UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended JANUARY 1, 2005

For the transition period from ___________ to ___________

Commission file number 0-1790

RUSSELL CORPORATION

Registrant’s telephone number, including area code: (678) 742-8000

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

The aggregate market value of Common Stock, par value $.01, held by non-affiliates of the registrant, as of July 4, 2004, was approximately $574,000,000.

As of March 11, 2005, there were 32,819,331 shares of Common Stock, $.01 par value outstanding (excluding treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2005 (the “Proxy Statement”) are incorporated by reference into Part III.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

General

Russell Corporation (“Russell,” “we,” “our” or the “Company”) is a leading authentic athletic and sporting goods company with over a century of success. Headquartered in Atlanta, Georgia, we sell athletic uniforms, apparel, athletic footwear, sporting goods, athletic equipment, and accessories for a wide variety of sports, outdoor and fitness activities under well-known brands such as Russell Athletic^®, JERZEES^®, Spalding^®, and Brooks^®. Other brands include American Athletic^®, Huffy Sports^®, Mossy Oak^®, Cross Creek^®, Moving Comfort^®, Bike^®, Dudley^®, Discus^®,and Sherrin^®.

Since incorporating in 1902, the “Russell” name has been associated with high quality apparel. In 1998, we initiated a restructuring and reorganization program with the objectives of (i) transitioning the Company from a manufacturing-driven business to a consumer-focused organization that markets branded apparel products; and (ii) creating an efficient, low-cost operating structure with the flexibility to take advantage of future opportunities to further reduce costs, such as strategic outsourcing arrangements, transferring our sewing and assembly operations to offshore facilities, and utilizing increasingly efficient domestic facilities. We substantially completed our restructuring and reorganization program in 2001.

In addition to the initiatives of the restructuring and reorganization program in our apparel business, we began evaluating selective acquisition opportunities to further diversify our portfolio of brands and products. In 2000, we acquired the Mossy Oak^® camouflage apparel business of Haas Outdoors, one of the premier camouflage brands in the world. In 2003, we completed two acquisitions that launched our participation in the sporting goods and athletic equipment markets. The acquisition of the Bike Athletic Company business introduced athletic supporters, knee and elbow pads, braces, and protective equipment into our product offering. Then, with the May 2003 acquisition of the brands, contracts and related assets of the sporting goods business of Spalding Sports Worldwide, Inc., we became a leading marketer of basketballs and other inflatable sporting goods products.

During 2004, we further expanded our sports equipment product mix with three strategic acquisitions. In June, we acquired the assets of American Athletic, Inc., a leading supplier of gymnastics equipment and basketball backboard and backboard systems, which provided a platform for the extension of our Spalding business. In July, we acquired the Huffy Sports business, further expanding our line of basketball backboards, backboard systems and accessories. American Athletic and Huffy Sports now operate as part of our Spalding business. Then, in December, we entered the athletic footwear business with the acquisition of Brooks Sports. The Brooks^® brand is a leader in high performance athletic footwear and apparel (primarily for running) and is considered a pioneer in the technical athletic footwear and apparel industry.

Today, Russell is a major branded athletic and sporting goods company with a rich history of marketing athletic uniforms, apparel, athletic footwear, and equipment for a wide variety of sports and fitness activities. Its global position is built on well-known brands and quality products. Through Russell Athletic, the Company is a leading supplier of team uniforms in the U.S. Through Spalding, which now includes American Athletic and Huffy Sports, Russell is also the largest provider of basketball equipment in the world. This position was solidified by our recently signed eight-year agreement with the National Basketball Association (“NBA”) that allows us to continue our involvement with one of the fastest growing sports in the world.

