QUAKER FABRIC CORP /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 1, 2005

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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QUAKER FABRIC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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DELAWARE 04-1933106
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

941 GRINNELL STREET
FALL RIVER, MASSACHUSETTS 02721
(ADDRESS PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (508) 678-1951

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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $.01
(TITLE OF CLASS)

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, and (2) has been subject to such filing
requirements for the past 90 days. Yes: _X_ No: ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes: _X_ No: ___

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant, computed by reference to the closing sales
price as quoted on NASDAQ on July 3, 2004 was approximately $111.6 million.

As of March 14, 2005, 16,826,218 shares of Registrant's common stock, par
value $0.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

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PART I

ITEM 1. BUSINESS

OVERVIEW

Quaker Fabric Corporation ('Quaker' or the 'Company') is a leading designer,
manufacturer and worldwide marketer of woven upholstery fabrics primarily for
residential furniture and one of the largest producers of Jacquard upholstery
fabrics in the world. The Company is also a leading developer and manufacturer
of specialty yarns, including a variety of chenille, taslan and spun products,
which Quaker both sells and uses in the production of its fabrics. The Company's
vertically integrated operations provide Quaker with important design and
delivery advantages. The Company's product line is one of the most comprehensive
in the industry and Quaker is well known for its broad range of Jacquard
fabrics. The Company's revenues in 2004 were $289.1 million.

Quaker has been producing upholstery fabric for almost sixty years and is a
full-service supplier of Jacquard and plain woven upholstery fabric to the
furniture industry. Quaker's current product line consists of over 5,000
traditional, contemporary, transitional and country fabric patterns intended to
meet the styling and design, color, texture, quality and pricing requirements of
promotional through middle to higher-end furniture manufacturers. Additionally,
the Company introduces over 1,000 new products to the market annually.
Management believes that Jacquard fabrics, with their detailed designs, provide
furniture manufacturers with more product differentiation opportunities than any
other fabric construction on the market.

The Company sells its upholstery fabrics to over 3,000 furniture
manufacturers worldwide. Quaker also distributes its fabrics internationally. In
2004, net fabric sales outside the United States of $35.9 million represented
approximately 13.4% of net fabric sales.

Quaker uses three tradenames in the marketing of its fabrics -- Whitaker'r',
Quaker'TM' and Davol'r'. Quaker's Whitaker'r' Collection, a branded line of a
select group of the Company's better-end products, is intended to meet the
design and construction requirements of higher-end furniture manufacturers and
jobbers. In 2001, the Company began marketing certain fabrics intended to meet
the design, construction and pricing needs of its promotional-end customers
under the Company's Davol'r' brand name. The balance of the Company's fabrics
carry the Quaker'TM' name -- and while there is some price point overlap at the
extreme ends of the Quaker line, most of the fabrics marketed under the Quaker
umbrella are intended to meet the product needs of the Company's high-volume,
middle to higher-end furniture manufacturing customers. Management estimates
that approximately 60% of the Company's fabric sales are manufactured to
customer order.

During the past five years, Quaker has invested $78.2 million in new
manufacturing equipment to expand its yarn and fabric production capacity,
increase productivity, and improve product quality. During 2005, Quaker plans to
spend approximately $7.6 million for new projects consisting principally of
facilities maintenance expenditures, modifications needed at the 540,000 square
foot manufacturing and warehousing facility leased by the Company in December
2004 and a modest amount of new equipment needed to support the expansion of the
Company's craft yarn sales.

The Company's yarn and fabric manufacturing and warehousing operations are
conducted at its ten manufacturing plants in the greater Fall River,
Massachusetts area, where Quaker has approximately 2.2 million square feet of
manufacturing and warehousing space. Quaker also leases 217,000 square feet of
warehousing space in Brockton, Massachusetts. During the fourth quarter of 2004,
the Company entered into a long-term lease on 540,000 square feet of
manufacturing and warehousing space in Fall River. During 2005, the Company
plans to consolidate operations currently conducted in four of its leased
facilities, including its leased Brockton facility, into this new plant. In
addition to distribution from the Company's facilities in Fall River, Quaker
maintains domestic distribution centers in High Point, North Carolina, Verona,
Mississippi, and City of Industry, California. To provide better service to its
international customers, the Company also has a distribution center in Mexico
and uses a third-party distribution company to provide warehousing services in
Brazil.

The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q,
and all amendments to those reports will be made available free of charge
through the Investor Relations

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section of the Company's Internet website (http://www.quakerfabric.com) as soon
as practicable after such material is electronically filed with, or furnished
to, the Securities and Exchange Commission.

THE INDUSTRY

Total domestic upholstery fabric sales, exclusive of automotive
applications, are estimated to be approximately $1.6 billion annually, with
sales of imported fabrics, in both roll and 'kit' form, representing
approximately 42% of total U.S. fabric sales during 2004, up from 29% in 2003
and 11% in 2002. Management estimates international fabric sales to be at least
twice those of the domestic market. The top ten upholstery fabric manufacturers,
including Quaker, account for approximately 57% of total domestic sales.
Management believes that Quaker is currently the only large U.S. fabric producer
that is continuing to demonstrate its long-term commitment to the international
market by focusing on expanding its export sales.

Within the Jacquard segment, price is a more important competitive factor in
the sale of promotional products than it is in middle to better-end lines, where
fabric styling and design considerations typically play a more important role.

Demand for upholstery fabric is a function of demand for upholstered
furniture. U.S. retail upholstered furniture sales grew from $20.3 billion in
1999 to an estimated $23.9 billion in 2004. Total upholstered furniture demand
is cyclical and is affected by population growth and demographics, new household
formations, consumer confidence, disposable income, geographic mobility, housing
starts, and home sales. Historically, the U.S. furniture market has been
characterized by relatively slow growth, with compounded annual growth rates
typically in the 2.5% to 3.5% range.

The upholstery fabric covering a sofa, chair, or other piece of furniture is
one of the most significant factors influencing a furniture buyer's selection.
Purchase decisions are based primarily on the consumer's evaluation of
aesthetics, comfort, durability, quality and price. As a result, the fabric
decisions a furniture manufacturer makes play a critical role in its ability to
capture retail floor space, thereby generating increased sales by attracting
consumer attention.

Management believes the long-term outlook for the Company's upholstery
fabric sales will be influenced by the following factors:

(i) The furniture industry has been consolidating at both the retail and
manufacturing levels for several years. As a result, fabric suppliers
are required to deal with larger and more sophisticated customers that
require a broader range of product choices, shorter delivery lead
times, customer-specific inventory management programs, and additional
information technology-based support services.

(ii) In recent years, the lines between the furniture industry's
manufacturers and retailers have begun to blur, with several of the
nation's larger furniture manufacturers opening retail outlets of
their own.

(iii) Fabrics, leather and faux suede microdenier products entering the
United States from Asia in both roll and 'kit' form are resulting in
increased competition in the upholstery fabric and upholstered
furniture markets and are capturing an increasing share of the
domestic furniture market. Economic factors affecting purchasing
decisions made by U.S. furniture manufacturers to source furniture
coverings domestically or in the international market are expected to
cause this trend to accelerate. In addition, recent increases in
imported furniture coverings and an increase in imports of fully
upholstered furniture into the U.S. can be anticipated to have a
deflationary effect on pricing throughout the distribution chain.
Competition in the U.S. domestic market may also intensify further
following the January 1, 2005 expiration of the quotas imposed under
the Uruguay Round Agreement on Textiles and Clothing on textile and
apparel products coming into the U.S.

(iv) The United States has shifted toward a more casual lifestyle, as
evidenced by product shifts in the apparel and home furnishings
industries. Management believes this has resulted in growing demand
for less formal furniture upholstered with softer, more comfortable
fabric.

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(v) Consumer tastes in upholstered furniture coverings change as new trends
and styles emerge. Leather and faux suedes as furniture coverings have
increased in popularity in recent years, resulting in a reduction in
overall sales of woven upholstery fabric.

(vi) Pushed by consumers demanding immediate product delivery, the
furniture industry has increased its focus on just-in-time
manufacturing methods and shorter delivery lead times.

(vii) Advances in the use and application of information technology
throughout the industry supply chain can be anticipated to allow
furniture industry manufacturers, suppliers and customers to share
information more quickly and more effectively, resulting in reduced
cycle times and greater transparency for end consumers who will be
able to determine the status of their orders at each stage of the
manufacturing process. Significant advances in the use of information
technology in the sales and marketing function are also anticipated.

(viii) Both consumers and furniture manufacturers have placed increased
emphasis on product quality, enabling fabric manufacturers with
effective quality control systems to gain a competitive advantage.

(ix) A move by the baby boom generation toward more upscale furniture as
they approach retirement age and additional demand generated by that
same group's purchases of vacation and retirement homes can be
expected to provide favorable longer term demand trends.

(x) While at one time most of the largest U.S. fabric producers had
leveraged their size and broad product lines to expand their export
sales, management believes that Quaker alone continues to focus on
international sales as a major strategic initiative.

STRATEGY

Quaker's strategy to further its growth and financial performance objectives
includes:

Maintaining its Leadership Position in the Domestic Residential Fabric
Market. The Company has positioned itself as a full-service supplier of Jacquard
and plain woven fabrics to the promotional and middle to better end of the
market by offering a wide variety of fabric patterns at prices ranging from
$2.40 to $35.00 per yard and by emphasizing superior customer service.

Expanding International Sales. The Company has made worldwide distribution
of its upholstery fabrics a key component of its strategy. Quaker has built an
international sales and distribution network, dedicated significant corporate
resources to the development of fabrics to meet the specific styling and design
needs of its international customers, and put programs in place to simplify the
purchase of product from Quaker, including the operation of a distribution
facility in Mexico, and the utilization of the services of a third party
distribution company in Brazil. The Company's international net fabric sales
were $35.9 million in 2004.

Penetrating Related Fabric Segments. Management believes the Company's
styling and design expertise, as well as its ISO 9001-certified operations,
provide opportunities to penetrate the contract and outdoor segments, as well as
increase Quaker's share of the interior decorator and recreational vehicle
segments. Management believes Quaker's fabric finishing and post-finishing
abilities will provide the Company with a product advantage in these segments.

Maintaining Specialty Yarn Sales. Quaker is a leading producer of specialty
yarns, including chenille, taslan, and spun products. Approximately 82% of the
chenille and spun yarns manufactured by the Company are used in the production
of the Company's fabric. The balance is sold to craft yarn distributors,
upholstery weavers and home fashion accessories firms. The Company's yarn
styling and yarn technology has allowed the development of a number of unique
yarns for the craft yarn sector. These new yarns, many of which are patented,
have met with considerable success in the craft yarn sector. To support further
penetration of this sector and to provide improved product aesthetics on retail
store shelves, during the fourth quarter of 2004, the Company invested in yarn
'balling' and packaging equipment. Net sales for this division increased by
91.9% to $20.4 million in 2004 from $10.7 million in 2003. The Company's current
line of specialty yarns includes over 50 different varieties of spun and
chenille yarns, and Quaker's yarn design and development staff regularly creates
innovative new specialty yarns for use in the Company's fabrics and sale to the
Company's yarn customers.

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Considering Strategic Acquisition Opportunities. The Company has evaluated a
number of acquisition candidates in the past and plans to pursue appropriate
acquisition opportunities in the future. An ideal acquisition candidate would
either support the Company's new market development objectives; enhance its
international position; permit additional investments in marketing, new product
research and development, design, information technology and manufacturing;
improve Quaker's financial performance by increasing efficiency and absorption
of overhead; or offer a unique and complementary product, manufacturing or
technical capability.

COMPETITIVE STRENGTHS

Management believes that the following competitive strengths distinguish
Quaker from its competitors and that these strengths serve as a solid foundation
for the Company's long-term strategy:

Product Design, Development and Technological Innovation Capabilities.
Management believes that Quaker's reputation for design excellence, product
leadership and technological development is, and will continue to be, the
Company's most important competitive strength.

Commitment to Customer Service. The Company is committed to offering its
customers the best overall service levels in the industry.

Broad Product Offering. The breadth and depth of Quaker's product line
enables the Company to be a full-service supplier of Jacquard and plain woven
fabrics to the domestic and international furniture market.

Technological Expertise. Quaker is driven by innovation and is committed to
exploring the development and use of new technology to meet its product
development, customer service, operating and financial objectives.

State-of-the-Art Manufacturing Equipment. Management believes the Company
has one of the most modern, efficient and technologically advanced manufacturing
bases in the industry.

Focus on Jacquard Fabrics. Management believes the detailed, copyrighted
designs of the Company's Jacquard fabrics support its efforts to compete on the
basis of superior styling and design, rather than price.

Vertical Integration. Using Quaker's own specialty yarns in the production
of its fabrics provides the Company with significant design, cost and delivery
advantages.

PRODUCTS

The Company offers a broad assortment of contemporary, traditional,
transitional and country fabrics to manufacturers of both promotional-end and
middle to better-end furniture at prices ranging from $2.40 to $35.00 per yard.
While most of the Company's fabrics have historically been sold under the Quaker
label, the Company began marketing a select group of its middle to better-end
fabrics under its Whitaker'r' label in October 1996. During 2001, the Company
began marketing certain of its fabrics to its promotional-end customers under
its Davol'r' brand name. In 2004, the Company's promotional-end fabric line and
its middle to better-end fabric line had average gross sales prices of $4.05 per
yard and $6.80 per yard, respectively, compared to $4.08 and $6.63,
respectively, in 2003. The weighted average gross sales price per yard of the
Company's fabrics was $5.74 in 2004, compared to $5.66 in 2003.

Quaker's product line is focused on fabrics with woven designs referred to
in the industry as 'Jacquards,' because of the special Jacquard equipment, or
heads, required to produce them, and also includes a broad assortment of
striped, plaid, and plain fabrics. The vast majority of Quaker's looms are
equipped with Jacquard heads. The use of these heads makes it possible to vary
the pattern, color, and texture of both the filling and warp yarns in a fabric.
While fabrics manufactured on looms without Jacquard heads have a much more
limited range of possible designs, Quaker added thirty-six Dobby looms to its
manufacturing base during 2001 to reduce the cost of manufacturing certain
fabrics that do not require the use of Jacquard heads. During 2002, Quaker also
added 24 'double-wide' Jacquard looms to its manufacturing base. Management
believes that the Company's newest collections of sueded fabrics provide
Quaker's customers with a superior product that they can use to advance their
efforts to

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ensure that their own product offerings bring something distinctive to the
market. Management also believes that the development and introduction of these
products allows the Company to compete with less expensive imported goods on the
basis of styling and performance rather than price.

Quaker's product offerings are noted for their use of the chenille and other
specialty yarns manufactured by the Company. These yarns give the fabric a soft
appearance and feel. To take advantage of the trend toward casually styled
furniture, and to capitalize on the growth of the motion furniture segment,
Quaker developed a soft chenille yarn with superior abrasion resistance. The
Company markets the line of chenille fabrics it produces using these yarns under
its Ankyra'TM' label. Management anticipates that chenille and the other
specialty yarns produced by the Company will remain an important element in the
Company's fabric designs and that they will continue to influence -- and be
enhanced by -- Quaker's on-going development and use of additional new specialty
yarns and manufacturing techniques and processes. In addition, the Company has
recently developed a collection of spun yarn products, including several
distinctive boucles that Quaker's design staff is using to further the Company's
styling and design objectives.

Quaker's broad product line is intended to allow the Company's customers to
meet most of their fabric needs through one full-service supplier while, at the
same time, allowing them to purchase fabrics in a wide enough range of designs
to enable them to differentiate their own new lines of upholstered furniture
from those of their competitors. To generate additional business from
manufacturers of higher-end upholstered furniture, the Company offers a select
group of its middle to better-end products under its Whitaker'r' label, and in
2001 the Company began marketing certain of its promotional-end products under
its Davol'r' brand name. Gross sales of the Company's middle to better-end
fabrics were $197.2 million, or 72.8% of total gross fabric sales in 2004, with
approximately 30.7% of those sales made under the Whitaker'r' label.

NEW PRODUCT DEVELOPMENT AND DESIGN

Although management believes fashion trends in the upholstery industry do
not change significantly from year to year, consumer tastes in upholstery fabric
and other furniture coverings do change over time. Therefore, it is important to
identify emerging fashion needs and to develop new products responsive to those
needs. Management believes Quaker's design staff has an established reputation
for design excellence and product leadership.

The Company's design department has overall responsibility for the
development of new upholstery fabric patterns for sale by the Company. Although
the Company purchases artwork from independent artists, the Company's staff of
professional designers and designer technicians creates the majority of the
designs on which the Company's fabric patterns are based and also determines the
construction of those patterns. The design department uses Computer Aided Design
('CAD') equipment to reduce the length of the Company's new product development
cycle.

The development of each new fabric line requires six months. The first step
in the new product development process is the preparation of a merchandising
plan for the line. The Company's merchandising plans are based on extensive
input from Quaker's sales representatives, senior managers, and major customers
and provide both a broad outline of the number of new products to be included
within each major styling category (e.g., contemporary, traditional,
transitional, and country), as well as the number of new products to be created
for sale at each of the major price points within those styling categories.
Beginning in 2002, the Company enhanced its merchandising practices by including
a number of fabric collections reflecting a common theme in each new line.

In addition, because of the design and delivery advantages of Quaker's
vertically integrated manufacturing operations, substantial emphasis is placed
on making maximum use of the Company's internally produced yarns during the
fabric development process. In conjunction with the development of each new
fabric merchandising plan, members of the Company's fabric design and yarn
development staffs meet to identify the design staff's yarn requirements for the
Company's next fabric line and many of Quaker's proprietary yarns trace their
origins to this design-driven process. Quaker's product development, engineering
and manufacturing staffs also play a key role in the new product development
process by reviewing proposed new product constructions to evaluate their impact
on the Company's

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raw material costs, equipment utilization rates and quality performance. The
Company's product development and engineering staffs also design and develop new
product attributes that add value to Quaker's products from the consumer's
perspective, and their efforts have lead to initiatives such as the Company's
entry into a non-exclusive agreement with Hi-Tex, Inc. for the use of its
patented Crypton'r' finish for certain of the Company's fabrics for the contract
market.

Although a few plain, striped and plaid fabrics remain in the Company's
product line for ten years or more, a successful product typically has a life of
two to three years. Quaker's design staff also regularly creates custom patterns
for customers seeking to differentiate their products for distribution purposes,
hit a certain price point at the retail level, or meet a particular styling need
in the market they serve. These patterns, which are not part of Quaker's 'open
line,' are known in the industry as 'Specials' and have become increasingly
important to the Company's overall marketing efforts in recent years.

In addition, within the past several years, Quaker has entered into a number
of licensing agreements with various designers, including Todd Oldham
(La-Z-Boy), Alexander Julian, and Jaclyn Smith, pursuant to which Quaker has
been granted the exclusive right to manufacture upholstery fabrics incorporating
the copyrighted fabric patterns created by those designers.

SALES AND MARKETING

UPHOLSTERY FABRICS

Net fabric sales during 2004 were $268.7 million, or approximately 92.9% of
the Company's net sales. The Company sells its upholstery fabrics to over 3,000
furniture manufacturers worldwide. Fabric sales to the Company's top 25
customers accounted for approximately 41% of 2004 net sales. None of the
Company's customers accounted for more than 7.5% of net sales during 2004.

The Company uses a direct marketing force of 25 sales representatives, five
of whom are based in Mexico, to market its fabrics in the United States, Canada
and Mexico. All such sales representatives are paid on a commission basis and
represent the Company exclusively. Quaker's fabrics are distributed
internationally through a network of eleven exclusive sales representatives,
working out of sales offices and showrooms in the United Kingdom, the United
Arab Emirates, India, Singapore, and Germany, and four exclusive sales agents in
Brazil, where Quaker maintains a showroom, customer service center and sales
office in Sao Paulo. In addition, Quaker has appointed 10 independent
commissioned sales agents to represent the Company in the Far East, Australia,
New Zealand, the Middle East, Central and South America, Africa and Asia. All
agents located outside the United States are supervised by Quaker's Vice
President -- Sales.

Quaker's United States customers market their products through two annual
national furniture industry trade shows held in April and October in High Point,
North Carolina, as well as through various regional shows. These shows provide
most of Quaker's customers with the opportunity to introduce their new furniture
lines to their major retail customers in a single setting. Quaker's design and
marketing process is closely linked to these trade shows. The Company develops
two major lines for introduction to the Company's customers at the Showtime
Fabric Fairs held in High Point in January and July of each year. Almost every
major U.S. furniture manufacturer attends Showtime to begin selecting fabric for
the new lines of sofas and other upholstered furniture products that they will
exhibit at the April and October High Point Furniture Markets. Beginning in
December 2005, these semi-annual Showtime Fabric Fairs will be held in December
and June.

