1,762 )
Equity in income of unconsolidated
affiliates                                          54                  (202 )                   227                    39

Net loss                                      (126,546 )              (3,526 )              (181,521 )             (27,862 )
Less: net loss attributable to
noncontrolling interests                        (2,255 )              (1,933 )                (5,052 )              (3,937 )

Net loss attributable to
International Textile Group, Inc.      $      (124,291 )     $        (1,593 )       $      (176,469 )     $       (23,925 )

(1) Includes gain on sale of the Burlington brand name as described elsewhere herein of $24.3 million.

Comparison of Three Months Ended June 30, 2009 and Three Months ended June 30, 2008

Consolidated: The Company's consolidated net sales in the quarter ended June 30, 2009 were $202.1 million, a decrease of $77.6 million, or 27.7%, from the $279.7 million reported in the quarter ended June 30, 2008. Net sales decreased in all segments primarily due to the unfavorable global economic environment, which resulted in reduced consumer purchasing activities and ultimately also resulted in the tightening of retail inventory levels. Sales volumes for substantially all of the Company's markets were down from the prior year except for the bottom-weight woven apparel government dress uniform fabrics market. In addition to the economic pressures, the decline in the Company's reported net sales was . . .