The Condensed Consolidated Balance Sheet of Unifi, Inc. together with its subsidiaries (the “Company”) at June 27, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by United States (“U.S.”) generally accepted accounting principles (“GAAP”) for complete financial statements.  Except as noted with respect to the balance sheet at June 27, 2010, this information is unaudited and reflects all adjustments which are, in the opinion of management, necessary to present fairly the financial position at SeptemberDecember 26, 2010, and the results of operations and cash flows for the periods ended SeptemberDecember 26, 2010 and SeptemberDecember 27, 2009.  Such adjustments consisted of normal recurring items necessaryn ecessary for fai rfair presentation in conformity with U.S. GAAP.  Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results may differ from these estimates.  Interim results are not necessarily indicative of results for a full year.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010, as recast in its Current Report on Form 8-K filed January 7, 2011 to reflect the reverse stock split of the Company’s Common Stock at a reverse stock split ratio of 1-for-3, which became effective November 3, 2010. All share and per share computations have been retroactively adjust ed for all periods presented to reflect the decrease in shares as a result of the reverse stock split.  Certain prior period amounts have been reclassified to conform to current year presentation.

The significant accounting policies followed by the Company are presented on pages 67 to 73 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010.2010, as recast as discussed above.

Intangible assets subject to amortization consist of a customer list of $22.0 million and non-compete agreementsagreement of $4.0 million which were entered into in connection with an asset acquisition consummated in fiscal year 2007.  The customer list is being amortized in a manner which reflects the expected economic benefit that will be received over its thirteen year life.  The non-compete agreements are being amortized using the straight-line method over seventen years, which is equal to the term of the agreement and its extensions.  There are no residual values related to these intangible assets.  Accumulated amortization at SeptemberDecember 26, 2010 and June 27, 2010 for these intangible assets was $12.5$13.1 million and $11.9 million, respectively.  These intangible assets relatere late to the polyester segment.

The following table represents the expected intangible asset amortization for the next five fiscal years (amounts in thousands):

The following table represents the Company’s investments in unconsolidated affiliates:

CondensedSummarized balance sheet information as of SeptemberDecember 26, 2010 and June 27, 2010 and summarized income statement information for the quarters and year-to-date periods ended SeptemberDecember 26, 2010 and SeptemberDecember 27, 2009 of the combined unconsolidated equity affiliates are as follows (amounts in thousands):

On September 9, 2010, the Company and its subsidiary guarantors (as co-borrowers) closed on the First Amendment to the Amended and Restated Credit Agreement with Bank of America, N.A. (the “First Amended Credit Agreement”).  As a result, the Company incurred additional debt refinancing fees in the amount of $0.8 million.  See “Footnote 3.  Long-term Debt and Other Liabilities” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010, as recast in its Current Report on Form 8-K filed January 7, 2011, for a detailed discussion of the terms and covenants of the First Amended Credit Agreement.

At SeptemberAs of December 26, 2010 and June 27, 2010, accumulated amortization for debt issue costs and refinancing fees was $4.9$5.1 million and $4.6 million, respectively.  The original amount of issue costs and financing fees that was capitalized for the 2014 notes and the amended senior secured asset-based revolving credit facility ("Amended Credit Agreement") was $7.3 million and $1.2 million, respectively.

The Company’s income tax provision for the quarter ended SeptemberDecember 26, 2010 resulted in tax expense at an effective rate of 19.7%25.6% compared to the quarter ended SeptemberDecember 27, 2009 which resulted in a tax expense at an effective rate of 50.5%36.5%.  The Company’s income tax provision for the year-to-date period ended December 26, 2010 resulted in tax expense at an effective rate of 21.9% compared to the year-to-date period ended December 27, 2009 which resulted in tax expense at an effective rate of 45.2%.

The difference between the Company’s income tax expense and the U.S. statutory rate for the quarter and year-to-date period ended SeptemberDecember 26, 2010 was primarily due to the utilization of prior losses for which no benefit had been recognized previously, and foreign operations taxed at rates lower than the U.S., partially offset by foreign dividends taxed in the U.S.  The differencedifferences between the Company’s income tax expense and the U.S. statutory rate for the quarter and year-to-date period ended SeptemberDecember 27, 2009 was primarily due to losses in the U.S. and other jurisdictions for which no tax benefit coul dcould be recognized while operating profit was generated in other taxable jurisdictions.