Quaker also markets its fabrics at a number of trade shows regularly
attended by its export customers, including shows in Belgium, Dubai, Germany,
Italy, Brazil and Mexico, as well as certain trade shows in the United States
aimed at the international market. Net foreign sales of fabric accounted for
approximately 13.4% of Quaker's net fabric sales during 2004.

In addition to distribution from the Company's facilities in Fall River,
Massachusetts, Quaker maintains five distribution centers from which its
customers may take immediate delivery of selected products. These facilities are
located in City of Industry, California; Verona, Mississippi; High Point, North
Carolina; Sao Paulo, Brazil; and Mexico City, Mexico.

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SPECIALTY YARNS

Net yarn sales during 2004 were $20.4 million, or approximately 7.1% of the
Company's net sales. The Company designs, manufactures and markets several types
of specialty yarns, including fancy spun, fancy twisted and chenille. Because of
their softness, the specialty yarns produced by the Company and the fabrics made
out of them are intended to be responsive to consumer demand for softer, more
casual home furnishings and accessories. The Company's specialty yarns are sold
under the name of Nortex Yarns to craft yarn distributors and manufacturers of
home furnishings products, principally weavers of upholstery fabric, throws,
afghans and other products. The Company has approximately 70 yarn customers,
with recent sales into the craft yarn market reflecting significant growth, and
sales to one customer representing more than 50% of the Company's yarn sales.

Management believes the technical expertise of Quaker's yarn development
staff provides the Company with an important competitive advantage by enabling
Quaker to create and market innovative specialty yarns to meet its customers'
styling and performance criteria. Historically, chenille yarns have had
difficulty meeting the durability standards required for use in fabrics which
are likely to be subjected to heavy wear. To address this problem, Quaker's yarn
development staff created a finished chenille yarn with superior abrasion
resistance, and in 1997 the United States Patent and Trademark Office issued a
patent to protect the Company's Ankyra'TM' process.

MANUFACTURING

The Company operates ten manufacturing facilities in the greater Fall River,
Massachusetts area, and management estimates that approximately 60% of the
Company's fabric sales are manufactured to customer order. Management, in
partnership with key customers, uses forecasting techniques to significantly
reduce delivery lead times to its key customers. The Company's objective is to
operate its production facilities on a three-shift, five to five and one
half-day per week schedule. However, during periods of heaviest demand, Quaker
operates some or all of its production areas on seven-day, three-shift schedules
and/or outsources a portion of its production requirements. During periods of
weaker demand, the Company will decrease its production rates accordingly.

The Company's vertically integrated manufacturing process begins with the
production of specialty yarns, primarily for use in the production of the
Company's fabrics, but also for sale to manufacturers of craft yarns, home
furnishings products and apparel. Although the Company purchases all of its
commodity yarns, most of the Company's weft, or filling, yarn needs are met
through internal production. The next stage of the fabric manufacturing process
involves the preparation of beams of warp yarn. The beams are then sent to the
Company's weave rooms, where looms are used to weave the warp and filling yarns
together. The final steps in the fabric production process include routing the
fabric through various fabric finishing and post-finishing processes to enhance
the durability and performance characteristics of the end product. Some of the
Company's fabrics, including its Quaker Plush'r', Quaker Suede'TM', Quaker
Silk'TM' and Quaker Ultra'r' products, and the products it markets under the
Crypton'r' brand as a result of its licensing agreement with Hi-Tex, Inc.,
benefit from additional chemical and mechanical finishing processes designed to
enhance their appearance, texture or 'hand' and/or performance characteristics.
A final product quality inspection is conducted prior to shipment to the
Company's customers.

Over the past two years Quaker has introduced 'lean manufacturing'
principles in two of its newest plants. These principles involve more training
for the Company's hourly workforce, plant layouts designed to ensure a smooth
continuous flow of product through the manufacturing process and an emphasis on
inventory reduction. These two plants have proven to be the most effective in
terms of utilization of assets, overall conversion costs and quality. The lean
initiative is now being aggressively introduced in Quaker's beaming, weaving and
yarn producing areas.

Since 1988, the United Kingdom has had a flammability standard in place
applicable to all upholstery fabrics sold in the U.K., including products
imported into the U.K. market from other countries. To ensure compliance with
this regulatory standard, the Company devoted considerable resources to the
successful development of fabrics which would meet the performance
specifications set forth in the standard. For the past several years, the United
States Consumer Product Safety

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Commission has been working on the development of a similar upholstered
furniture flammability standard, and the Company has played a lead role in the
shaping of these proposed regulations. Management believes the adoption by the
CPSC of new regulations in this area, if that were to occur, would not likely
have a material adverse effect on the Company's results of operations or
financial condition and that, prior to the effective date of such regulations,
if any, the Company would be able to make such changes in its fabric designs and
manufacturing processes as would be required to ensure the Company's compliance.

Quaker has added approximately 400 new looms to its manufacturing base since
1989. The vast majority of the Company's looms are equipped with Jacquard heads,
maximizing the Company's ability to design its products to meet customer needs,
without equipment-related design constraints. During 2000, the mechanical
Jacquard heads on approximately 80 of the Company's older looms were replaced
with electronic Jacquard heads to improve productivity, and another 26
mechanical heads were replaced with electronic heads during 2002. During 2001,
the Company added 36 Dobby looms to its manufacturing base to reduce the cost of
manufacturing certain fabrics not requiring the use of Jacquard heads, and in
2002, 24 'double-wide' Jacquard looms were moved into production.

The Company's fabrics are generally shipped directly to its customers on an
FOB Fall River or FOB warehouse basis. The Company also supplies its
distribution centers with an appropriate selection of fabrics for customers
needing immediate delivery.

During the past five years, the Company placed in service approximately
$78.2 million of new manufacturing equipment to increase capacity, improve
manufacturing efficiencies, and support the Company's marketing, quality and
delivery objectives.

QUALITY ASSURANCE

Management believes that product quality is a significant competitive factor
in both the domestic and international fabric markets. Quaker's quality
initiatives include:

Inspection of incoming raw materials to ensure they meet the Company's
product specifications and to provide prompt feedback to vendors when
defects are discovered so that corrective actions may be undertaken
immediately.

A final quality inspection of the Company's yarn and fabric products
before they are released for shipment.

Continuous monitoring of the Company's performance against industry
standards and its own internal quality standards.

ISO 9001 certification of all of the Company's operations. During 2001,
the Company received certification to the new ISO 9000: 2000 Quality
Standard for ISO 9001.

In addition to these measures, the built-in quality control features and
more precise settings on the Company's newer production equipment also support
the Company's efforts to provide defect-free products to its customers.

The Company's quality-related return rate, as a percentage of total yards
shipped, was 0.35% in 2004 and 0.30% in 2003, and the Company's sales of
second-quality fabric were $1.3 million in 2004 and $1.5 million in 2003.

TECHNOLOGY

As part of Quaker's overall strategy to improve productivity and meet its
customers' total service requirements, the Company strives to introduce new
technologies into its operations whenever possible. Quaker's efforts in this
area include: (i) the use of its management information system to provide
computer support to the Company's manufacturing operations; (ii) the use of CAD
equipment to reduce the time required to bring its new products to market,
including the design of 'Specials'; (iii) the use of bar-coding systems for
inventory control purposes and to improve both the efficiency of its own
manufacturing operations and service to its customers; (iv) the use of
electronic Jacquard heads and other production equipment equipped with
microprocessors to improve manufacturing efficiencies and

8

reduce unit costs; (v) the use of a heuristic advanced planning system to both
support Quaker's delivery lead time objectives and improve productivity levels
in Quaker's manufacturing areas; (vi) the use of real-time process monitoring
control systems to identify opportunities to improve manufacturing efficiencies;
(vii) the implementation of a web portal to provide Quaker's customers with
secure, on-line access to product and order shipment information; and
(viii) the introduction of KANBAN scheduling practices in some production areas.

The Company's CAD equipment is used to develop new fabric designs and to
prepare plastic Jacquard cards for use with the Company's mechanical Jacquard
heads, and computer disks for use with Quaker's electronic Jacquard heads. These
plastic cards and computer disks contain precise instructions about the
construction of the particular fabric pattern to be woven. During 2001, the
Company installed new CAD software, providing all of Quaker's design
professionals with enhanced automated design support directly on their
individual desktop computers.

SOURCES AND AVAILABILITY OF RAW MATERIALS

Quaker's raw materials consist principally of polypropylene, polyester,
acrylic, cotton and rayon fibers and yarns for use in its yarn manufacturing and
fabric weaving operations, and latex to backcoat its finished fabrics. In
addition, Quaker purchases commission dyeing services from various dyehouses
which dye, to the Company's specifications, certain fabrics produced by the
Company and certain of the yarns the Company produces internally or purchases
from other manufacturers. While the Company purchases its raw material
requirements from both U.S. and non-U.S. based suppliers, in 2004, Quaker
sourced over 95% of its raw materials from suppliers in North America. The
Company is dependent upon outside suppliers for its raw material needs,
including dyeing services, and is subject to price increases and delays in
receiving these materials and services. The Company's raw materials are
predominantly petrochemical products and their prices typically fluctuate with
changes in the underlying market for petrochemicals in general. In addition, the
financial performance and/or condition of a number of textile industry suppliers
has been hurt by recent reductions in the overall size of the U.S. textile
industry, increasing the risk of business failures and/or further consolidations
among the Company's supplier population and the related risk of disruption to
Quaker's operations.

Although other sources may be available, the Company currently procures
approximately 81% of its raw material components from four major industry
suppliers, one of which is the sole supplier of a filament yarn used in the
Company's chenille and Taslan air texturizing manufacturing operations.
Approximately 36% of the Company's filling yarns are acrylic and are purchased
from spinners that use acrylic fiber from Solutia, Inc. ('Solutia'.) On December
17, 2003, Solutia, the Company's supplier of acrylic fiber, filed for
reorganization under Chapter 11 of the federal bankruptcy laws and on January
25, 2005, Solutia announced that it would be exiting the acrylic business, with
operations at Solutia's acrylic manufacturing facilities expected to cease in
early to mid-April 2005. With the closure of Solutia, Quaker will source acrylic
from two primary offshore producers. To maintain customer service levels, the
longer lead times associated with offshore sourcing will require the Company to
hold additional component safety stock inventory at both the spinners used by
the Company and at Quaker.

In addition, the Company currently purchases essentially all of its
polypropylene yarn, a component used in approximately 12% of the Company's
fabrics, from one domestic supplier. While the Company has previously evaluated
various approaches to dealing with an interruption in its supply of
polypropylene from this supplier, including a hybrid approach involving the use
of both alternate suppliers and an adjustment in the fiber content and other
product specifications of certain fabrics, the Company is developing, but
currently does not have, a firm alternate program in place to mitigate the risks
associated with an interruption in its supply of polypropylene arising out of an
operating, financial or other problem at this supplier. Further, the Company
sources a low melt polymer essential to the production of Quaker's Ankyra'TM'
chenille yarns from a single supplier. While an alternate source of this polymer
is available, it is unlikely that this source would have the manufacturing
capacity to meet all the Company's requirements for this raw material, at least
initially.

In addition, Quaker was notified that, on January 25, 2005, an interim
receiver was appointed to hold and control the estate of Les Textiles Du-Re Ltee
('Du-Re') and to operate Du-Re's business on a temporary basis pursuant to the
provisions of Section 47 of the Canadian Bankruptcy and Insolvency

9

Act. Du-Re is a spinner that supplies Quaker with a number of acrylic spun yarns
made with Solutia fiber and included in a number of the fabrics manufactured and
sold by Quaker. Quaker is working with Du-Re's receiver and Regitex Inc.,
another Canadian yarn manufacturer with which Quaker has worked in the past, to
arrange for a continuous flow of these raw materials.

Although Quaker expects that it will be able to obtain adequate amounts of
raw materials to meet its future requirements, and as a matter of corporate
policy, attempts to identify alternate sources for all critical raw material
components, an increase in the price of or a shortage or interruption in the
supply of any critical component could have a material adverse effect on the
Company.

The Company's production operations are heavily reliant upon a consistent
supply of energy, including electricity to power the Company's manufacturing
equipment, natural gas to generate the heat used in Quaker's finishing
operations and oil to heat the Company's office areas. A significant shortage or
interruption in the availability of these energy sources would likely have a
material adverse effect on the Company's operations and financial performance.
Beginning in the latter part of 2000, the Company began to experience rising
energy costs. To help provide the Company with greater stability and to reduce
the impact of rising energy costs, during 2001, Quaker entered into a contract
to purchase its electrical power requirements at a fixed price through December
2004. Upon expiration of this agreement, the Company began purchasing 60% of its
electricity requirements at the default rate and the balance at an 'hour to
hour' rate. The Company expects to experience a significant increase in its
energy costs during 2005.

COMPETITION

The markets for the Company's products are highly competitive. Competitive
factors in the upholstery fabric business include product design, styling,
price, customer service and quality. Price is a more important competitive
factor in the promotional-end of the market than it is in the middle to
better-end of the market, where competition is weighted more heavily toward
fabric styling and design considerations. Recently, cost and other factors have
made imported fabrics more competitive with the Company's products. Imported
furniture coverings, including leather, fabric in both roll and 'kit' form and
faux suede products, are currently estimated to represent approximately 42% of
sales into the U.S. fabric market, up from 29% in 2003 and 11% in 2002. This
percentage can be expected to increase in the absence of a change in U.S. trade
policy or other international developments. In addition, competition in the U.S.
domestic market may further intensify as a result of the January 1, 2005
expiration of the quotas imposed under the Uruguay Round Agreement on Textiles
and Clothing on textile and apparel products coming into the U.S. During 2004,
the Company's yarn sales business continued to be adversely affected by
diminished demand for products manufactured by the Company's customers in the
home furnishings and apparel markets. Recently, the Company's sales to the craft
yarn market grew significantly, with sales to one craft yarn customer
representing more than 50% of the Company's yarn sales. The Company anticipates
additional sales growth during 2005 in the craft yarn market.

Several of the companies with which the Company competes may have greater
financial resources than the Company. The Company's products compete with other
upholstery fabrics and furniture coverings, including prints, flocks, tufts,
velvets, suede and leather, with leather, faux suede and plain furniture
coverings enjoying growing popularity over the past few years, primarily at the
expense of woven fabrics, such as the Jacquards and other woven fabrics Quaker
manufactures.

BACKLOG

As of January 1, 2005, the Company had orders pending for approximately
$14.6 million of fabric and yarn compared to $26.5 million as of January 3,
2004. The Company's backlog position at any given time may not be indicative of
the Company's long-term performance.

TRADEMARKS, PATENTS, COPYRIGHTS

The Company seeks copyright protection for all new fabric designs it
creates, and management believes that the copyrights owned by the Company serve
as a deterrent to those industry participants

10

which might otherwise seek to replicate the Company's unique fabric designs. In
June 1995, the Company introduced a new collection of fabrics featuring Quaker's
proprietary Ankyra'TM'chenille yarns. In 1997, the United States Patent and
Trademark Office issued a patent to the Company protecting the proprietary
manufacturing process developed by Quaker to produce these yarns. The Company's
Davol'r', Quaker Ultra'r' and Whitaker'r' marks, as well as a logo form of the
'W'r' mark, are registered with the U.S. Patent and Trademark Office. In
addition, the Company has filed patent applications with the U.S. Patent and
Trademark Office to protect its intellectual property rights in several new
technologies and processes created by the Company's product development staff,
including certain laminated textured products, Quaker's Regal'TM' chenilles, a
continuous washing and post finishing process, and for the Company's high-value
laminated fabrics. During 2003, the Company also entered into a non-exclusive
licensing agreement with Hi-Tex, Inc. for the use of its patented Crypton'r'
finish for certain of the Company's fabrics for the contract market.

INSURANCE

The Company maintains general liability and property insurance. The costs of
insurance coverage vary generally and the availability of certain coverages can
change. Following the events of September 11, 2001, the Company experienced
significant increases in the premium rates on certain of its insurance coverages
and certain changes were made in the insurance carriers used by the Company and
in the terms and conditions of some of the Company's insurance policies.
Although premium rates for most coverages purchased by the Company have dropped
since the significant increases experienced during the first round of
post-September 11 renewals, most rates have still not decreased to their pre-
September 11 levels. While the Company believes that its present insurance
coverage is adequate for its current operations, there can be no assurance that
the coverage is sufficient for all future claims or will continue to be
available in adequate amounts or at reasonable rates.

EMPLOYEES

As of January 1, 2005, Quaker employed 2,509 persons, including 2,020
production employees, 175 technical and clerical employees, and 314 exempt
employees and commissioned sales representatives. As a result of a reduction in
force during the first quarter of 2005, the Company employed approximately 2,200
persons as of March 14, 2005. The Company's employees are not represented by a
labor union, and management believes that employee relations are good. The
Company's operations are heavily dependent on the availability of labor in the
Fall River, Massachusetts area.

11

ITEM 1A. EXECUTIVE OFFICERS OF THE REGISTRANT (See Item 10 herein)

The executive officers of the Company are as follows:

Larry A. Liebenow. Mr. Liebenow has served as President, Chief Executive
Officer, and a Director of the Company since September 1989. From July 1983
until September 1989, Mr. Liebenow was Chairman of the Board and President of
Nortex International, Inc. ('Nortex International'). From September 1971 to July
1983, Mr. Liebenow served as the Chief Operating Officer of Grupo Pliana, S.A.,
a Mexican yarn and upholstery fabric manufacturing concern.

James A. Dulude. Mr. Dulude has been employed by the Company since May 1986
and has served as Vice President -- Manufacturing since August 1995. Mr. Dulude
served as Vice President -- Purchasing, Planning and MIS from November 1990 to
August 1995. Mr. Dulude served as the Company's Director of Purchasing and
Planning from May 1989 to November 1990, Director of Planning and Scheduling
from July 1988 to May 1989, and Director of Information Systems from May 1986 to
July 1988.

Cynthia L. Gordan. Ms. Gordan has been employed by the Company since March
1988 and has served as Vice President, Secretary, and General Counsel of the
Company since March 1989. Ms. Gordan is also responsible for the Company's Risk
Management, Investor Relations and Human Resources functions. From April 1986 to
November 1987, Ms. Gordan served as a Senior Associate in the Corporate
Department of the Chicago law firm of Katten Muchin & Zavis. From November 1981
to April 1986, Ms. Gordan was employed by The General Electric Company where she
served first as the Vice President and General Counsel of General Electric's
life, property, and casualty insurance affiliates in Providence, Rhode Island,
and later as the strategic planner and acquisition specialist for a division of
General Electric Capital Corporation.

Mark R. Hellwig. Mr. Hellwig has served as Vice President -- Supply Chain
Management since October 1998. From January 1996 until October 1998, Mr. Hellwig
was Director -- Supply Chain Management for Solo Cup Company. From August 1993
to January 1996, Mr. Hellwig was Director -- Logistics at Solo Cup Company. From
1989 to 1993, Mr. Hellwig was with Deloitte and Touche LLP.

Paul J. Kelly. Mr. Kelly has served as Vice President -- Finance, Chief
Financial Officer and Treasurer of the Company since December 1989, and since
November 1993 has also had responsibility for working with industry and
institutional analysts. From January 1988 to December 1989, Mr. Kelly was the
co-founder and President of International Business Brokers and Consultants Ltd.,
a business broker and consulting firm. From December 1977 to December 1987, Mr.
Kelly served as Chief Financial Officer of Ferranti Ocean Research Equipment,
Inc., an international manufacturing concern. From February 1973 to December
1977, he was a certified public accountant with Arthur Andersen & Co.

Thomas H. Muzekari. Mr. Muzekari has served as Vice President -- Sales since
March 2003, and was Vice President -- Sales and Marketing from October 1998
until March 2003, and Vice President -- Marketing from March 1996 until October
1998. From September 1989 until February 1996, Mr. Muzekari was the Vice
President -- Marketing for Collins & Aikman's Velvet Division. From 1970 to
September 1989, Mr. Muzekari held various management positions in both sales and
marketing with Milliken and Company.

12

M. Beatrice Spires. Ms. Spires has been employed by the Company since
September 1995 and has served as Vice President -- Design and Merchandising
since March 2003, and was Vice President -- Styling and Design from March 1996
until March 2003. From September 1995 to March 1996, Ms. Spires served as
Quaker's Director of Design. From July 1992 to September 1995, Ms. Spires was
Vice President -- Merchandising for Collins & Aikman's Velvet Division. From
September 1991 to July 1992, Ms. Spires was Merchandising Manager at Collins &
Aikman.