We offer a diversified portfolio of brands and products across multiple distribution channels and our products are marketed and sold throughout North America and approximately 100 other countries. We market and distribute our products through mass merchandisers, sporting goods dealers, specialty running stores, department and sports specialty stores, college stores, on-line retailers, mail order houses, artwear distributors, screenprinters, embroiderers, and on a limited basis through owned retail stores. We sell our products primarily through a combination of salaried, Company-employed sales persons and commission agents. We operate in two segments: Domestic, which includes the United States and the international sales and licensing revenue from our Spalding business, and International Apparel. Domestic segment sales represented approximately 90% of our total 2004 net sales. The Domestic segment is further aligned by Athletic and Activewear. For fiscal 2004, these channels represented approximately 43% and 47%, respectively of our total net sales. For fiscal 2003, these channels represented approximately 41% and 51%, respectively of our total net sales, and for fiscal 2002, these channels represented approximately 34% and 58%, respectively of our total net sales. International Apparel segment sales represented approximately 10% of our total 2004 net sales.

For our apparel business, we produce or source products utilizing a combination of owned facilities primarily in the United States, Honduras and Mexico, as well as contractors and other suppliers around the world. Approximately 99% of our apparel sewing and assembly operations are conducted offshore for products sold by the Domestic segment (excluding socks). Our yarn spinning joint venture supplies the majority of our yarn requirements.

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For our sporting goods and athletic equipment businesses, the products offered by Spalding, Brooks and Bike are generally sourced from third-party contractors outside the United States, primarily in Asia. American Athletic and Huffy Sports produce the majority of our basketball backboard and gymnastics equipment in Company-operated facilities. Steel and other raw materials used in this production are sourced from a variety of suppliers and countries.

Our dependence on third parties for manufacturing and raw materials production could subject us to difficulties in obtaining timely delivery of products and materials that meet our quality standards. We do not have long-term supply contracts for any of our raw materials other than yarn, but we believe there are readily available alternative sources of supply. However, if we are unable to secure or maintain our relationships with contractors or suppliers, or experience delays in obtaining alternative sources of supply, we could encounter difficulties in satisfying our customers’ requirements, which could result in our customers canceling orders, demanding reduced prices, refusing to accept orders, or reducing future orders, any of which could have a material adverse effect on our business, results of operations and financial condition.

In addition, the raw materials used to manufacture our products are subject to price volatility caused by weather, supply conditions, government regulations, economic climate, and other unpredictable factors. To reduce the risk caused by market fluctuations, we have in the past entered into futures contracts to hedge commodity prices, principally cotton, on portions of anticipated purchases. However, we do not currently hold any significant hedging positions and have no present intention to engage in further commodity hedging. The supply agreement with our yarn joint venture provides for pricing to be calculated on a conversion cost basis plus the actual cost of raw materials. We direct the timing and pricing of cotton purchases by the joint venture.

In October 2003, we announced an Operational Improvement Program (“OIP”) targeting $50 million in cost reductions to offset anticipated selling price decreases, higher fiber costs and other cost increases for fiscal 2004. During 2004, we increased the targeted savings of that program to $60 million. That plan included improving operating efficiencies and asset utilization, while streamlining processes in both our manufacturing and administrative areas such as: (1) lower full-packaged sourcing costs; (2) increased efficiencies in existing manufacturing operations; (3) improved distribution costs; and (4) expanded production with lower cost contractors in Haiti.

Our results of operations are affected by numerous factors, including seasonal variations. Typically, demand for our apparel products is higher during the third and fourth quarters of each fiscal year. Weather conditions also affect the demand for our apparel products, particularly for our fleece (sweatshirts and sweatpants) products. Demand in our basketball and basketball equipment business is typically higher in the second and fourth quarters, but is not as pronounced as the seasonality of our fleece business. We expect demand for our newest acquisition, Brooks, to be slightly higher in the first half of the year. Generally, we produce and store finished goods inventory, particularly fleece, to meet the expected demand for delivery in the upcoming season. If, after producing and storing inventory in anticipation of seasonal deliveries, demand is significantly less than expected, we may hold inventory for extended periods of time or sell excess inventory at reduced prices. Either scenario could adversely affect our results of operations. Reduced demand could also result in lower plant and equipment utilization, which would have a negative impact on our business. In addition, due to the time that may lapse between production and shipment of goods, prices may not immediately reflect changes in our cost of raw materials and other costs.