Deferred income taxes have been provided for the temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities.  The valuation allowance onIn assessing the Company’s net domesticrealization of deferred tax assets, is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance.  In addition, until such time that the Company determinesmanagement considers whether it is more likely than not that it will generate sufficient taxable income to realize itssome portion or all of the deferred tax assets newly generated income tax benefits will be fully reserved.realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the periods in which those temporary differences reverse. Management considers the scheduled reversal of taxable temporary differences, taxable income in carryback periods, projected future taxable income and tax planning strategies in making this assessment.  The Company currently has a full valuation allowance against its net deferred tax assets in the U.S. due to negative evidence concerning the realization of those deferred tax assets in recent years.  As results of operations improve, the Company continues to evaluate both positive and negative evidence to determine whether and when the valuation allowance, or a portion thereof, should be released.  A release of the valuation allowance could have a material effect on earnings in the period of release.

The Company is subject to income tax examinations for U.S. federal income taxes for fiscal years 20052004 through 2010, for non-U.S. income taxes for tax years 2001 through 2010, and for state and local income taxes for fiscal years 2001 through 2010.

On November 25, 2009, the Company agreed to purchase 1,885,000628,333 shares (adjusted for the November 2010 reverse stock split) of its common stock at a purchase price of $2.65$7.95 per share from Invemed Catalyst Fund, L.P. (based on an approximate 10% discount to the closing price of the common stock on November 24, 2009). The purchase of the shares pursuant to the transaction was not pursuant to the Company’s stock repurchase plan. The transaction closed on November 30, 2009 at a total purchase price of $5 million.  This transaction was not adjusted to reflect the reverse stock split discussed above.

The following table sets forth the reconciliation of basic and diluted per share computations (amounts in thousands, except per share data).  All share and per share computations have been retroactively adjusted for all periods presented to reflect the reverse stock split.

The following table represents the number of stock options to purchase shares of common stock which were not included in the calculation of diluted per share amounts because they were anti-dilutive (amounts in thousands):

Comprehensive income amounted to $16.9$13.6 million and $30.5 million for the firstsecond quarter and year-to-date periods of fiscal year 2011, respectively, compared to comprehensive income of $10.9$3.8 million and $14.7 million for the firstsecond quarter and year-to-date periods of fiscal year 2010.  Comprehensive income was comprised of net income of $10.2$5.4 million and $15.6 million, positive cumulative translation adjustments of $1.5 million and $8.2 million, and the Company’s 34% share of other comprehensive income related to its investment in PAL of $6.7 million for the firstsecond quarter and year-to-date periods of fiscal year 2011.2011, respectively. Comparatively, comprehensive income was comprised of net income of $2.5$2.0 million and $4.4 million and positive cumulative translation adjustments of $8.4$1.8 million and $10.3 mil lion for the firstsecond quarter and year-to-date periods of fiscal year 2010.  2010, respectively. Other comprehensive income associated with PAL has historically been immaterial to the Company and therefore the Company did not record its share of PAL’s other comprehensive income in its balance sheet in previous periods.  Due to a significant increase in cotton prices and the large percentage of future cotton purchases that PAL has hedged in order to protect the gross margin of its fixed-price yarn sales, PAL’s other comprehensive income has increased considerably.

The Company does not provide income taxes on the impact of currency translations as earnings from foreign subsidiaries are deemed to be permanently invested.

For purposes of internal managementsegment reporting, segment operating profit represents segment net sales less cost of sales, segment restructuring charges, segment impairments of long-lived assets, and allocated selling, general and administrative (“SG&A”) expenses.  Certain non-segment manufacturing and unallocated SG&A costs are allocated to the operating segments based on activity drivers relevant to the respective costs.  This allocation methodology is updated as part of the annual budgeting process.

The primary differences between the segmented financial information of the operating segments, as reported to management and the Company’s consolidated reporting relate to the provision for bad debts, net other operating expense (income), net interest expense, netother non-operating expense, and equity in earnings of unconsolidated affiliates and related impairments.