Norman J. Sturdevant. Mr. Sturdevant has served as Vice President -- Chief
Information Officer since August 2001. From August 1999 to April 2001, Mr.
Sturdevant served as Vice President of Information Technology for Bausch &
Lomb's Europe, Middle East and Africa Region. Prior to that, Mr. Sturdevant
served in various director and manager-level information technology positions
with Bausch & Lomb, Entex Information Services and Electronic Data Systems. Mr.
Sturdevant served as an officer in the U.S. Navy from 1978 to 1984.

Duncan Whitehead. Mr. Whitehead has served as Vice President -- Technology
and Development, and Yarn Sales since August 1995. Mr. Whitehead served as Vice
President -- Yarn Sales and Development from May 1990 to August 1995. From
September 1989 to May 1990, Mr. Whitehead was the Vice President -- Sales and
Marketing for the Company's Nortex Division. From July 1983 to September 1989,
Mr. Whitehead served as Vice President of Sales and Marketing for Nortex
International.

The Company's President, Secretary, and Treasurer are elected annually by
the Board at its first meeting following the annual meeting of stockholders. All
other executive officers hold office until their successors are chosen and
qualified.

13

ITEM 2. PROPERTIES

PROPERTIES

Quaker is headquartered in Fall River, Massachusetts where it currently has
eleven facilities, ten of which are used primarily for manufacturing and
warehousing purposes. The eleventh facility houses the Company's executive,
administrative and design areas as well as certain manufacturing operations. In
addition, the Company maintains a manufacturing facility in Somerset,
Massachusetts and warehouse space in Brockton, Massachusetts. The Company has
three distribution centers in the United States and one in Mexico. We believe
our facilities are in good condition and are suitable and adequate for our
current and future uses. During the fourth quarter of 2004, the Company entered
into a long-term lease on 540,000 square feet of manufacturing and warehousing
space in Fall River. During 2005, the Company plans to consolidate operations
currently conducted in four of its leased facilities, including its leased
Brockton facility, into this new plant. The table below sets forth certain
information relating to the Company's current facilities:

- ---------
(1) Lease expires December 31, 2005 -- Management plans to move operations at
this facility to the Company's Commerce Drive plant during 2005.
(2) Lease expires December 31, 2015
(3) Lease expires July 31, 2007
(4) Month-to-month lease -- Management plans to move operations at this facility
to the Company's Commerce Drive plant during 2005.
(5) Lease expires June 30, 2005 -- Management plans to move operations at this
facility to the Company's Commerce Drive plant during 2005.
(6) Month-to-month lease -- Management plans to move operations at this facility
to the Company's Commerce Drive plant during 2005.
(7) Lease expires September 30, 2006
(8) Lease expires February 28, 2006
(9) Lease expires July 31, 2006

During 2000, the Company also started to maintain inventory at a third party
warehouse provider in Sao Paulo, Brazil. Quaker has sales offices in Fall River,
Massachusetts; Guadalajara and Mexico City, Mexico; Sharjah, United Arab
Emirates; Hickory and High Point, North Carolina; Chicago, Illinois; Tupelo,
Mississippi; City of Industry, California; and Sao Paulo, Brazil. All of the
Company's

14

sales offices, except the one in Fall River, Massachusetts, are leased. In
addition Quaker has five exclusive sales representatives who lease and maintain
sales offices in Germany, India, Johannesburg, London and Singapore.

The Company also owns approximately 60 acres of undeveloped land in Fall
River, Massachusetts which was purchased in 1998 to allow for expansion of its
operations. The Company's December 2004 decision to enter into a long-term lease
on an additional 540,000 square feet of manufacturing and warehousing space in
Fall River led the Company to reevaluate its interest in developing this land as
a manufacturing location. The net book value of this land is approximately $4.0
million, and the Company intends to market it for sale or development.

ENVIRONMENTAL MATTERS

The Company's operations are subject to numerous federal, state, and local
laws and regulations pertaining to the discharge of materials into the
environment or otherwise relating to the protection of the environment. The
Company's facilities are located in industrial areas and, therefore, there is
the possibility of incurring environmental liabilities as a result of historic
operations at the Company's sites. Environmental liability can extend to
previously owned or leased properties, properties owned by third parties, and
properties currently owned or leased by the Company. Environmental liabilities
can also be asserted by adjacent landowners or other third parties in toxic tort
litigation. In addition, under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended ('CERCLA'), and analogous
state statutes, liability can be imposed for the disposal of waste at sites
targeted for cleanup by federal and state regulatory authorities. Liability
under CERCLA is strict as well as joint and several. Environmental laws and
regulations are subject to change in the future, and any failure by the Company
to comply with present or future laws or regulations could subject it to future
liabilities or interruption of production which could have a material adverse
effect on the Company. In addition, changes in environmental regulations could
restrict the Company's ability to expand its facilities or require the Company
to incur substantial unexpected other expenses to comply with such regulations.

In particular, the Company is aware of soil and groundwater contamination
relating to the use of certain underground fuel oil storage tanks at its Fall
River facilities. During 2001, the Company filed Response Action Outcome
Statements (RAOs) and Activities and Use Limitations (AULs) with the
Commonwealth of Massachusetts with respect to soil and groundwater contamination
at two of its facilities. The AULs are intended to limit human access to the
tainted soil and groundwater, close out the sites and end future regulatory
reporting. During the fourth quarter of 2003, the Company terminated the AUL
with respect to one of these facilities at the direction of the Massachusetts
Department of Environmental Protection in order to complete additional response
actions necessary to support the conclusion that a condition of No Significant
Risk has been achieved at the site. Management anticipates that the Company will
complete the additional response actions and file a new AUL with respect to the
site within two years. In addition, during the fourth quarter of 1993 the
Company removed and encapsulated asbestos at two of its facilities and the
Company has an on-going asbestos management program in place to appropriately
maintain the asbestos that remains present at its facilities. During the fourth
quarter of 1998 and the first quarter of 1999 oil-contaminated soil resulting
from a leak during the mid-1970s from an underground fuel storage tank at the
Company's former facility in Claremont, New Hampshire, was removed and disposed
of at an asphalt batching plant. In January 2003, the New Hampshire Department
of Environmental Services issued a 'no further action required' letter with
respect to this site, and a related escrow account originally established to
cover Quaker's clean up cost indemnification obligations was closed out. The
Company has also agreed to indemnify the purchaser of the Company's former
facility in Leominster, Massachusetts, for certain environmental contingencies.

Quaker has also determined that several localized areas of a sixty-acre
parcel of land in Fall River owned by the Company contain surficial soil
contamination from polyaromatic hydrocarbons ('PAHs') and lead, and are thus
subject to the Massachusetts Superfund law. Over eighty percent of the
contaminated soil exists under high-tension power lines. The site is currently
undeveloped and was purchased by the Company during 1998-1999 to provide a
location for the possible future development

15

of a manufacturing and warehouse facility. The Company engaged the services of a
Licensed Site Professional ('LSP') and filed the appropriate notices and reports
with the Massachusetts Department of Environmental Protection. Following the
determination of the vertical and lateral extent of the contamination and the
nature of the soil contamination by the LSP, it was established that the site
could be properly remediated by covering the contaminated soil with a one-foot
depth of clean soil. This was completed during the second half of 2000.
Subsequent soil sampling and laboratory analyses have confirmed that the areas
of contamination have been properly remediated. Additional environmental
assessment and remediation work at the site is anticipated, the final cost of
which is currently uncertain.

The Company acquired two additional manufacturing facilities during the
second half of 2001. Prior to the Company's purchase, comprehensive
environmental site assessments, including soil and groundwater analyses, were
completed at both sites by an LSP. As a result of these assessments, an AUL has
been filed with the Commonwealth of Massachusetts with respect to one of the
sites. Further, although urban fill containing waste material, including coal
and ash, was discovered at the other site, the Company has determined that the
'urban fill' exemption from the assessment and remediation requirements of the
Massachusetts environmental regulations requires no further action by the
Company with respect to this property.

During 2003, the Company entered into agreements with the Massachusetts
Department of Environmental Protection to install air pollution control
equipment on three of the stacks at one of its manufacturing facilities located
in Fall River. The control equipment is intended to ensure that emissions from
the stacks do not exceed the 0% opacity limit set forth in the Company's
operating permit for air emissions. Management anticipates that the costs
associated with the acquisition and installation of the control equipment will
total approximately $900,000 over a three-year period, which began during 2003.
The equipment itself is scheduled to be fully installed by the end of 2005.

The Company has accrued reserves for environmental matters based on
information presently available. Based on this information and the Company's
established reserves, the Company does not believe that these environmental
matters will have a material adverse effect on either the Company's financial
condition or results of operations. However, there can be no assurance that
these reserves will be adequate or that the costs associated with environmental
matters will not increase in the future.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings other than routine legal
proceedings incidental to its business, which, in the opinion of management, are
immaterial in amount or are expected to be covered by the Company's insurance
carriers.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

The Company's common stock is traded over the counter and is quoted on the
Nasdaq National Market under the symbol 'QFAB.'

As of March 14, 2005, there were approximately 83 record holders of the
Company's common stock.

No dividends were paid on the Company's common stock prior to fiscal year
2003. During the first quarter of 2003, the Board of Directors adopted a new
dividend policy. This policy provides for future dividends to be declared at the
discretion of the Board of Directors, based on the Board's quarterly evaluation
of the Company's results of operations, cash requirements, financial condition
and other factors deemed relevant by the Board. The Company's Credit Agreement,
Senior Notes, and Series A Notes (the 'Loan Documents') contain restrictive
covenants which restrict the Company's ability to pay dividends. In accordance
with amendments made to the Loan Documents during the second half of 2004, the
Company suspended dividend payments during the third quarter of 2004 and no
dividends have been declared or paid since that time. See Note 5 of Notes to
Consolidated Financial Statements.

MARKET INFORMATION

The following summarizes the high and low sales prices for a share of the
Company's common stock as reported by NASDAQ and cash dividends paid per share
for each of the quarters in the years ended January 1, 2005 and January 3, 2004.

17

EQUITY COMPENSATION PLAN INFORMATION

(IN THOUSANDS)
JANUARY 1, 2005

EQUITY COMPENSATION PLANS NOT APPROVED BY SECURITY HOLDERS

Options granted under the 1993 Stock Option Plan for certain Company
officers are fully vested and currently cover 53,000 shares of common stock.
When granted, the exercise price of the shares covered by the 1993 Stock Option
Plan was $2.75 per share as to 60% of the shares granted and $1.37 per share as
to 40% of the shares granted. The Company's 1996 Stock Option Plan for certain
key employees currently covers 891,700 shares of common stock. Options granted
under the 1996 Stock Option Plan vest over a five-year period beginning on the
date of each grant. Options are issued at their fair market value at the date of
grant, and the average exercise price for all options granted is $7.86 per
share. Prior to their participation in the Company's 1997 Stock Option Plan in
2001, the Company's non-employee directors were awarded options pursuant to
individual contracts. These options were issued at their fair market value at
the date of grant, and the average exercise price for all such options granted
is $8.19 per share. All options granted to the Company's non-employee directors
under these contracts are fully vested and currently cover a total of 112,500
shares of common stock.

PURCHASES OF EQUITY SECURITIES BY THE COMPANY

During the fourth quarter of 2004 the Company did not purchase any of its
equity securities.

18

ITEM 6. SELECTED FINANCIAL DATA

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND PER YARD AMOUNTS)

The following table sets forth certain consolidated financial and operating
data of the Company for the periods indicated. This selected financial and
operating data should be read in conjunction with the Consolidated Financial
Statements, the Notes thereto and the other financial information included
herein.

- ---------

(1) The fiscal year ended January 4, 2003 was a 53-week period.

(2) Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the year.

(3) In the fiscal year ended January 3, 2004, income resulted from a settlement
of a tariff dispute with the Mexican tax authorities. See Note 11 to the
Consolidated Financial Statements. In the fiscal year ended December 29,
2001, the charge was for costs incurred related to a potential acquisition
which was not completed.

(4) Favorable settlement of the Company's claim for certain federal research and
development tax credits added approximately $2,000 or $0.12 per share, to
the Company's results of operations for fiscal 2004. See Note 6 to the
Consolidated Financial Statements.

19

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.

GENERAL

Overview. Quaker is a leading designer, manufacturer and worldwide marketer
of woven upholstery fabrics and one of the largest producers of Jacquard
upholstery fabrics in the world. The Company also manufactures specialty yarns,
most of which are used in the production of the Company's fabric products. The
balance is sold to manufacturers of craft yarns, home furnishings and other
products.

Overall demand levels in the upholstery fabric sector are a function of
overall demand for household furniture, which is, in turn, affected by general
economic conditions, population demographics, new household formations, consumer
confidence and disposable income levels, sales of new and existing homes and
interest rates.

Competition in the industry is intense, from both domestic fabric mills and
fabric mills located outside the U.S. manufacturing products for sale into the
U.S. market. In addition, there has been a recent and significant increase in
imports of both furniture coverings and fully upholstered furniture into the
U.S. market, with industry data indicating that sales of imported fabrics in
both roll and 'kit' form represented approximately 42% of total U.S. fabric
sales during 2004, up from 29% in 2003 and 11% in 2002. Competition in the U.S.
domestic market may further intensify as a result of the January 1, 2005
expiration of the quotas imposed under the Uruguay Round Agreement on Textiles
and Clothing on textile and apparel products coming into the U.S.

The Company's fabric products compete with other furniture coverings,
including leather, suede, microdenier 'faux suede', prints, tufts, flocks and
velvets, for consumer acceptance. Consumer tastes in upholstered furniture
coverings are somewhat cyclical and do change over time, with various coverings
gaining or losing share depending on changes in home furnishing trends and the
amount of retail floor space allocated to various upholstered furniture product
categories at any given time. For example, leather furniture and furniture
covered with microdenier faux suede products, primarily imported in roll and
'kit' form from low labor cost countries, particularly China, have enjoyed
growing popularity over the past few years, primarily at the expense of woven
fabrics, such as the Jacquards and other woven fabrics Quaker manufactures, and
in some retail furniture stores, these products may occupy as much as 50% of the
floor space allocated to upholstered furniture products.

Quaker's 2002 revenues of $365.4 million and net income of $11.6 million
both set new company records. During the first half of 2002, Quaker's revenues
were running at an annualized rate of approximately $400.0 million, however,
global economic conditions deteriorated as the year progressed, ultimately
resulting in a weak fourth quarter, with domestic fabric sales down 8.9% for the
quarter and yarn sales off significantly. The Company's backlog position was
also down considerably, from $43.0 million at the end of 2001 to $26.1 million
at the end of 2002, due to both significant reductions Quaker achieved in its
delivery lead times and weakness in the Company's fourth quarter order rate.
During 2002, Quaker also further strengthened its balance sheet, with the
Company generating approximately $13.0 million of free cash flow during the
fourth quarter, thereby allowing Quaker to reduce funded debt by approximately
$13.3 million during the quarter.

Net sales for the 52-week fiscal year ended January 3, 2004 of $325.3
million were down 11%, with net income of $7.9 million, down 31.3%, and diluted
earnings per share of $0.47. A refund related to the favorable resolution of a
foreign tariff dispute added $1.4 million of non-recurring income to fiscal 2003
pre-tax income, increasing diluted earnings per share for the year by $0.05.

Uncertainty surrounding the global economic and geopolitical environment
continued to put pressure on the Company's fabric sales during 2003, with 2003
domestic net fabric sales down 9.0% and net export sales down 16.5% versus 2002.
While the Company's 2003 yarn revenues were also down 32.1%, yarn sales for the
fourth quarter of $3.0 million were up 12.0% versus the comparable period of
2002, primarily as a result of the steps taken during the year to strategically
reposition that segment of the Company's business. Despite a drop of a little
over $40.0 million in Quaker's 52-week revenues for

20

2003 compared to 2002's 53-week fiscal year, the Company's gross margin declined
only 30 basis points, showing particular improvement in the fourth quarter.
Quaker's operating margin, however, was down 130 basis points for the year,
largely because of the ongoing costs associated with the strategic investments
the Company has made to build competitive advantage, particularly in the areas
of research and development, product styling and design, and information and
supply chain management. The 11% year-over-year decrease in the Company's
revenues caused those investments to push up Quaker's 'SG&A as a percentage of
revenues' results for the year and kept the Company from achieving its 'SG&A as
a percentage of revenues' objectives.

In addition, during 2003, Quaker reduced inventory, paid dividends for the
first time, generated improved cash flows, and paid down debt -- ending the year
with a net debt to total capitalization ratio of 18.9%, versus 28.7% at the end
of 2002, further strengthening the Company's balance sheet.

RECENT DEVELOPMENTS

Fiscal 2004 started out reasonably strong, but the Company's financial
performance deteriorated as the year progressed, particularly during the second
half. Because of the significant investments Quaker has made in machinery and
equipment over the years, the Company's fixed costs are relatively high --
causing any shortfall at the top line to quickly erode Quaker's margins and
bottom line profitability.

Net sales of $289.1 million for 2004 were down 11.1% versus 2003 -- with net
sales into the domestic residential market of $232.8 million for the year and
$53.8 million for the fourth quarter, down 15.3% and 17.8%, respectively -- and
international fabric sales of $35.9 million for the year and $10.5 million for
the fourth quarter, down 10.2% and 12.2%, respectively. Yarn sales, however,
showed consistent strength throughout the year, with total 2004 sales into that
market of $20.4 million, up 92% over 2003 and reflecting the strategic
repositioning of that aspect of Quaker's business.

From a profitability standpoint, the Company's performance during the first
quarter of 2004 was solid, with net income of $2.4 million -- but the Company
recorded a small loss in the second quarter, a ($2.1) million loss in the third
quarter and a ($1.9) million loss in the fourth quarter -- leading to a loss of
($2.0) million for the year as a whole, with favorable settlement of a Company
claim for certain federal research and development tax credits adding
approximately $2.0 million, or $0.12 per share, to the Company's results for the
fourth quarter and for the year.

The $41.9 million drop in Quaker's net sales into the domestic residential
furniture market in 2004 compared to 2003 was the single most important factor
affecting the Company's financial performance during 2004. This decline reflects
a continuation of intense competition in the domestic market, including
competition and pricing pressure from leather, faux suede and other furniture
coverings coming into the U.S. from Asia. The current popularity of faux suede
at the promotional end of the market and leather at the middle and upper-end has
reduced the size of the market for the woven Jacquard and plain fabrics Quaker
makes.

Last year's lower revenues resulted in a significant deterioration in
Quaker's margin performance, pushed SG&A expense as a percentage of sales up to
19.1% for the year, and 20.2% for the fourth quarter -- and generally hurt the
Company's financial performance resulting in losses at the bottom line in every
quarter except the first. The problems created by 2004's revenue shortfall were
exacerbated by a number of other factors, including higher energy and raw
material prices and the more than $0.7 million of professional fees Quaker
incurred in connection with its Sarbanes-Oxley Act compliance efforts.

The deterioration in the Company's financial results led to violations of
several of the financial covenants in Quaker's principal loan documents and the
Company sought and received waivers from its two major financing sources to deal
with this. Quaker is continuing to work with its lenders to put new loan
agreements in place that are consistent with the Company's current operating and
financing needs. This process is expected to be completed during the second
quarter of 2005. Last year's cash flow from operations was $19.8 million, with
capital expenditures of $14.9 million -- compared to cash flow from operations
of $34.4 million in 2003, with capital expenditures of $7.9 million in that
year.

The Company took aggressive action during the second half of 2004 to reduce
its operating costs. These actions included staffing reductions intended to
reduce overhead and bring production rates in

21

line with demand, and the temporary idling of certain yarn manufacturing
equipment as well as the execution of a long-term lease on 540,000 square feet
of additional manufacturing and warehousing space in Fall River. In addition,
during the first quarter of 2005, the Company began implementing further
company-wide cost cutting measures intended to reduce annual fixed operating
costs by approximately $6.0 million, and reduced employment levels at the
Company by an additional 275 production staff employees.

New fabric orders during the fourth quarter of 2004 were down approximately
17% versus the comparable period of 2003, and 2004 ended with a total production
backlog valued at approximately $14.6 million, down 45.1% in comparison to $26.5
million at the end of 2003. This drop in the backlog reflects both lower orders
during the fourth quarter of last year and Quaker's continued efforts to reduce
delivery lead times.

In January 2005, an important raw material supplier announced its decision
to exit the acrylic business. Over the short term, dealing with this development
will increase Quaker's raw material costs, put additional pressure on the
Company's margins and also involve some significant opportunity costs. The
Company has placed orders with this supplier to build a safety stock of acrylic
inventory at Quaker sufficient to cover its manufacturing requirements until raw
materials from the new suppliers enter the Company's supply chain. Quaker has
also moved ahead with some adjustments in its pricing to deal with the pressure
placed on the Company's margins by the significant raw material and other cost
increases affecting its business.