Some of our customers are material to our business and results of operations. For fiscal 2004, 2003 and 2002 respectively, Wal-Mart and its subsidiaries, our largest customer, represented approximately 19.3%, 21.2%, and 19.6% of our consolidated gross sales. Our percentage of gross sales to Wal-Mart and its subsidiaries may increase as we pursue opportunities for new business with Wal-Mart. Our top ten customers accounted for approximately 44% of our 2004 gross sales. We believe that consolidation in the retail industry, particularly in the sporting goods retail industry and the strength of our customers have given certain customers the ability to make greater demands and we expect this trend to continue. However, we also believe that this consolidation may afford us greater cost savings potential as a result of more advantageous economies of scale, as we have such a broad array of products and brands focused on the sporting goods market. If consolidation continues, our sales and results of operations may be increasingly sensitive to deterioration in the financial condition of, or other adverse developments with, one or more of our customers. Although we believe that our relationships with our major customers are good, we generally do not have long-term contracts with any of them, which is typical of our industry. As a result, although our customers provide indications of their product needs and purchases on a season by season basis, they generally purchase our products on an order-by-order basis and the relationship, as well as particular orders, can be terminated at any time. The loss of, or significant decrease in, business from any of our major customers could have a material adverse effect on our business, results of operations and financial condition.

Financial Information About Segments

Russell has two reportable segments: Domestic and International Apparel. The Domestic segment is further aligned by Athletic and Activewear. Athletic and Activewear have been aggregated into the Domestic reportable segment because these business lines are similar in economic characteristics, products, production processes, type of customer, distribution method and regulatory environment. The International Apparel segment primarily consists of sales of our core Russell Athletic^® and JERZEES^® apparel products outside

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the United States. For further discussion of the financial information on our segments, see Note 9 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

Domestic. Our Domestic segment is organized into two business groups: Athletic and Activewear. The Athletic group markets and sells apparel, footwear, sporting goods, and sports equipment products under the brand names Russell Athletic^®, Brooks^®, Bike^®, Mossy Oak^®, Moving Comfort^®, Spalding^®, American Athletic^®, Huffy Sports^®, and Dudley^®. The Activewear Group is made up of JERZEES^® products sold to a variety of retailers, predominately mass merchandisers, and certain JERZEES^®, Cross Creek^®, and Three Rivers^® unprinted or “blank” products that are sold to artwear distributors and wholesalers. Typically, these customers then decorate the products or sell them to a third party, such as a screen printer or embroiderer, many of which we may also sell direct. The Activewear channel also includes fabrics that we sell to other apparel manufacturers, primarily for the manufacture of school and industrial uniforms.

International Apparel. The International Apparel segment is made up primarily of sales of our core Russell Athletic^® and JERZEES^® apparel products outside the United States. For fiscal 2004, this segment represented approximately 10%, or $122.8 million, of total net sales. The majority of our International Apparel segment business is sales of JERZEES^® products to the artwear/careerwear channel in Europe. In Europe, we also market Russell Athletic^® products, primarily through licensing arrangements. Russell Athletic^® products are also sold in Japan, where JERZEES^® and Discus^® products are sold as well. Our International Apparel segment sales force and the independent agents dedicated to the international business are primarily based in the United Kingdom, continental Europe, Canada, Mexico, Japan, and Australia and are generally assigned by business line and by geographic territory.

Financial Information About Geographic Areas

See “Enterprise-wide Disclosures” from Note 9 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

Our foreign operations subject us to risks customarily associated with foreign operations. Our products are sold in more than 100 countries and we have facilities in numerous foreign countries, including Australia, Honduras, Mexico, and the United Kingdom, with the majority of our foreign sales being in Europe, Australia and Mexico. Net sales are collected in the local currency, exposing the Company to risks of change in social, political and economic conditions inherent in operating in foreign countries, including, but not limited to, the following: (i) currency fluctuations; (ii) import and export license requirements; (iii) trade restrictions; (iv) changes in tariffs and taxes; (v) restrictions on repatriating foreign profits back to the United States; (vi) foreign laws and regulations; (vii) difficulties in staffing and managing international operations; (viii) political unrest; and (ix) disruptions or delays in shipments.