Segment operating profit excluded the benefitprovision for bad debts of $41$86 thousand for the first quarter of fiscal year 2011 and the provisionbenefit for bad debts of $0.6 million for the firstsecond quarter of fiscal year 2010.years 2011 and 2010, respectively, and the provision for bad debts of $45 thousand and $12 thousand for the year-to-date period of fiscal years 2011 and 2010, respectively.

The total assets for the polyester segment increased from $322.2 million at June 27, 2010 to $325.7$325.8 million at SeptemberDecember 26, 2010 primarily due to increases in inventory, accounts receivable, and property, plant and equipment ("(“PP&E"&E”), inventory, cash, and deferred taxes of $5.0$4.0 million, $3.2$4.2 million, $1.6 million, and $1.5$0.1 million, respectively.  These increases were offset by decreases in cash,accounts receivables, other non-current assets, and other current assets and other non-current assets of $4.9$4.6 million, $0.8$1.0 million, and $0.5$0.7 million, respectively.  The total assets for the nylon segment increased from $81.1 million at June 27, 2010 to $86.6$83.8 million at SeptemberDecember 26, 2010 due primarily to increases in inventory accounts receivable,and cash and other current assets of $4.7 million, $1.0 million, $0.1$8.2 million and $0.1$0.3 million, respectively.  These increases were offset by a decrea sedecrease in accounts receivable a nd PP&E of $0.4$4.6 million and $1.2 million.

During the first quarter of fiscal year 2010, the Compensation Committee (“Committee”) of the Board of Directors (“Board”) authorized the issuance of 566,659 stock options from the 2008 Unifi, Inc. Long-Term Incentive Plan (“2008 Long-Term Incentive Plan”) to certain key employees and certain members of the Board.  The stock options vest ratably over a three year period and have ten year contractual terms.  The Company used the Black-Scholes model to estimate the weighed-averageweighted-average grant date fair value of $3.34 per post-split share.

There were no stock options issued duringDuring the firstsecond quarter of fiscal year 2011.2011, the Board authorized the issuance of an aggregate of 25,200 restricted stock units (“RSUs”) under the 2008 Long-Term Incentive Plan to the Company’s non-employee directors.  The RSUs are subject to vesting restriction and convey no rights of ownership in shares of Company stock until such RSUs have vested and been distributed to the grantee in the form of Company stock.  The RSUs will become fully vested on November 27, 2011, provided the grantee remains in continuous service as a member of the Board from the grant date until the vesting date.  The vested RSUs will be converted into an equivalent number of shares of Company common stock and distributed to the grantee following the grantee’s termination of services as a member of the Board.  The Company estimated the grant-date fair value of the award to be $13.89 per RSU.

The Company incurred $0.2 million and $0.6$0.7 million in the firstsecond quarter of fiscal years 2011 and 2010 respectively, and $0.4 million and $1.3 million for the year-to-date periods respectively, in stock-based compensation expense which was recorded as SG&A expensesexpense with the offset to capital in excess of par value.

During the second quarter of fiscal year 2011, the Company issued 8,888 shares of common stock as a result of the exercise of stock options.   There were no stock options exercised during the first quarter of fiscal yearsyear 2011 andor during the year-to-date period of fiscal year 2010.

The Company accounts for derivative contracts and hedging activities at fair value. Changes in the fair value of derivative contracts are recorded in the line item Other operating expense (income) expense,, net in the Condensed Consolidated Statements of Operations.  The Company does not enter into derivative financial instruments for trading purposes nor is it a party to any leveraged financial instruments.

The Company conducts its business in various foreign currencies.  As a result, it is subject to the transaction exposure that arises from foreign exchange rate movements between the dates that foreign currency transactions are recorded and the dates they are consummated.  The Company utilizes some natural hedging to mitigate these transaction exposures. The Company primarily enters into foreign currency forward contracts for the purchase and sale of European, North American and Brazilian currencies to use as economic hedges against balance sheet and income statement currency exposures.  These contracts are principally entered into for the purchase of inventory and equipment and the sale of Company products into export markets.  Counter-parties for these instruments are major financial institutio ns.f inancial institutions.