Management believes that domestic market conditions are likely to remain
both challenging and highly dynamic, with problems at the Company's suppliers
just one symptom of the broader challenges arising out of the changes taking
place in the furniture industry as a whole. These challenges -- including rapid
changes in the competitive landscape, a significant increase in fabric imports,
the emergence of new industry participants, consolidation in the furniture
retailing and manufacturing sectors and changes in the kind of furniture
consumers want to purchase and in how they want to purchase it -- will make
building the kind of sales volume the Company needs a difficult task. These
challenges also place additional importance on the wisdom of Quaker's corporate
and marketing strategies and the effectiveness of their execution.

In late 2004, Quaker arranged to have an in-depth market study performed to
serve as the basis of a refinement of the Company's strategy going forward so
that the core competencies the Company has developed in the design, technology,
supply chain and new product development areas can be used to best advantage to
further the Company's revenue and profitability objectives.

In the meantime, the Company is moving aggressively to build sales in both
the domestic and international residential fabric markets. Quaker is also
continuing its efforts to grow sales into the contract and specialty yarn
markets and is working on a new line of products for the outdoor furniture
segment, where the product and service advantages Quaker has already developed
can be leveraged to generate additional sales.

In addition, Quaker intends to begin bringing fabrics into the U.S. market
that the Company does not have the equipment to make, as a complement to
Quaker's existing product offerings.

22

Quarterly Operating Results. The following table sets forth certain
unaudited condensed consolidated statements of operations data for the eight
fiscal quarters ended January 1, 2005, as well as certain data expressed as a
percentage of the Company's total net sales for the periods indicated:

- ---------

The data reflected in this table has been derived from unaudited financial
statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for the fair
presentation of such information when read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto contained elsewhere in
this report. Fiscal years 2004 and 2003 contained 52 weeks.

-------------------

The Company follows industry practice by closing its operating facilities
for a one-to-two week period during July of each year. In 2003, this shutdown
period, and the resulting effect on sales, was split between the second and
third fiscal quarters. In 2004, the shutdown period, and the resulting effect on
sales, occured in the third fiscal quarter.

Product Mix. By offering a broad assortment of fabrics at each price point
and in each styling category, the Company has positioned itself as a full
service supplier of Jacquard and plain woven fabrics to the upholstered
furniture segment. While Quaker offers a full range of fabrics to its
promotional-end customers, the Company's primary focus is on the development of
products for the middle to upper-end of the market, where Quaker's design,
technology and manufacturing expertise provide the Company with the greatest
competitive advantage. Quaker's product line is divided into three distinct
branded collections, with its Davol'TM', Quaker'TM', and Whitaker'r' Collections
intended to meet the styling, design, quality and pricing needs of the
promotional, middle to better, and better to upper ends of the market,
respectively.

Geographic Distribution of Fabric Sales. To develop markets for upholstery
fabric outside the United States, the Company has placed substantial emphasis on
building both direct exports from the United States as well as on sales from its
distribution centers in Mexico and Brazil. The following table sets forth
certain information about the changes which have occurred in the geographic
distribution of the Company's net fabric sales since 2002:

23

- ---------

(1) Foreign sales consists of both direct exports from the United States as well
as sales from the Company's distribution centers in Mexico and Brazil.

CRITICAL ACCOUNTING POLICIES

The following is a brief discussion of the more significant accounting
estimates used by the Company.

GENERAL

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to
accounts receivable reserves, inventory valuation and inventory reserves,
self-insurance reserves, property, plant and equipment and income taxes. Actual
amounts could differ significantly from these estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS AND ALLOWANCES

The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current
creditworthiness, as determined by management's review of their current credit
information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues identified.
While such credit losses have historically been within expectations and the
provisions established, the Company cannot guarantee that credit loss rates in
the future will be consistent with those experienced in the past. The Company's
accounts receivable are spread among more than 1,000 customers and no single
customer represented more than 4.4% and 4.3% of the accounts receivable balance
at January 1, 2005 and January 3, 2004, respectively.

Management analyzes historical sales and quality returns, current economic
trends, and the Company's quality performance when evaluating the adequacy of
the reserve for sales returns and allowances. Significant management judgments
and estimates must be made and used in connection with establishing the reserve
for sales returns and allowances in any accounting period. Material differences
may result in the amount and timing of the Company's net sales for any period if
management makes different judgments or uses different estimates.

INVENTORIES

Inventory is valued using the last-in, first-out (LIFO) method.
Approximately 60% of finished goods are produced upon receipt of a firm order.
Management, in partnership with key customers, is utilizing forecasting
techniques to significantly reduce delivery lead times. Management regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on historical information and estimated
forecasts of product demand and raw material requirements for the next twelve
months. A significant increase in demand for the Company's products

24

could result in a short-term increase in manufacturing costs, including but not
limited to overtime and other costs related to capacity constraints in certain
areas of the Company. A significant decrease in demand could result in an
increase in the amount of excess inventory quantities on hand. Additionally,
assumptions used in determining management's estimates of future product demand
may prove to be incorrect, in which case the provision required for excess and
obsolete inventory would have to be adjusted in the future. If inventory is
determined to be overvalued, the Company would be required to recognize such
costs as cost of goods sold at the time of such determination. Therefore,
although every effort is made to ensure the accuracy of management's forecasts
of future product demand, any significant unanticipated changes in demand could
have a significant impact on the value of the Company's inventory and the
Company's reported operating results.

SELF-INSURANCE RESERVES

The Company is self-insured for workers' compensation and medical insurance.
Quaker has purchased stop loss coverage for both types of risks in order to
minimize the effect of a catastrophic level of claims. At the end of each
accounting period, the reserves for incurred but not reported claims are
evaluated. Management evaluates claims experience on a regular basis in
consultation with the Company's insurance advisors and makes adjustments to
these reserves. Significant management judgments and estimates must be made and
used in connection with evaluating the adequacy of self-insurance reserves.
Material differences may result in the amount and timing of these costs for any
period if management makes different judgments or uses different estimates.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is depreciated over the estimated useful
lives. Useful lives are based on management's estimates of the period that the
assets will generate revenue. These assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. Reductions in the useful lives of the Company's fixed
assets would have an adverse impact on the Company's financial results.

INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, 'Accounting for
Income Taxes.' This statement requires that the Company recognize a current tax
liability or asset for current taxes payable or refundable and a deferred tax
liability or asset for the estimated future tax effects of temporary differences
and carryforwards to the extent they are realizable. A valuation allowance is
recorded to reduce the Company's deferred tax assets to the amount that is more
likely than not to be realized. While management has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event management were to determine that
the Company would be able to realize deferred tax assets in the future in excess
of the net recorded amount, an adjustment to the deferred tax asset would
increase income in the period such determination was made. Likewise, should
management determine that the Company would not be able to realize all or part
of its net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period such determination was made. The
Company does not provide for United States income taxes on earnings of
subsidiaries outside of the United States. The Company's intention is to
reinvest these earnings permanently. Management believes that United States
foreign tax credits would largely eliminate any United States taxes or offset
any foreign withholding taxes.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued a
revised Statement of Financial Accounting Standards (SFAS) No. 123, 'Share Based
Payment.' The revised SFAS No. 123 requires that the fair value of stock options
be recorded in the results of operations beginning no later than July 1, 2005.
Upon adoption of the revised standard, prior awards are charged to expense under
the prior rules, and awards after adoption are charged to expense under the
revised rules. The

25

Company has not determined the effect of the new standard on its earnings,
however, expense under the new standard will likely be somewhat higher. The
effect of adopting the new rules on reported diluted earnings per share is
dependent on the number of options granted in the future, the terms of those
awards and their fair values and, therefore, the effect on diluted earnings per
share could change. The Company will adopt the revised rules on July 1, 2005,
but has not determined whether it would adopt prospectively, or retrospectively
to January 1, 2005.

In November 2004, the FASB issued SFAS No. 151, 'Inventory Costs.' This
statement clarifies the accounting for the abnormal amount of idle facilities
expense, freight, handling costs and wasted material. This statement requires
that those items be recognized as current-period expense. In addition the
statement requires that allocation of fixed overhead to the cost of conversion
be based on the normal capacity of the production facilities. This statement is
effective for inventory costs incurred after December 31, 2005. Adoption of this
statement will not have a material effect on the financial statements of the
Company.

On December 17, 2003, the SEC issued SEC Staff Accounting Bulletin No. 104,
'Revenue Recognition' ('SAB 104'), which supersedes a portion of SEC Staff
Accounting Bulletin No. 101, 'Revenue Recognition in Financial Statements'
('SAB 101'). The primary purpose of SAB 104 is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements, which was
superseded as a result of the issuance of Emerging Issues Task Force 00-21,
'Accounting for Revenue Arrangements with Multiple Deliverables' ('EITF
No. 00-21'). While the wording of SAB 104 has changes to reflect the issuance of
EITF No. 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have an
impact on the Company's consolidated results of operations, financial position
or cash flows.

RESULTS OF OPERATIONS

FISCAL 2004 COMPARED TO FISCAL 2003

Net Sales. Net sales for 2004 decreased $36.2 million, or 11.1%, to $289.1
million from $325.3 million in 2003. Net fabric sales decreased due to decreases
in both domestic and foreign fabric sales. Net fabric sales within the United
States decreased 15.3%, to $232.8 million in 2004 from $274.7 million in 2003,
as a result of increased competition from leather, microdenier faux suede and
other furniture coverings being imported into the U.S. in roll and 'kit' form,
primarily from low labor cost countries in Asia. Net foreign sales decreased
10.2%, to $35.9 million in 2004 from $40.0 million in 2003. This decrease in
foreign sales was due primarily to lower sales in Mexico, Canada and the Middle
East. In Mexico, the Company competes primarily with Mexican weavers which
typically offer their products at prices lower than the Company's. As a result,
the Company has lost some market share to lower cost local mills. In Canada,
where furniture manufacturers sell furniture into both the United States and
Canadian markets, competition from faux suede fabrics and leather increased
during 2004 and contributed to a more difficult competitive environment. The
political climate in the Middle East continued to have a negative impact on
sales into that region during 2004. Net yarn sales increased 91.9%, to $20.4
million in 2004 from $10.7 million in 2003, primarily as a result of the effort
made by the Company to penetrate the craft yarn sector.

The gross volume of fabric sold decreased 15.9%, to 47.2 million yards in
2004 from 56.1 million yards in 2003. The weighted average gross sales price per
yard increased 1.4%, to $5.74 in 2004 from $5.66 in 2003 as a result of product
mix changes. The Company sold 16.9% fewer yards of middle to better-end fabrics
and 14.4% fewer yards of promotional-end fabrics in 2004 than in 2003. The
average gross sales price per yard of middle to better-end fabrics increased by
2.6%, to $6.80 in 2004 from $6.63 in 2003. The average gross sales price per
yard of promotional-end fabrics decreased by 0.7%, to $4.05 in 2004 from $4.08
in 2003.

Gross Margin. The gross margin percentage for 2004 decreased to 18.3% as
compared to 21.6% for 2003. Total fixed costs increased by approximately $0.8
million due primarily to higher payroll taxes and fringe benefits in 2004
compared to 2003. The gross profit margin also was negatively affected by higher
raw material costs in 2004 versus 2003, primarily due to increased petrochemical
costs and higher

26

variable labor and overhead costs caused by inefficiencies in the Company's
manufacturing operations as demand and production rates declined.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $55.3 million in 2004 and 2003. Selling, general
and administrative expenses as a percentage of net sales were 19.1% and 17.0% in
2004 and 2003, respectively. Lower variable costs in 2004, such as sales
commissions, resulting from lower sales were offset by higher sampling expenses
and $0.7 million of costs incurred in connection with the Company's
Sarbanes-Oxley compliance efforts. Selling, general and administrative expenses
were higher as a percentage of net sales due to lower sales.

Interest Expense, Net. Interest expense decreased to $3.3 million in 2004
from $3.9 million in 2003. Lower average levels of senior debt was the primary
reason for the decrease.

Effective Tax Rate. The Company's effective tax rate was a benefit of 65% in
2004 compared to a provision of 35.4% in 2003. The tax benefit rate in 2004 was
increased to 65% principally due to the $2.0 million favorable settlement of
certain claims for federal research and development tax credits.

The Company is currently challenging tax assessments from the Massachusetts
Department of Revenue (MDOR) for the years 1993-1998. During the third quarter
of 2003, the Company filed amended tax returns with the MDOR claiming
approximately $1.4 million of research and development tax credits for the years
1993-2001. Also, additional credits of $0.7 million were claimed on the
originally filed tax returns for 2002 and 2003. The MDOR is currently reviewing
the amended tax returns. There is significant uncertainty surrounding the
amount, if any, and timing of the benefit that will be ultimately realized. The
Company believes that it has a supportable basis for claiming these research and
development tax credits, but the amounts are subject to an ongoing audit.
Accordingly, the Company has not reflected the potential benefits of these
credits in its financial statements for these or subsequent years. No benefit
will be recognized in the financial statements until these gain contingencies
are resolved through the eventual disposition with the tax authorities.

FISCAL 2003 COMPARED TO FISCAL 2002

Net Sales. Net sales for 2003 decreased $40.1 million, or 11.0%, to $325.3
million from $365.4 million in 2002. Net fabric sales decreased due to decreases
in both domestic and foreign fabric sales. Net fabric sales within the United
States decreased 9.0%, to $274.7 million in 2003 from $301.8 million in 2002, as
a result of increased competition from leather and poor macroeconomic conditions
for much of the year, particularly in the furniture sector. Net foreign sales
decreased 16.5%, to $40.0 million in 2003 from $47.9 million in 2002. This
decrease in foreign sales was due primarily to lower sales in Mexico, Canada and
the Middle East. In Mexico, where the Company competes primarily with Mexican
fabric mills, weakness in the Mexican peso versus the U.S. dollar caused the
Company to be at a competitive disadvantage vis a vis Mexican domestic mills for
much of 2003. A significant portion of furniture manufactured in Canada is
actually sold in the United States. As a result of a strong Canadian dollar
during 2003, Canadian furniture sales into the United States declined, reducing
demand for the Company's upholstery fabric in Canada. The political climate in
the Middle East during 2003 negatively impacted sales into that region. Net yarn
sales decreased 32.1%, to $10.7 million in 2003 from $15.7 million in 2002.

The gross volume of fabric sold decreased 12.1%, to 56.1 million yards in
2003 from 63.8 million yards in 2002. The weighted average gross sales price per
yard increased 1.6%, to $5.66 in 2003 from $5.57 in 2002 as a result of product
mix changes. The Company sold 15.1% fewer yards of middle to better-end fabrics
and 6.7% fewer yards of promotional-end fabrics in 2003 than in 2002. The
average gross sales price per yard of middle to better-end fabrics increased by
3.1%, to $6.63 in 2003 from $6.43 in 2002. The average gross sales price per
yard of promotional-end fabrics increased by 2.0%, to $4.08 in 2003 from $4.00
in 2002.

Gross Margin. The gross margin percentage for 2003 decreased to 21.6% as
compared to 21.9% for 2002. Gross profit declined by $4.4 million due to lower
production volumes resulting in higher fixed costs per unit. Also, total fixed
costs increased by approximately $1.0 million in 2003 as compared to 2002
primarily due to an increase in depreciation expense. These higher unit costs
were partially offset by improvements in manufacturing operating performance and
raw material cost reductions.

27

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $55.3 million in 2003 from $56.9 million in
2002. Selling, general and administrative expenses as a percentage of net sales
were 17.0% and 15.6% in 2003 and 2002, respectively. The decrease in selling,
general and administrative expenses was due to lower variable costs, such as
sales commissions, resulting from lower sales. Selling, general and
administrative expenses were higher as a percentage of net sales due to lower
sales.

Interest Expense, Net. Interest expense decreased to $3.9 million in 2003
from $4.6 million in 2002. Lower average levels of senior debt, and lower rates
of interest were the primary reasons for the decrease.

Effective Tax Rate. The Company's effective tax rate was 35.4% for 2003 and
37.0% for 2002. The Company provides for income taxes on an interim basis, using
an estimated annual effective income tax rate. The Company's estimated tax rate
was 37% for 2002 and the first quarter of 2003. In the second quarter of 2003,
the Company adjusted the estimated annual effective tax rate for 2003 downward
to 34%. This reduction in the tax rate is due to lower levels of projected
income for 2003 reducing the effective statutory federal tax rate from 35% to
approximately 34% and an increased estimated benefit to the tax rate from the
Extraterritorial Income Exclusion. In the fourth quarter of 2003, the Company
adjusted the annual effective tax rate to 35.4%. This increase was due to the
tariff refund received from the Mexican tax authorities during the fourth
quarter which was taxed at a higher rate. The effective income tax rate is lower
than the combined federal and state statutory rates, due primarily to certain
tax benefits related to extraterritorial income at the federal level and
investment tax credits at the state level.

LIQUIDITY AND CAPITAL RESOURCES

The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings
under the Credit Agreement (as hereinafter defined), and debt and equity
offerings. The Company's capital requirements have arisen principally in
connection with (i) the purchase of equipment to expand production capacity,
introduce new technologies to broaden and differentiate the Company's products,
and improve the Company's quality and productivity performance (ii) increases in
the Company's working capital needs related to its sales growth, and (iii)
investments in the Company's information technology systems.

The primary source of the Company's liquidity and capital resources in
recent years has been operating cash flow. The Company's net cash provided by
operating activities was $19.8 million, $34.4 million and $29.1 million in 2004,
2003, and 2002, respectively. Cash provided by operating activities decreased
during 2004 due principally to a reduction in net income of $10.0 million and a
reduction in the deferred tax provision. Historically, the Company has
supplemented its operating cash flow with borrowings under the Credit Agreement.

Capital expenditures in 2004, 2003 and 2002 were $14.9 million, $7.9 million
and $32.1 million, respectively. Capital expenditures during 2004 were funded by
operating cash flow. Management anticipates that capital expenditures for new
projects will total approximately $7.6 million in 2005 consisting principally of
facilities maintenance expenditures, modifications needed at the 540,000 square
feet manufacturing and warehousing facility leased by the Company in December
2004 and a modest amount of new equipment needed to support the expansion of the
Company's craft yarn sales. Management believes that cash on hand, operating
income and borrowings under the Credit Agreement (as hereinafter defined), will
provide sufficient funding for the Company's capital expenditures, working
capital and debt service needs for the foreseeable future, subject to the
favorable resolution of discussions with its Lenders (as hereinafter defined)
described below.

Quaker Fabric Corporation of Fall River, a wholly-owned subsidiary of the
Company ('QFR') issued $45.0 million of Senior Notes due October 2005 and 2007
(the 'Senior Notes') during 1997 under a Note Agreement (as amended, the 'Senior
Note Agreement') with an insurance company (the 'Insurance Company'). The Senior
Notes are unsecured and bear interest at a fixed rate of 7.09% on $15.0 million
and 7.18% on $30.0 million. The Senior Notes may be prepaid in whole or in part
prior to maturity, at QFR's option, subject to a yield maintenance premium, as
defined. Annual principal

28

payments began on October 10, 2003 with a final payment due October 10, 2007.
Annual principal payment amounts are three payments of $5.0 million beginning in
October 2003 (of which only the October 2005 payment is unpaid as of March 15,
2005), followed by two annual payments of $15.0 million beginning in 2006.

On February 14, 2002, QFR issued $5.0 million of 7.56% Series A Notes due
February 2009 (the 'Series A Notes') under a Note Purchase Agreement (as
amended, the 'Series A Note Agreement' and together with the Senior Note
Agreement, the 'Note Agreements') with the Insurance Company. The Series A Notes
are unsecured and bear interest at a fixed rate of 7.56%, payable semiannually.
The Series A Notes may be prepaid in whole or in part prior to maturity, at
QFR's option, subject to a yield maintenance premium, as defined.

The long term portion of the amounts outstanding under the Note Agreements
was classified as 'current' on the Balance Sheet as of October 2, 2004 in
accordance with Emerging Issues Task Force Issue 86-30, 'Classification of
Obligations When a Violation is Waived by the Creditor' due to the debt covenant
violations referred to below.

QFR, two other subsidiaries of the Company and the Company, as guarantor,
are parties to a Credit Agreement with a bank (the 'Bank,' and the Bank,
together with the Insurance Company, the 'Lenders') which expires January 31,
2007 (the 'Credit Agreement'). The Credit Agreement provides for a revolving
credit facility and a letter of credit facility.