We have foreign currency exposures relating to buying, selling and financing in currencies other than our functional currencies. We also have foreign currency exposure related to foreign denominated revenues and costs translated into U.S. dollars. These exposures are primarily concentrated in the euro, British pound sterling and Mexican peso. Fluctuations in foreign currency exchange rates may affect the results of our operations and the value of our foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations. Fluctuations in currency exchange rates may also affect the relative prices at which we and our foreign competitors sell products in the same markets. In addition, changes in the value of the relevant currencies may affect the cost of certain items required in our operations. Fluctuations in foreign currency exchange rates could have a material adverse effect on our business, results of operations and financial condition. For further discussion of foreign currency exposures, see “Quantitative and Qualitative Disclosures About Market Risks” in Part II, Item 7A of this Report on Form 10-K.

Intellectual Property

We market our products under a number of trademarks and tradenames. We have registered trademarks in the United States for Russell Athletic^®, Jerzees^®, Bike^®, Cross Creek^®, Moving Comfort^®, Spalding^®, Infusion^®, Dudley^®, American Athletic^®, Huffy Sports^®, and Brooks^® and variations of these brands as well as other trademarks. We have similar trademark registrations internationally. We also have a worldwide license to use certain registered Mossy Oak^® trademarks. The protection of our trademarks is important to our business. We believe that our registered and common law trademarks have significant value and these trademarks are instrumental to our ability to create and sustain demand for our products.

In December 2004, we entered into a new eight-year global partnership with the NBA, under which Spalding maintains its exclusive rights to produce and sell a complete line of NBA and team-identified basketballs (including the official game ball of the NBA). The Spalding^® NBA Game Ball will continue to be the only basketball used during all NBA practices, exhibitions, games and international competitions, and Spalding will also continue to serve as the official ball of the WNBA and NBDL, the NBA’s developmental league. The agreements also provide for Spalding and Huffy Sports to have exclusive rights to produce and sell NBA branded backboards and certain accessories to the retail channel. The agreements require us to (i) pay certain licensing fees, including fixed minimum fees plus a percentage of net sales of products, (ii) expend certain minimum amounts on advertising and promotion of NBA products, and

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(iii) provide a specified amount of product to the NBA and NBA teams free of charge. If we fail to comply with the material terms of the NBA agreements, including the obligation to pay licensing fees, the NBA may terminate the agreements.

Our Mossy Oak^® license from Haas Outdoors is perpetual and permits us to use certain of the licensor’s trademarks, service marks, trade names, logos, and copyrights on apparel and accessories. This license is non-exclusive for certain products including accessories, gloves, headwear, footwear, bags, and products incorporating performance features such as special fabrics. The Mossy Oak^® license also requires that we pay a licensing fee calculated as a percentage of net sales from our Mossy Oak® products, with certain minimum
annual royalty payments through 2005. If we fail to comply with the material terms of the Mossy Oak® license, including the obligation to make royalty payments, Haas Outdoors may terminate the license.

We have three non-exclusive licenses with licensing agents that cover approximately 338 colleges and universities. One of those licenses expires on March 31, 2006 and another expires on March 31, 2007. The third license automatically renews for rolling one-year terms, but is subject to termination without cause at any time on 90 days notice. We also have approximately 43 licenses directly with colleges and universities that are generally for one to two year terms and require us to pay a licensing fee of a percentage of net sales.

Product innovation is a highly important factor in our sporting goods and athletic equipment businesses and many of the innovations in the products marketed by those businesses have been patented. The loss of any of our patents could result in increased competition and reduced sales and margins of these products. However, we do not believe that the loss of any one patent would have a material effect on our business, results of operations and financial condition.

Competition

Competition in the apparel, sports equipment and athletic footwear industries varies by product line and we expect competition to intensify in all of our businesses. While no single competitor dominates any channel in which we operate, some of our competitors are larger, more diversified and have greater financial and other resources than we do. We, and others in our industry, face competition on many fronts, including, without limitation: (i) quality of product; (ii) brand recognition; (iii) price; (iv) product differentiation; (v) advertising; and (vi) customer service. We also compete with companies outside the United States, many of which may have lower costs. Our ability to remain competitive in the areas of quality, price, marketing, product development, manufacturing, distribution, and order processing will, in large part, determine our future success. Our primary competitors in the Athletic group are Nike, Reebok, Adidas, Wilson, New Balance, ASICS, Champion, and Under Armour. Our primary competitors in the Activewear group are Hanes, Gildan, Fruit of the Loom, and various private label and house brands.

