I always thought it was literally naked. After all, Mattie had just been caught in the arms of Lord Arlen's wife (or Lord Donald's - depending on which version). I'm sure some sing the line '...And I not a pocket knife' as a coy reference to no pockets, therefore no clothes.

Incidentally, if you can, listen out for Meet On The Ledge's version (brilliant folk-rock band based in the English Midlands) - it'll blow your socks off.

Pete W.