The Company and/or QFR are required to comply with a number of affirmative
and negative covenants under the Credit Agreement and the Note Agreements,
including, but not limited to, maintenance of certain financial tests and ratios
(including interest coverage ratios, net worth related ratios, and net worth
requirements); limitations on certain business activities of the Company and
QFR; restrictions on the Company's and/or QFR's ability to declare and pay
dividends, incur additional indebtedness, create certain liens, incur capital
lease obligations, make certain investments, engage in certain transactions with
stockholders and affiliates, and purchase, merge, or consolidate with or into
any other corporation.

On October 12, 2004, QFR and the Company, as guarantor, entered into an
amendment, effective as of October 1, 2004, to the Note Agreements with the
Insurance Company. The amendment provides for a reduction in the Fixed Charge
Coverage Ratio (as defined in the Note Agreements) required to be maintained by
QFR from 1.75 to 1.00, to 1.50 to 1.00 for the twelve (12) month period ended on
October 2, 2004 (the last day of the third fiscal quarter of 2004). In August
2004, QFR, two other subsidiaries of the Company and the Company, as guarantor,
entered into a similar amendment to the Credit Agreement with the Bank. The
amendment to the Note Agreements also provides that (a) neither QFR nor any of
its subsidiaries will create or permit to exist any Lien (as defined in the Note
Agreements) securing obligations under the Credit Agreement and (b) before
December 31, 2004 or at any time when a Default (as defined in the Note
Agreements) has occurred and is continuing, the Company will not declare or pay
any dividends on or make any distributions with respect, or purchase, redeem or
retire, any of its capital stock.

On March 11, 2005, the Borrowers and the Company, as guarantor, entered into
a Forbearance and Amendment to the Second Amended and Restated Credit Agreement
(the 'Bank Forbearance Agreement'). Pursuant to the terms of the Bank
Forbearance Agreement, the Borrowers and the Company acknowledged that in the
absence of a waiver from the Bank, they would be in breach of both the debt
service coverage ratio covenant and the profitable operations covenant in the
Credit Agreement for the last quarter of 2004 and possibly in violation of those
covenants and the leverage ratio and senior debt ratio covenants for each of the
first and second quarters of 2005 and that these breaches would constitute
Events of Default, as defined in the Credit Agreement (the 'Specified Bank
Defaults'). In the Bank Forbearance Agreement, the Bank agreed to waive the
Specified Bank Defaults through the period ending July 15, 2005 (the 'Limited
Bank Waiver Period'), subject to certain conditions including the Bank's receipt
of fully executed copies of a similar waiver from the Insurance Company with
respect to the fixed charge coverage ratio, senior debt ratio and the total debt
ratio set forth in the Note Agreements. The Bank Forbearance Agreement also
provides for, among other things, (i) an increase in the interest rate and fees
payable under the Credit Agreement, (ii) a

29

reduction in the permitted aggregate amount of capitalized leases and purchase
money debt to $5.0 million, (iii) the inclusion of a minimum EBITDA covenant,
(iv) a change in the definition of EBIT, (v) monthly financial reporting to the
Bank, (vi) the grant, not later than March 31, 2005, of a perfected, first
priority security interest (subject to certain exceptions, including pari passu
liens to be granted to the holders of the Term Notes) in all personal property
assets of the Borrowers and the Company then owned or thereafter acquired and
the contemporaneous execution of an intercreditor agreement, in form and
substance satisfactory to the Bank, among the Bank, the holders of the Term
Notes, the Borrowers and the Company, which is a condition to any further
borrowing under the Credit Agreement, and (vii) the reduction of the maximum
amount of loans and letters of credit the Bank has agreed to make under the
Credit Agreement to $15.0 million. In the Bank Forbearance Agreement, the
Borrowers and the Company agreed that they will repay all amounts outstanding,
and cash collateralize all letters of credit issued, under the Credit Agreement
on July 16, 2005 and that at such time the Bank will have all of its rights and
remedies under and in respect of the Credit Agreement and applicable law,
including those arising by virtue of the occurrence of the Specified Bank
Defaults. The parties previously had entered into waivers on December 20, 2004,
February 28, 2005 and March 4, 2005 with respect to the debt service coverage
ratio covenant and the profitable operations covenant in the Credit Agreement
and including a reduction in the Bank's Commitment to $20.0 million. As of March
14, 2004, there were no loans outstanding under the Credit Agreement,
approximately $5.3 million of letters of credit and unused availability (after a
reduction of the Bank's Commitment, as defined in the Credit Agreement) of $9.7
million.

On March 11, 2005, QFR and the Company, as guarantor, entered into a
Forbearance to Note Agreements with respect to the Note Agreements with the
Insurance Company (the 'Insurance Company Forbearance Agreement'). Pursuant to
the terms of the Insurance Company Forbearance Agreement, QFR and the Company
acknowledged that in the absence of a waiver from the Insurance Company, QFR and
the Company would be in breach of the fixed charge coverage ratio set forth in
the Note Agreements for the last quarter of 2004 and possibly for each of the
first and second quarters of 2005 and possibly in breach of the senior debt
ratio and total debt ratio set forth in the Note Agreements for each of the
first and second quarters of 2005 and that this breach would constitute an Event
of Default, as defined in the Note Agreements (the 'Specified Insurance Company
Defaults'). In the Insurance Company Forbearance Agreement, the Insurance
Company agreed to waive the Specified Insurance Company Defaults through the
period ending July 15, 2005 (the 'Limited Insurance Company Waiver Period'),
subject to certain conditions including, but not limited to, the Insurance
Company's receipt of fully executed copies of a similar waiver from the Bank
with respect to the debt service coverage ratio covenant, the profitable
operations covenant, the senior debt ratio covenant and the leverage ratio
covenant set forth in the Credit Agreement. The Insurance Company Forbearance
Agreement also provides, among other things, (i) that the Company will not
permit any Priority Debt (as defined in the Note Agreements) to be outstanding
at anytime other than as permitted under the Note Agreements, (ii) the Company
will not, and will not permit any subsidiary to, directly or indirectly create,
incur, assume or permit to exist any Lien (as defined in the Note Agreements)
for securing Recourse Obligations (as defined in the Note Agreements),
(iii) for the inclusion of a consolidated minimum EBITDA covenant, (iv) for
monthly financial reporting to the Insurance Company, (v) for the grant, not
later than March 31, 2005, of a perfected, first priority security interest
(subject to certain exceptions, including pari passu liens to be granted to the
Bank) in all personal property assets of the Borrowers and the Company then
owned or thereafter acquired and the contemporaneous execution of an
intercreditor agreement, in form and substance satisfactory to the Insurance
Company, among the Bank, the Insurance Company, Borrowers and the Company and
(vi) that on or prior to July 10, 2005, the Company shall enter into a
refinancing credit facility and using the proceeds thereof shall repay in full
all of the Obligations (as defined in the Insurance Company Forbearance
Agreement). Pursuant to the Insurance Company Forbearance Agreement, on July 15,
2005, the Company has agreed to immediately repay to the Insurance Company all
of the outstanding Obligations, and the Company has acknowledged that the
Insurance Company shall be free in its sole and absolute discretion to proceed
to enforce any or all of its rights and remedies under or in respect of the Note
Agreements and applicable law, including without limitation, those of
termination, acceleration, enforcement and other rights and remedies arising by
virtue of the maturity of the Obligations and of the occurrence of the Specified

30

Defaults. The parties previously had entered into waivers on December 22, 2004,
February 28, 2005 and March 4, 2005 with respect to the fixed charge coverage
covenant in the Note Agreements. As of March 14, 2005, QFR owed $40.0 million
principal plus accrued interest under the Note Agreements.

The Company is in discussions with a commercial bank (the 'Prospective
Lender') regarding a proposed new credit facility to replace, and repay
borrowings under, the Note Agreements and the Credit Agreement. Prepayment of
the Note Agreements may result in the Company incurring prepayment penalties in
an amount which may be as much as $2.3 million. Any such facility is expected
to include terms which may be unfavorable to the Company including, but not
limited to, the grant of security interests to the Prospective Lender to secure
the payment and performance of QFR's and the Company's obligations under the
proposed credit facility and restrictions on QFR's and the Company's capital
expenditures going forward. There can be no assurance that the Company will
reach agreement with the Prospective Lender on terms acceptable to the Company,
or at all. The Company may be required to seek alternate financing sources, the
terms of which financing, if obtainable, may be disadvantageous to the Company.
Based upon the anticipated performance of the Company for the foreseeable
future, and absent appropriate additional waivers from the Lenders, the failure
to obtain new financing would likely result in an Event of Default under the
Note Agreements and the Credit Agreement and the inability to borrow under the
Credit Agreement no later than July 16, 2005. Management anticipates that it
will successfully conclude an agreement for this new credit facility before the
expiry of the Forbearance Agreements.

The following table sets forth contractual obligations and commitments due
as of January 1, 2005.

No dividends were paid on the Company's common stock prior to 2003. During
the first quarter of 2003, the Board of Directors adopted a new dividend policy.
This policy provides for future dividends to be declared at the discretion of
the Board of Directors, based on the Board's quarterly evaluation of the
Company's results of operations, cash requirements, financial conditions and
other factors deemed relevant by the Board. In 2004 and 2003, the Company paid
cash dividends of $1.5 million or $0.09 per common share and $1.7 million or
$0.10 per common share, respectively. As noted above, the Company has agreed
with its Lenders not to declare or pay any dividends or distributions, and in
accordance with those agreements, the Company suspended dividend payments during
the third quarter of 2004 and no dividends have been declared or paid since that
time. It is anticipated that any further amendments to the Note Agreements or
the Credit Agreement, or any agreements for alternate financing, may prohibit
the declaration or payment of dividends.

The foregoing descriptions of the Bank Forbearance Agreement and the
Insurance Company Forbearance Agreement are qualified in their entirety by
reference to the Bank Forbearance Agreement and the Insurance Company
Forbearance Agreement, which are filed as Exhibits 10.126 and 10.127,
respectively, to this Form 10-K and are incorporated by reference herein. The
waivers from the Bank dated February 28, 2005 and the Insurance Company dated
February 28, 2005 are filed as Exhibits 10.124 and 10.125 respectively, to this
Form 10-K and are incorporated by reference. The waivers from the Bank dated
March 4, 2005 and the Insurance Company dated March 4, 2005 are filed as
Exhibits 10.122 and 10.123 respectively, to this Form 10-K and are incorporated
by reference.

INFLATION

The Company does not believe that inflation has had a significant impact on
the Company's results of operations for the periods presented. Historically, the
Company believes it has been able to minimize the effects of inflation by
improving its manufacturing and purchasing efficiency, by increasing employee

31

productivity, and by reflecting the effects of inflation in the selling prices
of the new products it introduces each year.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Statements contained in this report, as well as oral statements made by the
Company that are prefaced with the words 'may,' 'will,' 'expect,' 'anticipate,'
'continue,' 'estimate,' 'project,' 'intend,' 'designed' and similar expressions,
are intended to identify forward-looking statements regarding events, conditions
and financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial position. These
statements are based on the Company's current expectations and estimates as to
prospective events and circumstances about which the Company can give no firm
assurance. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which such statement is made. As it is not possible to predict every new
factor that may emerge, forward-looking statements should not be relied upon as
a prediction of the Company's actual future financial condition or results.
These forward-looking statements like any forward-looking statements, involve
risks and uncertainties that could cause actual results to differ materially
from those projected or anticipated. Such risks and uncertainties include the
Company's ability to obtain new financing in an amount and on terms acceptable
to it, product demand and market acceptance of the Company's products,
regulatory uncertainties, the effect of economic conditions, the impact of
competitive products and pricing, including, but not limited to, imported
furniture and furniture coverings sold into the U.S. domestic market, foreign
currency exchange rates, changes in customers' ordering patterns, and the effect
of uncertainties in markets outside the U.S. (including Mexico and South
America) in which the Company operates.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL INSTRUMENTS, AND DERIVATIVE
COMMODITY INSTRUMENTS

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposures relative to market risk are due to foreign exchange
risk and interest rate risk.

FOREIGN CURRENCY RISK

Approximately 2.7% of the Company's revenues are generated outside the U.S.
from sales which are not denominated in U.S. dollars. Foreign currency risk
arises because the Company engages in business in Mexico and Brazil in local
currency. Accordingly, in the absence of hedging activities, whenever the U.S.
dollar strengthens relative to the other major currencies, there is an adverse
affect on the Company's results of operations, and alternatively, whenever the
U.S. dollar weakens relative to the other major currencies, there is a positive
affect on the Company's results of operations.

It is the Company's policy to minimize, for a period of time, the unforeseen
impact on its results of operations of fluctuations in foreign exchange rates by
using derivative financial instruments to hedge the fair value of foreign
currency denominated intercompany payables. The Company's primary foreign
currency exposures in relation to the U.S. dollar are the Mexican peso and the
Brazilian real.

At January 1, 2005, the Company had the following significant derivative
financial instruments to hedge the anticipated cash flows from the repayment of
foreign currency denominated intercompany payables outstanding:

32

The Company estimated the change in the fair value of all derivative
financial instruments assuming both a 10% strengthening and weakening of the
U.S. dollar relative to all other major currencies. In the event of a 10%
strengthening of the U.S. dollar, the change in fair value of all derivative
financial instruments would result in approximately $0.4 million unrealized
loss; whereas a 10% weakening of the U.S. dollar would result in approximately a
$0.5 million unrealized gain.

INTEREST RATE RISK

All of the Company's long-term debt is at fixed rates, and has been
classified as current in accordance with Emerging Issues Task Force Issue 86-30,
'Classification of Obligations When a Violation is Waived by the Creditor,' due
to the debt covenant violations existing at January 1, 2005. Accordingly, a
change in interest rates has an insignificant effect on the Company's interest
expense. The fair value of the Company's long-term debt, however, would change
in response to interest rate movements due to its fixed rate nature.

Using a scenario analysis, the Company has evaluated the impact on all
long-term maturities of changing the interest rate 10% from the rate levels that
existed at January 1, 2005 and has determined that such a rate change would not
have a material impact on the Company.

33

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)

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

34

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

-------------------

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS)

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

35

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

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

36

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

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

37

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

1. OPERATIONS

Quaker Fabric Corporation and subsidiaries (the 'Company' or 'Quaker')
designs, manufactures and markets woven upholstery fabrics primarily for
residential furniture markets and specialty yarns for use in the production of
its own fabrics and for sale to distributors of craft yarns and manufacturers of
home furnishings and other products.

As discussed in Note 5, on March 11, 2005, the Company entered into
Forbearance Agreements, as hereinafter defined, with respect to the Note
Agreements, as hereinafter defined, and the Credit Agreement, as hereinafter
defined. Pursuant to the Forbearance Agreements, the Company's Lenders, as
hereinafter defined, agreed to waive certain specified covenant defaults as of
January 1, 2005 and to forebear from enforcing their rights under the Note
Agreements and the Credit Agreement until July 15, 2005 subject to certain terms
and conditions. The Company is in discussions with a commercial bank (the
'Prospective Lender') regarding a proposed new credit facility to replace, and
repay borrowings under, the Credit Agreement and the Note Agreements, including
the payment of a prepayment penalty in an amount which may be as much as $2,300.
Any such facility is expected to include terms which may be unfavorable to the
Company including, but not limited to, the grant of security interests to the
Prospective Lender to secure the payment and performance of the Company's
obligations under the proposed credit facility and restrictions on the Company's
capital expenditures going forward. There can be no assurance that the Company
will reach agreement with the Prospective Lender on terms acceptable to the
Company, or at all. The Company may be required to seek alternate financing
sources, the terms of which financing, if obtainable, may be disadvantageous to
the Company. Based upon the anticipated performance of the Company for the
foreseeable future, and absent appropriate additional waivers or agreements to
forbear from the Lenders, the failure to obtain new financing would likely
result in an Event of Default under the Note Agreements and the Credit Agreement
and the inability to borrow under the Credit Agreement no later than July 16,
2005. Management anticipates that it will successfully conclude an agreement for
this new credit facility before the expiry of the Forbearance Agreements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of Quaker Fabric Corporation and its wholly
owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.

(b) Fiscal Year. The Company's fiscal year ends on the Saturday nearest to
January 1 of each year. The fiscal years ended January 3, 2004 and January 1,
2005 each contained 52 weeks, while the fiscal year ended January 4, 2003
contained 53 weeks.

(c) Revenue Recognition. Revenue is recognized from product sales when
earned as required by generally accepted accounting principles and in accordance
with SAB 101, 'Revenue Recognition in Financial Statements.' Revenues are
recognized when product shipment has occurred. At that time, the price is fixed
and determinable and collectability is reasonably assured, title and risk of
loss have transferred and all provisions agreed to in the arrangement necessary
for customer acceptance have been fulfilled.

(d) Cash and Cash equivalents. Cash and cash equivalents includes cash on
hand, demand deposits and short-term cash investments which are highly liquid in
nature and have original maturities of three months or less. At January 1, 2005
and January 3, 2004, cash and cash equivalents included cash equivalents of
$2,000 and $5,000, respectively.

(e) Allowance for Doubtful Accounts and Sales Returns and Allowances. The
Company performs ongoing credit evaluations of its customers and adjusts credit
limits based upon payment history and the customer's current creditworthiness,
as determined by management's review of their current credit

38

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

information. The Company continuously monitors collections and payments from its
customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues identified.
While such credit losses have historically been within expectations and the
provisions established, the Company cannot guarantee that credit loss rates in
the future will be consistent with those experienced in the past. The Company's
accounts receivable are spread among approximately 1,000 customers and no single
customer represented more than 4.4% and 4.3% of the accounts receivable balance
at January 1, 2005 and January 3, 2004, respectively.

Management analyzes historical sales and quality returns, current economic
trends, and the Company's quality performance when evaluating the adequacy of
the reserve for sales returns and allowances. Significant management judgments
and estimates must be made and used in connection with establishing the reserve
for sales returns and allowances in any accounting period. The provision for
sales returns and allowances is recorded as a reduction of sales. Material
differences may result in the amount and timing of net sales for any period if
management makes different judgments or uses different estimates.

(f) Inventories. Inventories are stated at the lower of cost or market and
include materials, labor and overhead. A standard cost system is used and
approximates cost on a FIFO basis. Cost for financial reporting purposes is
determined by the last-in, first-out (LIFO) method. Inventories consist of the
following at January 1, 2005 and January 3, 2004:

As of January 3, 2004, LIFO inventory values were higher than FIFO costs
because manufacturing costs during 2003 were lower than the older historical
costs used to value inventory on a LIFO basis.

During the years ended January 1, 2005 and January 3, 2004, inventory
quantities were reduced. These reductions resulted in a liquidation of LIFO
inventory quantities. The effect of the inventory reduction in 2004 was
immaterial. The effect of the inventory reduction in 2003 increased cost of
goods sold by approximately $170, and decreased net income by approximately $110
or $0.01 per share.

Approximately 60% of finished goods are produced upon receipt of a firm
order. Management, in partnership with key customers, is utilizing forecasting
techniques to significantly reduce delivery lead times. Management regularly
reviews inventory quantities on hand and records a provision for excess and
obsolete inventory based primarily on historical information and estimated
forecasts of product demand and raw material requirements for the next twelve
months.

(g) Property, Plant and Equipment. Property, plant and equipment are stated
at cost. The Company provides for depreciation and amortization on property and
equipment on a straight-line basis over their estimated useful lives as follows:

Buildings and improvements.................................. 32-39 years
Machinery and equipment..................................... 2-20 years
Furniture and fixtures...................................... 5-10 years
Motor vehicles.............................................. 4-5 years
Leasehold improvements...................................... Life of Lease

39

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Maintenance and repairs are charged to operations as incurred. When
equipment and improvements are sold or otherwise disposed of, the asset's cost
and accumulated depreciation are removed from the accounts, and the resulting
gain or loss, if any, is included in the results of operations. Fully
depreciated assets are removed from the accounts when they are no longer in use.

(h) Impairment of Long-Lived Assets. The Company periodically considers
whether there has been a permanent impairment in the value of its long-lived
assets, primarily property and equipment in accordance with Financial Accounting
Standards Board ('FASB') Statement No. 144 ('SFAS No. 144'), 'Accounting for the
Impairment or Disposal of Long-Lived Assets.' The Company evaluates various
factors, including current and projected future operating results and the
undiscounted cash flows for any underperforming long-lived assets. To the extent
that the estimated future undiscounted cash flows are less than the carrying
amount of the asset, the asset is written down to its estimated fair market
value and an impairment loss is recognized. The value of impaired long-lived
assets is adjusted periodically based on changes in these factors. Based on its
review, the Company does not believe that any material impairment of its
long-lived assets has occurred.

(i) Goodwill. Goodwill represents the excess of the purchase price over the
fair value of identifiable net assets acquired. In accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards (SFAS)
No. 142, 'Goodwill and Other Intangible Assets,' the Company ceased amortization
of goodwill effective December 30, 2001. SFAS No. 142 requires companies to test
all goodwill for impairment at least annually. At January 1, 2005, the Company
was not required to recognize any impairment as a result of its annual
impairment test.