Employees

As of January 1, 2005, we employed approximately 14,400 persons. We have never had a strike or work stoppage and consider our relationship with our employees to be good.

Regulation

We are subject to federal, state and local laws and regulations affecting our business, including, but not limited to, those promulgated under the Occupational Safety and Health Act, the Consumer Product Safety Act, the Flammable Fabrics Act, the Textile Fiber Product Identification Act, and the rules and regulations of the Consumer Products Safety Commission and various environmental laws and regulations. We believe that we are in compliance with all applicable governmental regulations under these statutes. We also believe that we are in compliance with all current environmental requirements and we expect no material environmental expenditures in the foreseeable future to maintain such compliance.

Available Information

Our Internet address is www.russellcorp.com and our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available, free of charge, through the Investor Relations section of our website as soon as reasonably practicable after filing with the Securities and Exchange Commission.

Reincorporation in Delaware

Our shareholders approved a proposal to change the Company’s state of incorporation from Alabama to Delaware (the “reincorporation”) at the annual meeting of shareholders held on April 21, 2004. However, as previously disclosed, an entity holding approximately 10% of our outstanding shares delivered a written notice of dissent to the proposal in accordance with Alabama law. As a result, we have not yet proceeded with the reincorporation. On March 15, 2005, we entered into a Registration Rights Agreement with holders of an aggregate of 3,021,852 shares of the Company’s Common Stock, including members of the Russell family and affiliated entities. Pursuant to the Registration Rights Agreement, we granted the holders certain demand and piggyback registration rights, and the holders waived their dissenters’ rights to the reincorporation. The holders also agreed to refrain from certain actions affecting the Company for a period of 42 months and to vote or cause their shares to be voted in accordance with the recommendations of the Company’s management. As a result of the waiver of dissenters’ rights, the Company intends to effect the reincorporation shortly.

FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, contains certain statements that describe our beliefs concerning future business conditions, prospects, growth opportunities, and the outlook for the Company based upon currently available information. Wherever possible, we have identified these “forward-looking” statements (as defined in the Private Securities Litigation Reform Act of 1995 (the “Act”)) by words such as “anticipates”, “believes”, “could”, “may”, “intends”, “estimates”, “expects”, “projects”, and similar phrases. We include such statements because we believe it is important to communicate our future expectations to our shareholders, and we therefore make such forward-looking statements in reliance upon the safe harbor provisions of the Act. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including, but not limited to, any projections of net sales, gross margin, expenses, or earnings or losses from operations. These forward-looking statements are based upon assumptions we believe are reasonable.

Such forward-looking statements are subject to risks and uncertainties that could cause our actual results, performance and achievements to differ materially from those expressed in, or implied by, these statements, including, but not limited to: (a) changes in economic conditions such as changes in interest rates, currency exchange rates, commodity prices, and other external and political factors over which we have no control; (b) changes in weather and the seasonal nature of our business; (c) significant competitive activity, including, but not limited to, promotional and price competition; (d) changes in customer demand for our products and our ability to maintain customer relationships and grow our business; (e) risks associated with consolidation in the retail industry; (f) the ability to implement and achieve the goals of our Operational Improvement Program and other cost savings initiatives; (g) the collectibility of receivables from our customers; (h) our debt structure, cash management and cash requirements; (i) estimates and assumptions utilized in our accounting practices; (j) risks associated with our new Honduras textile operation; (k) our ability to efficiently utilize plants and equipment; (l) our mix of products sold; (m) effects of lawsuits and government regulations; (n) dependence on licenses from third parties, including, but not limited to, our agreements with the NBA; (o) price volatility of raw materials and the availability of alternative sources of supply; (p) reliance on a few customers for a portion of our sales; (q) dependence on third parties for the production of yarn and the manufacture of certain of our products; (r) our international operations; (s) protection of our intellectual property; (t) risks related to the Brooks, Huffy Sports and American Athletic acquisitions and our acquisition strategy; (u) our management of inventory levels and working capital; (v) our investments in capital expenditures; and (w) other risk factors listed from time to time in our SEC filings. The risks listed above are not exhaustive and other sections of this Annual Report on Form 10-K may include additional factors that could adversely affect our business, financial condition, results of operations, and cash flows. We assume no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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ITEM 2. PROPERTIES