Currency forward contracts are used as economic hedges for the exposure for sales in foreign currencies based on specific sales made to customers. Generally, approximately 60% to 75% of the sales value of these orders is covered by forward contracts. Maturity dates of the forward contracts are intended to match anticipated receivable collections. The Company marks the forward contracts to market at month end and any realized and unrealized gains or losses are recorded as Other operating expense (income) expense.. The Company also enters currency forward contracts for committed machinery and inventory purchases.  Generally up to 5% of inventory purchases made by the Company’s Brazilian subsidiary are covered by forward contracts although 100% of the cost may be covered by individual contracts in certain instances.  Theinstan ces.  As of December 26, 2010, the latest maturity date for all outstanding sales and purchase foreign currency forward contracts is December 2010.March 2011.

The Company has adopted the guidance issued by the Financial Accounting Standards Board (“FASB”) which established a framework for measuring and disclosing fair value measurements related to financial and non-financial assets. There is a common definition of fair value used and a hierarchy for fair value measurements based on the type of inputs that are used to value the assets or liabilities at fair value.

The levels of the fair value hierarchy are:

The dollar equivalent of these forward currency contracts and their related fair values are detailed below (amounts in thousands):

The fair values of the foreign exchange forward contracts at the respective quarter-end dates are based on discounted quarter-end forward currency rates. The total impact of foreign currency related items that are reported on the line item Other operating expense (income) expense,, net in the Condensed Consolidated Statements of Operations, including transactions that were hedged and those unrelated to hedging, was a pre-tax lossgain of $0.4$0.1 million and $13 thousand for the quarters ended SeptemberDecember 26, 2010 and SeptemberDecember 27, 2009, respectively.  For the year-to-date periods ended December 26, 2010 and December 27, 2009, the total impact of foreign currency related items resulted in a pre-tax loss of $0.3 million and a pre-tax gain of $0.1 million, respectively.

The Company’s financial assets include cash and cash equivalents, net receivables, accounts payable, currency forward contracts, and notes payable. The cash and cash equivalents, net receivables, and accounts payable approximate fair value due to their short maturities.  The Company calculates the fair value of its 2014 notes based on the traded price of the 2014 notes on the latest trade date prior to its period end.  These are considered Level 1 inputs in the fair value hierarchy.

The carrying values and approximate fair values of the Company’s financial assets and liabilities excluding the currency forward contracts discussed above as of SeptemberDecember 26, 2010 and June 27, 2010 were as follows (amounts in thousands):

In each of December 2008, 2009, and 2009,2010, the Company and Dillon Yarn Company (“Dillon”) extended the polyester services portion of a Sales and Service Agreement, each time for a term of one year.  As a result, the Company recorded $0.3 million and $0.4 million of SG&A expense for the firstsecond quarter of fiscal years 2011 and 2010, respectively, related to this contract and the related amendments.amendments and $0.7 million and $0.9 million for the year-to-date periods, respectively.  Mr. Stephen Wener is the President and Chief Executive Officer of Dillon.  Mr. Wener has been a member of the Company’s Board since May 24, 2007.  The terms of the Company’s Sales and Service Agreement with Dillon are, in management’s opinion, no less favorable than the CompanyCompa ny would have been able to negotiate with an independent third party for similar services.

At the end of fiscal year 2010, the Company had obligations for the purchase of two extrusion lines and for the construction of a recycled polyester chip facility located in Yadkinville, North Carolina.  The Company will purchase machinery and equipment for the recycling of post-consumer flake and post-industrial waste fiber and fabrics to be installed in the new facility.  As of SeptemberDecember 26, 2010, the Company had made a depositdeposits of $1.2 million and $2.4 million for the first and second down paymentpayments on the extruders.  The Company is obligated to make threetwo additional payments upon the completion of the installation of the machinery totaling $2.8$0.6 million.  The delivery date forCompany received the equipment is scheduled forfirst extruder (post-industrial waste fiber and fabrics) in December 2010 and expects the extruder to be in production by the end of February 2011.  The Company received the second extruder (post consumer flake) in January 2011, with production beginning in FebruaryMarch 2011.  The Company has also contracted for the con structionconstruction of the new facility in the amount of $1.5 million.  Related to the building of the facility, if the Company terminates theThe construction of the building without cause, the Company is obligatedwas completed in January 2011.