(j) Income Taxes. The Company accounts for income taxes under SFAS No. 109,
'Accounting for Income Taxes.' This statement requires that the Company
recognize a current tax liability or asset for current taxes payable or
refundable and a deferred tax liability or asset for the estimated future tax
effects of temporary differences and carryforwards to the extent they are
realizable. A valuation allowance is recorded to reduce the Company's deferred
tax assets to the amount that is more likely than not to be realized. While
management has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowance, in
the event management were to determine that the Company would be able to realize
deferred tax assets in the future in excess of the net recorded amount, an
adjustment to the deferred tax asset would increase income in the period such
determination was made. In like manner, should management determine that the
Company would not be able to realize all or part of its net deferred tax asset
in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made. The Company does not provide
for United States income taxes on earnings of subsidiaries outside of the United
States. The Company's intention is to reinvest these earnings permanently.
Management believes that United States foreign tax credits would largely
eliminate any United States taxes or offset any foreign withholding taxes.

(k) Earnings (Loss) Per Common Share. Basic earnings (loss) per common share
is computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. For diluted earnings (loss) per
share, the denominator also includes dilutive outstanding stock options
determined using the treasury stock method. The following table reconciles
weighted average

40

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

common shares outstanding to weighted average common shares outstanding and
dilutive potential common shares.

Due to a loss for the year ended January 1, 2005, no incremental shares are
included in the dilutive weighted average shares outstanding because the effect
would be antidilutive.

(l) Foreign Currency. The assets and liabilities of the Company's Mexican
and Brazilian operations are translated at period-end exchange rates, and
statement of operations accounts are translated at weighted average exchange
rates. The resulting translation adjustments are included in the consolidated
balance sheet as a separate component of equity, 'Accumulated Other
Comprehensive Loss,' and foreign currency transaction gains and losses are
included with selling, general and administrative expenses in the consolidated
statements of operations.

The Company accounts for its derivative instruments in accordance with SFAS
No. 133, 'Accounting for Derivative Instruments and Hedging Activities' and SFAS
No. 138 'Accounting for Certain Derivative Instruments and Hedging Activities,
an Amendment of FASB Statement No. 133,' (collectively, SFAS No. 133, as
amended) effective in fiscal 2001.

SFAS No. 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded on the balance sheet as either an asset or
liability measured at its fair value. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, to the extent effective, and requires that
the Company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. SFAS No. 133 in part, allows special
hedge accounting for fair value and cash flow hedges. The statement provides
that the gain or loss on a derivative instrument designated and qualifying as a
fair value hedging instrument, as well as the offsetting changes in the fair
value of the hedged item attributable to the hedged risk, be recognized
currently in earnings in the same accounting period. SFAS No. 133 provides that
the effective portion of the gain or loss on a derivative instrument designated
and qualifying as a cash flow hedging instrument be reported as a component of
other comprehensive income (loss) and be reclassified into earnings in the same
period or periods during which the hedged forecasted transaction affects
earnings. The ineffective portion of a derivative's change in fair value is
recognized currently through earnings regardless of whether the instrument is
designated as a hedge.

The Company enters into forward exchange contracts to hedge the fair value
of foreign currency denominated intercompany accounts payable. The purpose of
the Company's foreign currency hedging activities is to minimize, for a period
of time, the impact on the Company's results of operations of unforeseen
fluctuations in foreign exchange rates. At January 1, 2005, the Company had 21
forward exchange contracts totaling $4,600, all maturing in less than 12 months,
to exchange Brazilian reals and Mexican pesos for U.S. dollars. The Company has
designated these contracts as fair value hedges intended to lock in the expected
cash flows from the repayment of foreign currency denominated intercompany
payables at the available forward rate at the inception of the contract. Changes
in the fair value of the hedge instruments are recognized in earnings. At
January 1, 2005, the fair value of these contracts resulted in a loss of $62.

41

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The Company also enters into forward exchange contracts to hedge the
purchase of fixed assets denominated in foreign currencies. At January 1, 2005,
the Company had two forward contracts for $435 to hedge the purchase of
equipment denominated in a foreign currency. The Company has designated this
hedge as a cash flow hedge intended to reduce the risk of currency fluctuations
from the time of order through delivery of the equipment. The fair value of
these contracts is $15 as of January 1, 2005.

These derivative financial instruments are for risk management purposes only
and are not used for trading or speculative purposes.

(m) Use of Estimates in the Preparation of Financial Statements. The
presentation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions. Material estimates that are
particularly susceptible to significant changes in the near term relate to the
determination of income taxes, inventory reserves, accounts receivable reserves,
the useful life or potential impairment of long lived assets, self insurance
reserves, and the potential impairment of goodwill.

(n) Self-Insurance Reserves. The Company is self-insured for workers'
compensation and medical insurance. Quaker has purchased stop loss coverage for
both types of risks in order to minimize the effect of a catastrophic level of
claims. At the end of each accounting period, the reserves for incurred but not
reported claims must be evaluated. Management evaluates claims experience on a
regular basis in consultation with the Company's insurance advisors and makes
adjustments to these reserves as required. Significant management judgments and
estimates must be made and used in connection with evaluating the adequacy of
self-insurance reserves. Material differences may result in the amount and
timing of these costs for any period if management makes different judgments or
uses different estimates.

(o) Fair Value of Financial Instruments. The Company's financial instruments
mainly consist of cash, accounts receivable, accounts payable, foreign currency
financial instruments and debt. The carrying amounts of these financial
instruments as of January 1, 2005 approximate their fair values due to the short
term nature and terms of these instruments, and also the rates available to the
Company for debt and foreign currency financial instruments with similar terms
and remaining maturities.

(p) Shipping and Handling Costs. The Company accounts for shipping and
handling costs in accordance with Emerging Issues Task Force (EITF) Issue 00-10,
'Accounting for Shipping and Handling Fees and Costs' (EITF 00-10). In
accordance with this guidance, the Company records shipping and handling costs
billed to customers as a component of revenue. Shipping and handling costs,
which are included in cost of goods sold, are not significant.

(q) Research and Development Costs. Expenditures for research and
development are expensed as incurred. The Company expensed approximately $6,400,
$7,900 and $7,900 in research and development costs during the years ended
January 1, 2005, January 3, 2004 and January 4, 2003, respectively, primarily
related to the development of new products.

(r) Advertising Costs. Advertising expenditures consists primarily of print
media and trade shows. All advertising costs are expensed during the period
incurred and totaled $635, $926, and $1,015 for the years ended January 1, 2005,
January 3, 2004 and January 4, 2003, respectively.

(s) Stock Option Plans. As more fully described in Note 8, the Company has
stock option plans in effect that provide for the grant of non-qualified stock
options and other equity-based incentives to directors, officers and employees
of the Company. The Company applies APB Opinion 25, 'Accounting

42

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

for Stock Issued to Employees,' and related interpretations in accounting for
its stock option plans. The exercise price of stock options, set at the time of
grant, is not less than the fair market value per share at the date of grant.
Options have a term of 10 years and generally vest after 5 years.

The following table illustrates the effect on net income and earnings per
share as if the Black-Scholes fair value method described in SFAS No. 123,
'Accounting for Stock-Based Compensation,' had been applied to the Company's
stock option plans.

(t) Recently Issued Accounting Standards. In December 2004, the Financial
Accounting Standards Board (FASB) issued a revised Statement of Financial
Accounting Standards (SFAS) No. 123, 'Share Based Payment.' The revised SFAS
No. 123 requires that the fair value of stock options be recorded in the results
of operations beginning no later than July 1, 2005. Upon adoption of the revised
standard, prior awards are charged to expense under the prior rules, and awards
after adoption are charged to expense under the revised rules. The Company has
not determined the effect of the new standard on its earnings, however, expense
under the new standard will likely be somewhat higher. The effect of adopting
the new rules on reported diluted earnings per share is dependent on the number
of options granted in the future, the terms of those awards and their fair
values, and therefore, the effect on diluted earnings per share could change.
The Company expects to adopt the revised rules on July 1, 2005, but has not
determined whether it would adopt prospectively, or retrospectively to
January 1, 2005.

In November 2004, the FASB issued SFAS No. 151, 'Inventory Costs.' This
statement clarifies the accounting for the abnormal amount of idle facilities
expense, freight, handling costs and wasted material. This statement requires
that those items be recognized as current-period expense. In addition the
statement requires that allocation of fixed overhead to the cost of conversion
be based on the normal capacity of the production facilities. This statement is
effective for inventory costs incurred after December 31, 2005. Adoption of this
statement will not have a material effect on the financial statements of the
Company.

On December 17, 2003, the SEC issued SEC Staff Accounting Bulletin No. 104,
'Revenue Recognition' ('SAB 104'), which supersedes a portion of SEC Staff
Accounting Bulletin No. 101, 'Revenue Recognition in Financial Statements'
('SAB 101'). The primary purpose of SAB 104 is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements, which was
superseded as a result of the issuance of Emerging Issues Task Force 00-21,
'Accounting for Revenue Arrangements with Multiple Deliverables' ('EITF
No. 00-21'). While the wording of

43

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

SAB 104 has changes to reflect the issuance of EITF No. 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the issuance of
SAB 104. The adoption of SAB 104 did not have an impact on the Company's
consolidated results of operations, financial position or cash flows.

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

Depreciation and amortization expense related to property, plant and
equipment for the years ending January 1, 2005, January 3, 2004 and January 4,
2003 was $18,704, $19,418 and $17,723, respectively.

During the fourth quarter of 2004, the Company temporarily idled certain
machinery and equipment with a net book value of approximately $6,600 due to
reduced manufacturing volumes. Based on the future expected cash flows
associated with the redeployment of these assets, no impairment was recorded by
the Company. In December 2004, the Company entered into a long-term lease for
540,000 square feet of manufacturing and warehousing space in Fall River,
Massachusetts. This led the Company to reevaluate for impairment certain land
previously held for development as a manufacturing location and management
determined no impairment existed as of January 1, 2005. The net book value of
this land is approximately $4,000. The Company currently intends to market this
land for sale or development.

4. ACCRUED EXPENSES

Accrued expenses consists of the following:

44

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

5. DEBT

Debt consists of the following:

Quaker Fabric Corporation of Fall River ('QFR'), a wholly-owned subsidiary
of the Company, two other subsidiaries of the Company (together with QFR, the
'Borrowers') and the Company, as guarantor, are parties to a Second Amended and
Restated Credit Agreement, dated as of February 14, 2002, with a bank (the
'Bank') which expires January 31, 2007 (as amended, the 'Credit Agreement'). The
Credit Agreement provides for a revolving credit facility and a letter of credit
facility.

Advances made under the Credit Agreement bear interest at either the prime
rate plus 0.25% or the Eurodollar rate plus an 'Applicable Margin,' as
determined by the Company. The Applicable Margin on advances is adjusted
quarterly based on the Company's Leverage Ratio as defined in the Credit
Agreement. The Applicable Margin for Eurodollar advances may range from 1.0% to
1.875%. The Company is also required to pay certain fees including a commitment
fee which will vary based on the Company's Leverage Ratio. As of January 1,
2005, the commitment fee is 0.375% of the unused portion of the Credit Agreement
which was $35,332, net of outstanding letters of credit of $4,668. Total
commitment fees paid for the year ending January 1, 2005 were $184. As of
January 1, 2005 and January 3, 2004, the Company had $0 outstanding under the
Credit Agreement.

QFR issued $45,000 of Senior Notes due October 2005 and 2007 (the 'Senior
Notes') during 1997 under a Note Agreement (as amended, the 'Senior Note
Agreement') with an insurance company (the 'Insurance Company' and together with
the Bank, the 'Lenders'). The Senior Notes are unsecured and bear interest at a
fixed rate of 7.09% on $15,000 and 7.18% on $30,000. The Senior Notes may be
prepaid in whole or in part prior to maturity, at QFR's option, subject to a
yield maintenance premium, as defined. Annual principal payments began on
October 10, 2003 with a final payment due October 10, 2007. Annual principal
payment amounts are three payments of $5,000 beginning in October 2003 (of which
only the October 2005 payment is unpaid as of March 14, 2005), followed by two
annual payments of $15,000 beginning in 2006.

On February 14, 2002, QFR issued $5,000 of 7.56% Series A Notes due February
2009 (the 'Series A Notes' and together with the Senior Notes, the 'Term Notes')
under a Note Purchase Agreement (as amended, the 'Series A Note Agreement' and
together with the Senior Note Agreement, the 'Note Agreements') with the
Insurance Company. The Series A Notes are unsecured and bear interest at a fixed
rate of 7.56%, payable semiannually. The Series A Notes may be prepaid in whole
or in part prior to maturity, at QFR's option, subject to a yield maintenance
premium, as defined.

45

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

As of January 1, 2005, required principal payments under the original terms
of the Note Agreements are as follows:

The long-term portion of the amounts outstanding under the Note Agreements
was classified as 'current' on the Balance Sheet as of January 1, 2005, in
accordance with Emerging Issues Task Force Issue 86-30, 'Classification of
Obligations When a Violation is Waived by the Creditor' due to the debt covenant
violations existing at January 1, 2005 referred to below.

The Company and/or QFR are required to comply with a number of affirmative
and negative covenants under the Credit Agreement and the Note Agreements,
including, but not limited to, maintenance of certain financial tests and ratios
(including interest coverage ratios, net worth related ratios, and net worth
requirements); limitations on certain business activities of the Company and
QFR; restrictions on the Company's and/or QFR's ability to declare and pay
dividends, incur additional indebtedness, create certain liens, incur capital
lease obligations, make certain investments, engage in certain transactions with
stockholders and affiliates, and purchase, merge, or consolidate with or into
any other corporation.

On March 11, 2005, the Borrowers and the Company, as guarantor, entered into
a Forbearance and Amendment to the Second Amended and Restated Credit Agreement
(the 'Bank Forbearance Agreement'). Pursuant to the terms of the Bank
Forbearance Agreement, the Borrowers and the Company acknowledged that in the
absence of a waiver from the Bank, they would be in breach of both the debt
service coverage ratio covenant and the profitable operations covenant in the
Credit Agreement for the last quarter of 2004 and possibly in violation of those
covenants and the leverage ratio and senior debt ratio covenants for each of the
first and second quarters of 2005 and that these breaches would constitute
Events of Default, as defined in the Credit Agreement (the 'Specified Bank
Defaults'). In the Bank Forbearance Agreement, the Bank agreed to waive the
Specified Bank Defaults through the period ending July 15, 2005 (the 'Limited
Bank Waiver Period'), subject to certain conditions including the Bank's receipt
of fully executed copies of a similar waiver from the Insurance Company with
respect to the fixed charge coverage ratio, senior debt ratio and the total debt
ratio set forth in the Note Agreements. The Bank Forbearance Agreement also
provides for, among other things, (i) an increase in the interest rate and fees
payable under the Credit Agreement, (ii) a reduction in the permitted aggregate
amount of capitalized leases and purchase money debt to $5,000, (iii) the
inclusion of a minimum EBITDA covenant, (iv) a change in the definition of EBIT,
(v) monthly financial reporting to the Bank, (vi) the grant, not later than
March 31, 2005, of a perfected, first priority security interest (subject to
certain exceptions, including pari passu liens to be granted to the holders of
the Term Notes) in all personal property assets of the Borrowers and the Company
then owned or thereafter acquired and the contemporaneous execution of an
intercreditor agreement, in form and substance satisfactory to the Bank, among
the Bank, the holders of the Term Notes, the Borrowers and the Company, which is
a condition to any further borrowing under the Credit Agreement, and (vii) the
reduction of the maximum amount of loans and letters of credit the Bank has
agreed to make under the Credit Agreement to $15,000. In the Bank Forbearance
Agreement, the Borrowers and the Company agreed that they will repay all amounts
outstanding, and cash collateralize all letters of credit issued, under the
Credit Agreement on July 16, 2005 and that at such time the Bank will have all
of its rights and remedies under and in respect of the Credit Agreement and
applicable law, including those arising

46

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

by virtue of the occurrence of the Specified Bank Defaults. The parties
previously had entered into waivers on December 20, 2004, February 28, 2005 and
March 4, 2005 with respect to the debt service coverage ratio covenant and the
profitable operations covenant in the Credit Agreement and including a reduction
in the Bank's Commitment to $20,000. As of March 14, 2004, there were no loans
outstanding under the Credit Agreement, approximately $5,300 of letters of
credit and unused availability (after a reduction of the Bank's Commitment, as
defined in the Credit Agreement) of $9,700.

On March 11, 2005, QFR and the Company, as guarantor, entered into a
Forbearance to Note Agreements with respect to the Note Agreements with the
Insurance Company (the 'Insurance Company Forbearance Agreement') and together
with the Bank Forbearance Agreement, the 'Forbearance Agreements'). Pursuant to
the terms of the Insurance Company Forbearance Agreement, QFR and the Company
acknowledged that in the absence of a waiver from the Insurance Company, QFR and
the Company would be in breach of the fixed charge coverage ratio set forth in
the Note Agreements for the last quarter of 2004 and possibly for each of the
first and second quarters of 2005 and possibly in breach of the senior debt
ratio and total debt ratio set forth in the Note Agreements for each of the
first and second quarters of 2005 and that this breach would constitute an Event
of Default, as defined in the Note Agreements (the 'Specified Insurance Company
Defaults'). In the Insurance Company Forbearance Agreement, the Insurance
Company agreed to waive the Specified Insurance Company Defaults through the
period ending July 15, 2005 (the 'Limited Insurance Company Waiver Period'),
subject to certain conditions including, but not limited to, the Insurance
Company's receipt of fully executed copies of a similar waiver from the Bank
with respect to the debt service coverage ratio covenant, the profitable
operations covenant, the senior debt ratio covenant and the leverage ratio
covenant set forth in the Credit Agreement. The Insurance Company Forbearance
Agreement also provides, among other things, (i) that the Company will not
permit any Priority Debt (as defined in the Note Agreements) to be outstanding
at anytime other than as permitted under the Note Agreements, (ii) the Company
will not, and will not permit any subsidiary to, directly or indirectly create,
incur, assume or permit to exist any Lien (as defined in the Note Agreements)
for securing Recourse Obligations (as defined in the Note Agreements),
(iii) for the inclusion of a consolidated minimum EBITDA covenant, (iv) for
monthly financial reporting to the Insurance Company, (v) for the grant, not
later than March 31, 2005, of a perfected, first priority security interest
(subject to certain exceptions, including pari passu liens to be granted to the
Bank) in all personal property assets of the Borrowers and the Company then
owned or thereafter acquired and the contemporaneous execution of an
intercreditor agreement, in form and substance satisfactory to the Insurance
Company, among the Bank, the Insurance Company, Borrowers and the Company and
(vi) that on or prior to July 10, 2005, the Company shall enter into a
refinancing credit facility and using the proceeds thereof shall repay in full
all of the Obligations (as defined in the Insurance Company Forbearance
Agreement). Pursuant to the Insurance Company Forbearance Agreement, on
July 15, 2005, the Company has agreed to immediately repay to the Insurance
Company all of the outstanding Obligations, and the Company has acknowledged
that the Insurance Company shall be free in its sole and absolute discretion to
proceed to enforce any or all of its rights and remedies under or in respect of
the Note Agreements and applicable law, including without limitation, those of
termination, acceleration, enforcement and other rights and remedies arising by
virtue of the maturity of the Obligations and of the occurrence of the Specified
Defaults. The parties previously had entered into waivers on December 22, 2004,
February 28, 2005 and March 4, 2005 with respect to the fixed charge coverage
covenant in the Note Agreements. As of March 14, 2005, QFR owed $40,000
principal plus accrued interest under the Note Agreements.

The Company is in discussions with a commercial bank (the 'Prospective
Lender') regarding a proposed new credit facility to replace, and repay
borrowings under, the Note Agreements and the Credit Agreement. Prepayment of
the Note Agreements may result in the Company incurring prepayment penalties in
an amount which may be as much as $2,300. Any such facility is expected to
include

47

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

terms which may be unfavorable to the Company including, but not limited to, the
grant of security interests to the Prospective Lender to secure the payment and
performance of QFR's and the Company's obligations under the proposed credit
facility and restrictions on QFR's and the Company's capital expenditures going
forward. There can be no assurance that the Company will reach agreement with
the Prospective Lender on terms acceptable to the Company, or at all. The
Company may be required to seek alternate financing sources, the terms of which
financing, if obtainable, may be disadvantageous to the Company. Based upon the
anticipated performance of the Company for the foreseeable future, and absent
appropriate additional waivers or agreements to forbear from the Lenders, the
failure to obtain new financing would likely result in an Event of Default under
the Note Agreements and the Credit Agreement and the inability to borrow under
the Credit Agreement no later than July 16, 2005. Management anticipates that it
will successfully conclude an agreement for this new credit facility before the
expiry of the Forbearance Agreements.

As of January 1, 2005, total scheduled debt principal payments under the
original terms of the Note Agreements for each of the next five fiscal years and
thereafter are as follows:

2005....................................................... $ 5,000
2006....................................................... 15,000
2007....................................................... 15,000
2008....................................................... --
2009....................................................... 5,000
Thereafter................................................. 0
-------
$40,000
-------
-------

6. INCOME TAXES

Income (loss) before provision for income taxes consists of:

The following is a summary of the provision (benefit) for income taxes:

A reconciliation between the provision for income taxes computed at U.S.
federal statutory rates and the amount reflected in the accompanying
consolidated statements of operations is as follows:

48

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The Company has approximately $3,600 of federal tax credit carryforwards, of
which approximately $1,300 expire from 2022 to 2025. The remaining federal tax
credit carryforwards have no expiration date. The Company also has approximately
$2,200 of net operating loss carryforwards which expire in 2024. The timing and
use of the net operating loss carryforwards and tax credit carryforwards may be
limited under applicable federal tax legislation. In addition, the Company has
approximately $7,652 of state investment tax credit carryforwards, of which
approximately $2,400 expire from 2008 to 2014. The remaining state tax credits
have no expiration date. The timing and use of these credits is limited under
applicable state income tax legislation. The Company has provided a valuation
allowance for a portion of certain state tax credits that it has estimated may
not be realized.

The Company filed amended tax returns during the third quarter of 2003 with
the Internal Revenue Service claiming $1,378 of research and development tax
credits for the years 1993-2001. In addition, credits of $959 were claimed on
originally filed tax returns for 2002 and 2003. During the fourth quarter of
2004, the Company reached agreement with the Internal Revenue Service on certain
assessments and amended returns filed by the Company for the years 1997-1999. As
a result of this agreement, in the fourth quarter of 2004, the Company recorded
a tax benefit of $1,729 related to research and development tax credits for the
years prior to 2004, and $259 related to 2004. Due to uncertainties in the tax
law regarding qualified expenses, the Company has established a reserve for the
balance of the tax credits.

The Company is currently challenging tax assessments from the Massachusetts
Department of Revenue (MDOR) for the years 1993-1998. During the third quarter
of 2003, the Company filed amended tax returns with the MDOR claiming
approximately $1,420 of research and development tax credits for the years
1993-2001. Also, additional credits of $737 were claimed on the originally filed
tax returns for 2002 and 2003. The MDOR is currently reviewing the amended tax
returns. There is significant uncertainty surrounding the amount, if any, and
timing of the benefit that will be ultimately realized. The Company believes
that it has a supportable basis for claiming these research and development tax
credits, but the amounts are subject to an ongoing audit. Accordingly, the
Company has not reflected the potential benefits of these credits in its
financial statements for these or subsequent years. No benefit will be
recognized in the financial statements until these gain contingencies are
resolved through the eventual disposition with the tax authorities.

49

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The significant items comprising the deferred tax asset/liability are as
follows:

7. COMMITMENTS AND CONTINGENCIES

(a) Litigation. In the ordinary course of business, the Company is party to
various types of litigation. The Company believes it has meritorious defenses to
all claims and in its opinion, all litigation currently pending or threatened
will not have a material effect on the Company's financial position, results of
operations or liquidity.

(b) Environmental Cleanup Matters. The Company accrues for estimated costs
associated with known environmental matters when such costs are probable and can
be reasonably estimated. The actual costs to be incurred for environmental
remediation may vary from estimates, given the inherent uncertainties in
evaluating and estimating environmental liabilities, including the possible
effects of changes in laws and regulations, the stage of the remediation process
and the magnitude of contamination found as the remediation progresses. During
2003, the Company entered into agreements with the Massachusetts Department of
Environmental Protection to install air pollution control equipment at one of
its manufacturing plants in Fall River, Massachusetts. Management anticipates
that the costs associated with the acquisition and installation of the equipment
will total approximately $900 over a three-year period, which began in 2003.
Management believes the ultimate disposition of known environmental matters will
not have a material adverse effect on the liquidity, capital resources, business
or consolidated financial position of the Company.

50

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(c) Leases. The Company leases certain facilities and equipment under
operating lease agreements expiring at various dates from the current year to
the year 2015. As of January 1, 2005, the aggregate minimum future commitments
under leases are as follows:

Rent expense for operating leases for the years ended January 1, 2005,
January 3, 2004 and January 4, 2003 was $4,466, $4,227, and $3,903,
respectively.

(d) Letters of Credit. In the normal course of its business activities, the
Company is required under certain contracts to provide letters of credit which
may be drawn down in the event the Company fails to perform under the contracts.
As of January 1, 2005, the Company had issued or agreed to issue letters of
credit totaling $4,668.

(e) Employment Contract and Change-in-Control Agreements. In March 2004, the
Company's Board of Directors amended and restated the President and Chief
Executive Officer's Employment Agreement (the Employment Agreement). The
Employment Agreement provides for Mr. Liebenow to continue to serve as President
and Chief Executive Officer of the Company on a full-time basis through March
12, 2008, subject to an automatic three-year extension, unless terminated by the
Company upon one year's prior notice and provides for certain payments to be
made to Mr. Liebenow following certain termination events occurring in
connection with a change in control. The Employment Agreement as amended
effective October 4, 2004, provides for a base salary of $645, subject to such
annual increases as may be determined by the Board of Directors, as well as
certain benefits and reimbursement of expenses.

If the Employment Agreement is terminated as the result of a termination
without cause, Mr. Liebenow would be entitled to receive $1,935, plus the
continuation of certain benefits. If the Employment Agreement is terminated as a
result of a voluntary resignation, Mr. Liebenow would be entitled to receive
$1,935, plus the continuation of certain benefits, provided he agrees not to
engage in competition with the Company for a three year period following his
termination date. If the Employment Agreement is terminated as the result of a
termination for cause, Mr. Liebenow would be entitled to receive the
continuation of certain benefits, plus payment of accrued, but unpaid, salary
and benefits as of his termination date.

During 1999, the Company also entered into change-in-control agreements with
the Company's other corporate officers. These agreements provide certain
benefits to the Company's other officers in the event their employment with the
Company is terminated as a result of a change-in-control as defined. The maximum
contingent liability related to the change-in-control agreements is
approximately $3,000.

8. STOCK OPTIONS

The Company has several stock option plans (the Plans) in effect that
provide for the granting of non-qualified stock options and other equity-based
incentives to directors, officers, and employees of the Company. Options under
the Plans are generally granted at fair market value and vesting is determined
by the Board of Directors.

51

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Stock Option Activity. A summary of the Company's stock option activity is
as follows:

The following table summarizes information for options outstanding and
exercisable at January 1, 2005:

At its regular meeting in December 2001, the Company's Board of Directors
granted options to purchase 160 shares of common stock at an exercise price of
$8.30 per share to certain individuals subject to shareholder approval of an
increase of 750 shares in the number of shares available for grant under the
Plans. At the May 16, 2002 Annual Meeting, shareholder approval was received.
Accordingly, the Company recorded an unearned compensation charge equal to the
difference between the exercise price and the fair value on the date of
shareholder approval of $1,032. During 2004, 2003 and 2002, the Company
recognized $207, $206 and $131 of amortization of unearned compensation,
respectively.

On December 12, 2003, pursuant to the terms of the Company's 1997 Stock
Option Plan, the Company's Board of Directors granted to Mr. Liebenow, the
Company's President and CEO, options covering 90,000 shares of common Stock,
10,000 shares of which were subject to shareholder approval at the Company's
2004 Annual Meeting of Shareholders, which approval was received. This option
grant vests over a five year period, is exercisable for a period of ten years
from the grant date, and has an exercise price of $9.12 per share, the fair
market value of the Company's Common Stock on December 12, 2003.

At the May 21, 2004 Annual Shareholder meeting, the 2004 Stock Incentive
Compensation Plan was approved. A maximum of 1,500,000 shares may be issued
under this plan. Awards under this plan

52

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

may be in the form of stock options, stock appreciation rights, restricted stock
or other stock-based compensation, as determined by the Compensation Committee
of the Board of Directors.

Accounting for Stock-Based Compensation. The Company discloses stock-based
compensation information in accordance with SFAS 148 and SFAS 123. SFAS 148
provides additional transition guidance for companies that elect to voluntarily
adopt the provisions of SFAS 123. SFAS 148 does not change the provisions of
SFAS 123 that permit entities to continue to apply the intrinsic value method of
APB 25. The Company has elected to continue to account for its stock option
plans under APB 25 as well as to provide disclosure of stock based compensation
as outlined in SFAS 123 as amended by SFAS 148. SFAS 123 requires disclosure of
pro forma net income, EPS and other information as if the fair value method of
accounting for stock options and other equity instruments described in SFAS 123
had been adopted. SFAS 123 does not apply to awards made prior to June 24, 1995,
and so all pro forma disclosures include the effects of all options granted
after June 24, 1995. Additional awards in future years are anticipated. The
effects of applying SFAS 123 in this pro forma disclosure are not indicative of
future expectations.

Had compensation cost for awards granted in Fiscal 2004, Fiscal 2003 and
Fiscal 2002 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
in SFAS No. 123, the effect on the Company's net income (loss) and earnings
(loss) per common share would have been as follows:

Pro forma compensation expense for options is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.

The Black-Scholes option-pricing model is used to estimate the fair value on
the date of grant of each option granted after December 15, 1994. The
assumptions used for stock option grants and employee stock purchase right
grants were as follows:

The Black-Scholes option pricing model was developed for use in estimating
the fair value of traded options with no vesting or transferability
restrictions. In addition, option pricing models require the input of highly
subjective assumptions, including expected stock price volatility. Because the
Company's stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions used
can materially affect the fair value estimate, in

53

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.

9. SEGMENT REPORTING

The Company operates as a single business consisting of sales of two
products; upholstery fabric and specialty yarns. Management evaluates the
Company's financial performance in the aggregate and allocates the Company's
resources without distinguishing between yarn and fabric products.

Net foreign and export sales from the United States to unaffiliated
customers by major geographical area were as follows:

Net sales by product category are as follows:

10. EMPLOYEE BENEFIT PLANS
(reflects actual dollar and share amounts)

The Company has established a 401(k) plan (the 401(k) Plan) for eligible
employees of the Company who may contribute up to 100% of their annual salaries
(up to $13,000 for 2004) to the 401(k) Plan. All contributions made by an
employee are fully vested and are not subject to forfeiture. Each year the
Company contributes on behalf of each participating employee an amount equal to
100% of the first $200 contributed by each employee and 25% of the next $800
contributed by such employee, for a maximum annual Company contribution of $400
per employee. The Company's matching contribution was $517,000, $595,000, and
$586,000, in Fiscal 2004, 2003, and 2002, respectively. An employee is fully
vested in the contributions made by the Company upon his or her completion of
five years of participation in the 401(k) Plan.

Effective October 1, 1997, the Company established an Employee Stock
Purchase Plan (the ESPP) under which a maximum of 100,000 shares of common stock
may be purchased by eligible employees. All full-time employees of the Company,
other than officers of the Company, are eligible to participate in the ESPP.

The ESPP provides for quarterly 'purchase periods' within each of the
Company's fiscal years. Shares are purchased through payroll deductions (of not
less than 1% nor more than 10% of

54

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

compensation as defined, or up to a maximum of $10,000 in a designated dollar
amount per year.) The purchase price for shares is 85% of the fair market value
of the common stock at the date of purchase. For Fiscal Years 2004, 2003, and
2002 the Company issued 0 shares, 28,774 shares, and 19,899 shares respectively,
under the Plan. Purchases by the Plan were suspended in 2004. Management intends
to dissolve the Plan and distribute the shares to the individual participants.

11. NON-RECURRING ITEM

In December 2003, the Company settled a tariff dispute with the Mexican tax
authorities, receiving $1,426 net of legal fees. As a result, a non-recurring,
pre-tax gain of $1,426 ($769 after-tax or $0.05 per diluted share) was recorded
in the fourth quarter of 2003.

12. SUMMARY QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the results of operations for each of the
quarters within the years ended January 1, 2005 and January 3, 2004.

- ---------

(1) All quarters in 2004 and 2003 were 13 weeks.

(2) Earnings per common share for the quarters presented have each been
calculated separately. Accordingly, quarterly amounts may not sum to the
fiscal year amount presented.

55

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF QUAKER FABRIC CORPORATION:

We have completed an integrated audit of Quaker Fabric Corporation's January 1,
2005 consolidated financial statements and of its internal control over
financial reporting as of January 1, 2005 and audits of its January 3, 2004 and
January 4, 2003 consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.

CONSOLIDATED FINANCIAL STATEMENTS

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income (loss), changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Quaker Fabric Corporation and its subsidiaries at
January 1, 2005 and January 3, 2004, and the results of their operations and
cash flows for each of the three years in the period ended January 1, 2005 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 the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements 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 our opinion.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Also, in our opinion, management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting
appearing under Item 9A, that the Company maintained effective internal control
over financial reporting as of January 1, 2005 based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 1, 2005, based on criteria established in
Internal Control -- Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally

56

accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 16, 2005

57

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Our management, with the participation of our Chief Executive Officer, or
CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, or the Exchange Act), as of January
1, 2005. Based on this evaluation, our CEO and CFO concluded that, as of January
1, 2005, our disclosure controls and procedures were (1) designed to ensure that
material information relating to us, including our consolidated subsidiaries, is
made known to our CEO and CFO by others within those entities, particularly
during the period in which this report was being prepared and (2) effective, in
that they provide reasonable assurance that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms.

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING.

Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of our management,
including our CEO and CFO, we have conducted an evaluation of the effectiveness
of our internal control over financial reporting as of January 1, 2005, based
upon the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation, management has concluded that our internal control over financial
reporting was effective as of January 1, 2005.

Management's assessment of the effectiveness of our internal control over
financial reporting as of January 1, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears herein.

58

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.

No change in our internal control over financial reporting occurred during
the fiscal quarter ended January 1, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

/s/ SANGWOO AHN
...........................................
Sangwoo Ahn
Chairman of the Board

/s/ LARRY A. LIEBENOW
...........................................
Larry A. Liebenow
President and Chief Executive Officer

/s/ PAUL J. KELLY
...........................................
Paul J. Kelly
Vice President and Chief Financial Officer

March 16, 2005

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information with respect to the directors of the Company required by
this item will be included in the Company's definitive proxy statement for its
2005 Annual Meeting of Stockholders (the 'Proxy Statement') to be filed pursuant
to Regulation 14A, and such information is incorporated herein by reference. The
information with respect to the executive officers of the Company required by
this item is set forth in Item 1A of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be included in the Proxy
Statement to be filed pursuant to Regulation 14A, and such information is
incorporated herein by reference.

59

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents filed as part of this Form 10-K

(i) Financial Statements

Consolidated Balance Sheets -- January 1, 2005 and January 3, 2004

Consolidated Statements of Operations -- For the years ended January 1, 2005,
January 3, 2004 and January 4, 2003

Consolidated Statements of Comprehensive Income (Loss) -- For the years ended
January 1, 2005, January 3, 2004 and January 4, 2003

Consolidated Statements of Changes in Stockholders' Equity -- For the years
ended January 1, 2005, January 3, 2004, and January 4, 2003

Consolidated Statements of Cash Flows -- For the years ended January 1, 2005,
January 3, 2004 and January 4, 2003

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

(ii) Financial Statement Schedules

The following financial statement schedule of the Company included herein
should be read in conjunction with the audited financial statements incorporated
by reference in this Form 10-K.

Schedule II -- Valuation and Qualifying Accounts

Report of Independent Registered Public Accounting Firm on Financial
Statement Schedule.

All other schedules for the Company are omitted because either they are not
applicable or the required information is shown in the financial statements or
notes thereto.

(b) Exhibits

3(i) -- Certificate of Incorporation of the Company, as
amended.(1)
3(ii) -- By-laws of the Company.(1)
10.1 -- Loan and Security Agreement, dated as of October 31,
1990, between the Company and Continental Bank N.A., as
amended by Amendments Nos. 1 through 9 thereto.(1)
10.2 -- Securities Purchase Agreement, dated April 13, 1993,
among the Company, MLGA Fund II, L.P. and MLGAL Partners,
as amended by Amendment No. 1 thereto.(1)
10.3 -- Subscription Agreement, dated March 12, 1993, among the
Company and MLGA Fund II, L.P., Nortex Holdings, Inc., QFC
Holdings Corporation, and Larry Liebenow.(1)
10.4 -- Shareholders Agreement, dated March 12, 1993, by and
among the Company, Larry Liebenow, Ira Starr, and Sangwoo
Ahn.(1)
10.5 -- Employment Agreement, dated as of March 12, 1993, between
the Company and Larry A. Liebenow.(1)
10.6 -- Director Indemnification Contract, dated October 18,
1989, between the Company and Larry A. Liebenow.(1)
10.7 -- Director Indemnification Contract, dated October 18,
1989, between the Company and Roberto Pesaro.(1)
10.8 -- Director Indemnification Contract, dated April 15, 1992,
between the Company and Samuel A. Plum.(1)
10.9 -- Director Indemnification Contract, dated May 2, 1991,
between the Company and Andrea Gotti-Lega.(1)
10.10 -- Severance Contract, dated August 15, 1988, between the
Company and Thomas J. Finneran.(1)
10.11 -- Severance Contract, dated May 26, 1989, between the
Company and James Dulude.(1)
10.12 -- Severance Contract, dated December 1, 1988, between the
Company and Cynthia Gordan.(1)

60

10.13 -- Equipment Financing Lease Agreement, dated September 18,
1992, between QFR and United States Leasing
Corporation.(1)
10.14 -- Equipment Financing Lease Agreement, dated September 29,
1992, between QFR and KeyCorp Leasing pursuant to a Notice
of Assignment from U.S. Leasing.(1)
10.15 -- Equipment Financing Lease Agreement, dated February 16,
1989, between QFR and Key Financial Services, Inc.(1)
10.16 -- Equipment Financing Lease Agreement, dated September 22,
1992, between QFR and Dana Commercial Credit Corporation
(Fleet National Bank).(1)
10.17 -- Equipment Financing Lease Agreement, dated October 8,
1992, between QFR and Capital Associates International,
Inc.(1)
10.18 -- Equipment Financing Loan Agreement, dated August 31,
1992, between QFR and HCFS Business Equipment
Corporation.(1)
10.19 -- Equipment Financing Lease Agreement, dated September 13,
1991, between QFR and Sovran Leasing and Finance
Corp/NationsBanc Leasing Corp.(1)
10.20 -- Equipment Financing Lease Agreement, dated December 18,
1990, between QFR and IBM Credit Corporation.(1)
10.21 -- Equipment Financing Lease Agreement, dated May 5, 1993,
between QFR and The CIT Group.(1)
10.22 -- Equipment Financing Lease Agreement, dated June 30, 1993,
between QFR and AT&T Commercial Finance Corporation.(1)
10.23 -- Chicago, Illinois Showroom Lease, dated July 1, 1989,
between the Company and LaSalle National Bank, Trustee.(1)
10.24 -- Hickory, North Carolina Showroom Lease, dated June 15,
1993, between the Company and Hickory Furniture Mart,
Inc.(6)
10.25 -- High Point, North Carolina Showroom Lease, dated
November 6, 1991, between the Company and Market Square
Limited Partnership.(1)
10.26 -- Los Angeles, California Showroom Lease, dated
September 23, 1992, between the Company and The L.A.
Mart.(1)
10.27 -- Tupelo, Mississippi Showroom Lease, dated December 14,
1992, between the Company and Mississippi Furniture
Market, Inc.(6)
10.28 -- Mexico City, Mexico Warehouse Lease, dated June 6, 1993,
between Quaker Fabric Mexico, S.A. de C.V. and Irene Font
Byrom.(1)
10.29 -- Licensing Agreement, dated May 17, 1990, between the
Company as Licensee and General Electric Company.(1)
10.30 -- Licensing Agreement, dated September 24, 1990, between
the Company as Licensee and Amoco Fabrics and Fibers
Company.(1)
10.31 -- Software Licensing Agreement, dated October 29, 1987,
between the Company as Licensee and System Software
Associates.(1)
10.32 -- Licensing Agreement, dated June 5, 1974, between the
Company and E.I. DuPont de Nemours & Company, Inc.(1)
10.33 -- Licensing Agreement, dated October 17, 1988, between the
Company as Licensee and Monsanto Company.(1)
10.34 -- Licensing Agreement, dated July 28, 1987, between the
Company as Licensee and Phillips Fibers Corporation.(1)
10.35 -- Software Licensing Agreement, dated July 7, 1988, between
the Company as Licensee and Software 2000, Inc.(1)
10.36 -- Licensing Agreement, dated February 1, 1977, between the
Company as Licensee and 3M.(1)
10.37 -- Software Licensing Agreement, dated April 8, 1992,
between the Company as Licensee and Premenos
Corporation.(1)
10.38 -- Software Licensing Agreement, dated March 19, 1993,
between the Company as Licensee and Sophis U.S.A., Inc.(1)