On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located at Kinston from INVISTA S.a.r.l. (“INVISTA”).  The land for the Kinston site was leased pursuant to a 99 year ground lease (“Ground Lease”) with DuPont.  Since 1993, DuPont has been investigating and cleaning up the Kinston site under the supervision of the U.S. Environmental Protection Agency (“EPA”) and the North Carolina Department of Environment and Natural Resources (“DENR”) pursuant to the Resource Conservation and Recovery Act Corrective Action program.  The Corrective Action program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identifiedid entified AOCs and c leanclean it up to comply with applicable regulatory standards.  Effective March 20, 2008, the Company entered into a Lease Termination Agreement associated with conveyance of certain assets at Kinston to DuPont.  This agreement terminated the Ground Lease and relieved the Company of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to the Company’s period of operation of the Kinston site.  However, the Company continues to own a satellite service facility acquired in the INVISTA transaction that has contamination from DuPont’s operations and is monitored by DENR.  This site has been remediated by DuPont and DuPont has received authority from DENR to discontinue remediation, other than natural attenuation.  DuPont’s duty to monitor and report to DENR will be transferred to the Company in the future, at which time DuPont must pay the Company for seven yearsye ars of monitoring a ndand reporting costs and the Company will assume responsibility for any future remediation and monitoring of the site.  At this time, the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.

The Company is aware of certain claims and potential claims against it for the alleged use of non-compliant “Berry Amendment” nylon POY in yarns that the Company sold which may have ultimately been used to manufacture certain U.S. military garments (the “Military Claims”).  As of June 27, 2010, the Company recorded an accrual for the Military Claims of which $0.3 million was paid or settled during the quarter ended September 26, 2010.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20 “Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” to amend the disclosure requirements related to financing receivables. The guidance requires additional disclosures about the nature of an entity’s credit risk as it relates to its receivables, how that risk is analyzed for purposes of providing a credit loss provision, and the reasons for changes in the loss provision.  These disclosures are intended to provide financial statement users with more transparency related to an entity’s credit risk practices and the related allowances for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reportingrepor ting periods ending on or after December 15, 2010.  The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  Accordingly, the Company will implementadopted the guidance for period-end disclosures effective as of the end of its second quarter of fiscal year 2011 with the guidance for period activity disclosures to be implemented during its third quarter of fiscal year 2011.  The adoption of this guidance did not have and is not expected to have a material impact on the Company’s financial position or results of operations.

Effective November 3,On December 28, 2010, the Company filedannounced its commencement of a Certificatecash tender offer for any and all of Amendmentits outstanding 2014 notes conditioned on the successful receipt of proceeds of at least $140.0 million from a new debt financing on terms satisfactory to the Company’s Restated CertificateCompany.  On January 11, 2011, the Company announced its termination of Incorporationthe cash tender offer due to the condition of the debt capital markets which made the estimated cost savings generated from a new debt financing insufficient to offset the costs of conducting such a transaction.  Concurrently, the Company announced that it is calling for redemption on February 16, 2011 an aggregate principal amount of $30 million of the 2014 notes in accordance with the Secretary of State of New YorkIndenture. Pursuant to effect a 1-for-3 reverse stock splitthe terms of the Company’s common stock.  See “Footnote 9. Shareholders’ Equity”Indenture, the redemption price for further discussion.the 201 4 notes will be 105.75% of the principal amount of the redeemed notes, plus accrued and unpaid interest. Following completion of the redemption, the aggregate principal amount of the 2014 notes that will remain outstanding will be $133.7 million.

The guarantor subsidiaries presented below represent the Company’s subsidiaries that are subject to the terms and conditions outlined in the indenture governing the Company’s issuance of the 2014 notes and the guarantees, jointly and severally, on a senior secured basis. The non-guarantor subsidiaries presented below represent the foreign subsidiaries which do not guarantee the notes. Each subsidiary guarantor is 100% owned, directly or indirectly, by Unifi, Inc. and all guarantees are full and unconditional.

Supplemental financial information for the Company and its guarantor subsidiaries and non-guarantor subsidiaries of the 2014 notes is presented below.