61

10.39 -- Quaker Fabric Corporation 1993 Stock Option Plan and Form
of Option Agreement thereunder.(1)
10.40 -- Option to Purchase Common Stock issued to Nortex
Holdings, Inc., effective April 13, 1993.(1)
10.41 -- Amendment No. 1, dated as of October 25, 1993, to
Shareholders Agreement, dated March 12, 1993, by and
among the Company, Nortex Holdings, Inc., MLGA Fund II,
L.P., MLGAL Partners, W. Wallace McDowell, Jr., William
Ughetta, and Ira Starr.(1)]
10.42 -- Quaker Fabric Corporation Deferred Compensation Plan and
related Trust Agreement.(2)
10.43 -- Form of Split Dollar Agreement with Senior Officers.(2)
10.44 -- Credit Agreement, dated as of June 29, 1994, by and among
the Company, The First National Bank of Boston, and
Continental Bank, N.A.(3)
10.45 -- Equipment Schedule No. 5, dated as of September 14, 1994,
to Master Lease Agreement, dated as of May 5, 1993,
between QFR and the CIT Group/Equipment Financing, Inc.(4)
10.46 -- Commission and Sales Agreement, dated as of April 25,
1994, between QFR and Quaker Fabric Foreign Sales
Corporation.(4)
10.47 -- Stock Option Agreement, dated as of July 28, 1995,
between the Company and Eriberto R. Scocimara.(5)
10.48 -- Amended and Restated Credit Agreement, dated
December 18, 1995, among the Company, QFR, Quaker Textile
Corporation, Quaker Fabric Mexico, S.A. de C.V., The First
National Bank of Boston, and Fleet National Bank.(5)
10.49 -- Note Purchase and Private Shelf Agreement, dated
December 18, 1995, among the Company, Prudential Insurance
Company of America, and Pruco Life Insurance Company.(5)
10.50 -- Guarantee Agreement, dated as of December 18, 1995, among
the Company, The Prudential Insurance Company of America,
and Pruco Life Insurance Company.(5)
10.51 -- Amendment Agreement No. 1, dated as of March 21, 1996, to
that certain Amended and Restated Credit Agreement, dated
as of December 18, 1995, among the Company, QFR, Quaker
Textile Corporation, Quaker Fabric Mexico, S.A. de C.V.,
The First National Bank of Boston, and Fleet National
Bank.(5)
10.52 -- 1996 Stock Option Plan for Key Employees of QFR, dated
April 26, 1996.(6)
10.53 -- Amendment Agreement No. 2, dated as of October 21, 1996,
to that certain Amended and Restated Credit Agreement,
dated as of December 18, 1995, among the Company, QFR,
Quaker Textile Corporation, Quaker Fabric Mexico, S.A. de
C.V., The First National Bank of Boston, and Fleet
National Bank.(6)
10.54 -- Software License Agreement dated October 31, 1996 between
the Company and System Software Associates Inc.(6)
10.55 -- Medical Expense Reimbursement Plan.(6)
10.56 -- High Point, North Carolina Warehouse Lease, dated
April 1, 1996 between QFR and C&M Investments of High
Point, Inc.(6)
10.57 -- Standard Industrial Lease Agreement, dated May 10, 1996,
between CIIF Associates II Limited Partnership and QFR.(6)
10.58 -- Rights Agreement dated March 4, 1997 between the Company
and The First National Bank of Boston relating to the
Company's Stockholder Rights Plan.(6)
10.59 -- 1997 Stock Option Plan.(6)
10.60 -- Amendment, dated as of February 24, 1997, to Employment
Agreement between the Company and Larry A. Liebenow.(6)
10.61 -- Amendment No. 4, dated as of December 19, 1997 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(7)
10.62 -- Employee Stock Purchase Plan, dated as of October 1,
1997.(7)
10.63 -- Note Purchase Agreement dated October 10, 1997 among QFR,
The Prudential Insurance Company of America, and Pruco
Life Insurance Company.(7)
10.64 -- Guaranty Agreement, dated as of October 10, 1997, by the
Company in favor of the Prudential Insurance Company of
America and PrucoLife Insurance Company.(7)

62

10.65 -- Commercial Lease between QFR and Clocktower Enterprises,
Inc., dated as of August 1, 1997.(7)
10.66 -- Lease between Robbins Manufacturing Co., Inc. and QFR,
dated as of October 22, 1997.(7)
10.67 -- Lease between Tilly Realty Associates and QFR, dated as
of December 9, 1997.(7)
10.68 -- Lease between 1 Lewiston Street, LLC and QFR, dated as of
March 16, 1998.(7)
10.69 -- Purchase and Sale Agreement, dated August 7, 1998,
between QFR and Rodney Realty Trust.(8)
10.70 -- Stock Option Agreement, dated as of October 19, 1998,
between the Company and Mark R. Hellwig.(8)
10.71 -- Lease between ADAP, Inc. and QFR, dated as of December
11, 1998.(8)
10.72 -- Purchase and Sale Agreement, dated January 6, 1999,
between QFR and Montaup Electric Company.(8)
10.73 -- Purchase and Sale Agreement, dated January 22, 1999,
between QFR and Jefferson Realty Partnership.(8)
10.74 -- Amendment No. 6, dated as of March 26, 1999 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(8)
10.75 -- Amendment No. 1, dated as of March 26, 1999 to the Note
Purchase Agreement dated as of October 10, 1997 among QFR,
The Prudential Insurance Company of America, and Pruco
Life Insurance Company.(8)
10.76 -- Purchase and Sale Agreement, dated May, 1999, between QFR
and The Center for Child Care and Development, Inc.(9)
10.77 -- Tax Increment Financing Agreement, dated May 27, 1999,
between the City of Fall River and QFR.(9)
10.78 -- Memorandum of Understanding, dated July 1, 1999, between
the City of Fall River and QFR.(9)
10.79 -- Lease between Frank B. Peters, Jr. and QFR, dated as of
June 15, 1999.(9)
10.80 -- Amendment No. 7, dated as of September 30, 1999 to the
Amended and Restated Credit Agreement, dated as of
December 18, 1995, by and among QFR, Quaker Textile Corp.,
Quaker Fabric Mexico, S.A. de C.V., the Company,
BankBoston and Fleet National Bank.(9)
10.81 -- Lease between Hamriyah Free Zone Authority and QFR, dated
as of November 28, 1999.(9)
10.82 -- Form of change in control agreement, dated December 17,
1999, between the Company and each of its vice
presidents.(9)
10.83 -- Agreement concerning change in control, dated
December 17, 1999, between the Company and its
controller.(9)
10.84 -- Amendment No. 1 to the Company's Deferred Compensation
Plan, dated December 17, 1999.(9)
10.85 -- Amendment No. 1 to the Split Dollar Insurance Agreements
between QFR and each of its officers.(9)
10.86 -- Amendment, dated as of December 17, 1999, to Employment
Agreement between the Company and Larry A. Liebenow.(9)
10.87 -- 1999 Stock Purchase Loan Program and form of related
Secured Promissory Note and Stock Pledge Agreement.(9)
10.88 -- Amendment No. 2, dated as of December 28, 1999 to the
Note Purchase Agreement dated as of October 10, 1997 among
QFR, The Prudential Insurance Company of America, and
Pruco Life Insurance Company.(9)
10.89 -- Software License Agreement, dated December 29, 1999,
between QFR as Licensee and Paragon Management Systems,
Inc.(9)
10.90 -- Mexico City, Mexico Warehouse Lease, dated February 6,
2000, between Quaker Fabric Mexico, S.A. de C.V. and Irene
Font Byrom.(10)
10.91 -- Amendment to the 1997 Stock Option Plan.(10)
10.92 -- Lease between Sayre A. Litchman and QFR, dated June 30,
2000.(10)

63

10.93 -- Software License Agreement dated April 30, 2001 between
QFR and SSA Global Technologies, Inc.(11)
10.94 -- Purchase and Sale Agreement, dated June 29, 2001, between
QFR and Whaling Mfg. Co., Inc.(11)
10.95 -- High Point, North Carolina Warehouse Lease Extension
Agreement, dated July 29, 2001, between QFR and Bresmiro
Associates, LLC.(11)
10.96 -- Purchase and Sale Agreement, dated September 4, 2001,
between QFR and Charles McAnsin Associates, LP.(11)
10.97 -- Los Angeles Warehouse First Amendment to Standard
Industrial Lease Agreement, dated September 24, 2001,
between QFR and CIIF Associates II, LP.(11)
10.98 -- Energy Supply Agreement, dated December 4, 2001, between
QFR and Select Energy, Inc.(11)
10.99 -- Second Amended and Restated Credit Agreement, dated
February 14, 2002, among QFR, Quaker Textile Corp., Quaker
Fabric Mexico, S.A. de C.V., the Company, and Fleet
National Bank.(11)
10.100 -- Note Purchase and Private Shelf Agreement, dated
February 14, 2002, between QFR and The Prudential
Insurance Company of America.(11)
10.101 -- Form of stock option agreement between the Company and
outside directors, prior to participation in the 1997
Stock Option Plan.(12)
10.102 -- Natural Gas Service Terms Agreement, dated May 20, 2002,
between QFR and AllEnergy Gas and Electric Marketing
Company, L.L.C.(12)
10.103 -- Form of extension of change in control agreement, dated
December 13, 2002, between the Company, each of its vice
presidents, and its controller.(12)
10.104 -- Form of indemnification agreement, dated December 13,
2002, between the Company and each of its directors and
officers.(12)
10.105 -- Software License Agreement dated December 31, 2002
between QFR and SPSS, Inc.(12)
10.106 -- Mexico City, Mexico Warehouse Lease, dated February 6,
2003, between Quaker Fabric Mexico, S.A. de C.V. and Irene
Font Byrom.(12)
10.107 -- Amendment No. 1 to Software License Agreement, dated
February 24, 2003, between QFR and Adexa, Inc.(12)
*10.108 -- Amended and Restated Employment Agreement, dated as of
March 17, 2004, between the Company and Larry A. Liebenow.
(13)
10.109 -- Quaker Fabric Corporation 2004 Stock Incentive Plan. (14)
10.110 -- Purchase and Sale Agreement with respect to 81 Commerce
Drive, Fall River, Massachusetts dated July 2, 2004 by and
among Charles McAnsin Associates, A Limited Partnership,
as Seller, Joan Fabrics Corporation, Main Street Textiles,
L.P., Quaker Fabric Corporation of Fall River, as
Purchaser, and Stewart Title Guaranty Company, as Escrow
Agent. (15)
10.111 -- Amendment effective as of October 1, 2004 to the Note
Agreement dated as of October 10, 1997 between Quaker
Fabric Corporation of Fall River, Pruco Life Insurance
Company and the Prudential Insurance Company of America.
(16)
10.112 -- Amendment effective as of October 1, 2004 to the Note
Purchase and Private Shelf Agreement dated as of
February 14, 2002 between Quaker Fabric Corporation of
Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America. (16)
10.113 -- Amendment No. 1 to Second Amended and Restated Credit
Agreement dated as of August 16, 2004 by and among Quaker
Fabric Corporation of Fall River, Quaker Textile
Corporation and Quaker Fabric Mexico, S.A. de C.V., as
Borrowers, Quaker Fabric Corporation, as Parent, and Fleet
National Bank, as the Lender. (16)
10.114 -- Lease Agreement dated December 16, 2004 by and between
Charles McAnsin Associates, A Limited Partnership, as
Landlord, and Quaker Fabric Corporation of Fall River, as
Tenant. (17)
10.115 -- Lease Guaranty dated December 16, 2004 executed by Quaker
Fabric Corporation, as Guarantor. (17)
10.116 -- Use and Occupancy Agreement dated December 16, 2004 by
and between Quaker Fabric Corporation of Fall River, as
Licensor, and Joan Fabrics Corporation, as Licensee. (17)

64

10.117 -- Escrow Agreement dated December 16, 2004 by and among
Wilmer Cutler Pickering Hale and Dorr LLP, as Escrow
Agent, Quaker Fabric Corporation of Fall River, Quaker
Fabric Corporation, and Charles McAnsin Associates, A
Limited Partnership. (17)
10.118 -- Waiver Agreement dated as of December 22, 2004 to the
Note Agreement dated as of October 10, 1997 and the Note
Purchase and Private Shelf Agreement, dated as of February
14, 2002 by and among Quaker Fabric Corporation of Fall
River, Pruco Life Insurance Company and The Prudential
Insurance Company of America. (18)
10.119 -- Waiver and Amendment dated as of December 20, 2004 to the
Second Amended and Restated Credit Agreement dated as of
February 14, 2002 by and among Quaker Fabric Corporation
of Fall River, Quaker Textile Corporation and Quaker
Fabric Mexico, S.A. de C.V., as Borrowers, Quaker Fabric
Corporation, as Parent, and Fleet National Bank, as the
Lender. (18)
10.120 -- Escrow Extension Agreement dated January 14, 2005 by and
among Wilmer Cutler Pickering Hale and Dorr LLP, as Escrow
Agent, Quaker Fabric Corporation of Fall River, Quaker
Fabric Corporation and Charles McAnsin Associates, A
Limited Partnership. (19)
10.121 -- Escrow Extension Agreement dated January 20, 2005 by and
among Wilmer Cutler Pickering Hale and Dorr LLP, as Escrow
Agent, Quaker Fabric Corporation of Fall River, Quaker
Fabric Corporation and Charles McAnsin Associates, A
Limited Partnership. (19)
10.122 -- Waiver and Amendment dated as of March 4, 2005 to Second
Amended and Restated Credit Agreement dated as of
February 14, 2002 by and among Quaker Fabric Corporation
of Fall River, Quaker Textile Corporation and Quaker
Fabric Mexico, S.A. de C.V., as Borrowers, Quaker Fabric
Corporation, as Parent, and Fleet National Bank, as the
Lender. (20)
10.123 -- Waiver Agreement dated as of March 4, 2005 to the Note
Agreement dated as of October 10, 1997 and the Note
Purchase and Private Shelf Agreement, dated as of
February 14, 2002 by and among Quaker Fabric Corporation
of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America. (20)
10.124 -- Waiver and Amendment dated as of February 28, 2005 to
Second Amended and Restated Credit Agreement dated as of
February 14, 2002 by and among Quaker Fabric Corporation
of Fall River, Quaker Textile Corporation and Quaker
Fabric Mexico, S.A. de C.V., as Borrowers, Quaker Fabric
Corporation, as Parent, and Fleet National Bank, as the
Lender. (20)
10.125 -- Waiver Agreement dated as of February 28, 2005 to the
Note Agreement dated as of October 10, 1997 and the Note
Purchase and Private Shelf Agreement, dated as of
February 14, 2002 by and among Quaker Fabric Corporation
of Fall River, Pruco Life Insurance Company and The
Prudential Insurance Company of America. (20)
10.126 -- Forbearance and Amendment dated as of March 11, 2005 to
Second Amended and Restated Credit Agreement dated as of
February 14, 2002 by and among Quaker Fabric Corporation
of Fall River, Quaker Textile Corporation and Quaker
Fabric Mexico, S.A. de C.V., as Borrowers, Quaker Fabric
Corporation, as Parent, and Fleet National Bank, as the
Lender. (21)
10.127 -- Forbearance Agreement dated as of March 11, 2005 to the
Note Agreement dated as of October 10, 1997 and the Note
Purchase and Private Shelf Agreement, dated as of February
14, 2002 by and among Quaker Fabric Corporation of Fall
River, Pruco Life Insurance Company and The Prudential
Insurance Company of America. (21)
21 -- Subsidiaries.(5)
*23 -- Consent of PricewaterhouseCoopers LLP.
*31 -- Certificates of Chief Executive Officer and Chief
Financial Officer pursuant to Securities and Exchange Act
Rules 13a-14(a) and 15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 dated
March 16, 2005.
*32 -- Certificate of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. section 1350 dated
March 16, 2005.

- ---------

(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 33-69002, initially filed with the Securities and
Exchange Commission on September 17, 1993, as amended.
(footnotes continued on next page)

65

(footnotes continued from previous page)

(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 1994.

(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended July 2, 1994.

(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.

(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 1995.

(6) Incorporated by reference to the Company's Registration Statement on Form
S-1, Registration No. 333-21957, initially filed with the Securities and
Exchange Commission on February 25, 1997, as amended.

(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 3, 1998.

(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 2, 1999.

(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 1, 2000.

(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 30, 2000.

(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001.

(12) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 4, 2003.

(13) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 3, 2004.

(14) Incorporated by reference to the Company's 2004 Proxy Statement.

(15) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 2, 2004.

(16) Incorporated by reference to the Company's Current Report on Form 8-K dated
October 12, 2004.

(17) Incorporated by reference to the Company's Current Report on Form 8-K dated
December 16, 2004.

(18) Incorporated by reference to the Company's Current Report on Form 8-K dated
December 20, 2004.

(19) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 21, 2005.

(20) Incorporated by reference to the Company's Current Report on Form 8-K dated
February 28, 2005.

(21) Incorporated by reference to the Company's Current Report on Form 8-K dated
March 11, 2005.

66

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 16, 2005.

QUAKER FABRIC CORPORATION

By: /s/ LARRY A. LIEBENOW
..................................

LARRY A. LIEBENOW LARRY A. LIEBENOW
CHIEF EXECUTIVE OFFICER,
PRESIDENT, AND DIRECTOR

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

67

SCHEDULE II

QUAKER FABRIC CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 4, 2003, JANUARY 3, 2004, AND JANUARY 1, 2005
(DOLLARS IN THOUSANDS)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders of Quaker Fabric Corporation:

Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated March 16, 2005 appearing in the 2004 Annual Report to Shareholders
of Quaker Fabric Corporation (which report, consolidated financial statements
and assessment are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule included herein. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts
March 16, 2005

GENERAL INFORMATION

DIRECTORS
- ---------

SANGWOO AHN, Chairman
Founding Partner
Morgan Lewis Githens & Ahn

LARRY A. LIEBENOW
President and CEO
Quaker Fabric Corporation

DR. JERRY I. PORRAS,
Lane Professor of Organizational
Behavior and Change, Emeritus
Graduate School of Business -- Stanford University

ERIBERTO R. SCOCIMARA
President and Chief Executive Officer
Hungarian-American Enterprise Fund

COMMITTEES
- ----------

AUDIT COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

COMPENSATION AND STOCK OPTION COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Sangwoo Ahn
Jerry I. Porras
Eriberto R. Scocimara

OFFICERS
- --------

LARRY A. LIEBENOW
President and Chief
Executive Officer

MICHAEL E. COSTA
Controller

JAMES A. DULUDE
Vice President
Manufacturing

CYNTHIA L. GORDAN
Vice President, Secretary
and General Counsel

MARK R. HELLWIG
Vice President
Supply Chain Management

PAUL J. KELLY
Vice President -- Finance,
Treasurer and Chief Financial Officer

THOMAS H. MUZEKARI
Vice President
Sales

BEATRICE SPIRES
Vice President
Design and Merchandising

NORMAN J. STURDEVANT
Vice President and Chief
Information Officer

DUNCAN WHITEHEAD
Vice President
Research and Development

CORPORATE DATA
- --------------

CORPORATE OFFICE
Quaker Fabric Corporation
941 Grinnell Street
Fall River, Massachusetts 02721
(508) 678-1951

ANNUAL MEETING
11:00 a.m., May 26, 2005
Quaker Fabric Corporation
1082 Davol Street
Fall River, Massachusetts 02720

TRANSFER AGENT AND REGISTRAR
Equiserve Trust Company, N.A.
P.O. Box 43010 Providence, RI 02940-3010
(781) 575-3120
http://www.equiserve.com

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
125 High Street
Boston, Massachusetts 02110

LEGAL COUNSEL
Proskauer Rose LLP
1585 Broadway
New York, New York 10036

NASDAQ: QFAB

[LLOYD'S REGISTER QUALITY ASSURANCE LOGO]

Quaker Fabric Corporation
941 Grinnell Street
Fall River, MA 02721

Nasdaq QFAB
--------------------
www.quakerfabric.com

STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as............................... 'TM'
The registered trademark symbol shall be expressed as.................... 'r'