Russell’s principal executive office is located in Atlanta, Georgia, with other offices located in Alexander City, Alabama, Ft. Payne, Alabama, Springfield, Massachusetts, Jefferson, Iowa, Sussex, Wisconsin, Bothell, Washington, and Chantilly, Virginia. We have manufacturing plants and distribution facilities for the Domestic segment in Alabama, Georgia, North Carolina, Iowa, Wisconsin, Washington, Mexico, and Honduras. We have secured most of our outstanding debt by a pledge of substantially all of our domestic assets, which included first mortgages on most of our real property in the United States, other than property held for sale, and encumbrances on manufacturing machinery held in the United States. We have no other material encumbrances on real property or manufacturing machinery.

We believe that all of our properties are well maintained and suitable for operation and are currently fully utilized for such purposes, excluding plants and equipment that are held for sale as a result of our OIP and our restructuring and reorganization program.

We utilize an aggregate of approximately 9,489,000 square feet of manufacturing, warehousing and office facilities, and have approximately 1,074,000 square feet that is either idle or held for sale. The following table summarizes the approximate areas of such facilities:

All presently utilized facilities in the U.S. are owned, except certain regional sales offices, certain warehousing and shipping facilities, and the Company’s locations in Atlanta, Georgia, Springfield, Massachusetts, Sussex, Wisconsin, Bothell, Washington, and Chantilly, Virginia (see Note 8 of “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K).

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ITEM 3. LEGAL PROCEEDINGS

We are a co-defendant in Locke, et al. v. Russell Corporation, et al. filed on January 13, 2000 in the Circuit Court of Jefferson County, Alabama. Fifteen families who own property on Lake Martin in the Raintree Subdivision in Alexander City, Alabama, were the original plaintiffs in the case, which sought unspecified money damages for trespass and nuisance. However, ten families dropped out of the case and there are five remaining plaintiff families. In May 2002, the trial court entered summary judgment in our favor on all but one of the plaintiffs’ claims. The remaining claim involves a private right of action for public nuisance. We filed a summary judgment motion in October 2003, which was denied in March 2004. Trial of the Locke case has been set for September 2005. A complaint substantially identical to the one filed in the Locke case was filed on November 20, 2001, in the Circuit Court of Jefferson County, Alabama, by two residents of the Raintree Subdivision (Gould v. Russell Corporation, et al.). The trial court has entered summary judgment in our favor on all claims in that case, and the plaintiffs in the case have filed a motion to alter that determination, which remains pending. The allegations in the Locke and Gould cases are similar to those contained in a case styled Sullivan, et al. v. Russell Corporation, et al., which was resolved in our favor by a ruling of the Alabama Supreme Court in 2001. We plan to vigorously defend the Locke and Gould suits.

We are a party to various other lawsuits arising out of the normal conduct of our business. We do not believe that any of these matters, if adversely determined, would have a material adverse effect upon us.

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

No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

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PART II

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

Russell’s securities are traded on the New York Stock Exchange (“NYSE”) and various other regional exchanges under the ticker symbol RML. As of March 11, 2005, we had approximately 9,000 holders of record of our common stock. The range of high and low prices of our common stock, year-end closing prices and the dividends per share declared during each calendar quarter of the last two years are presented below:

We are subject to certain restrictions on our ability to pay dividends under the terms of our $325 million Senior Secured Credit Facilities and our $250 million aggregate principal amount of 9.25% Senior Unsecured Notes due 2010. For a description of such restrictions, see Note 2 of the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Report on Form 10-K.

The following table summarizes our purchases of our common stock for the quarter ending January 1, 2005:

ISSUER PURCHASES OF EQUITY SECURITIES

Our Chief Executive Officer certified to the NYSE on May 20, 2004, that he was not aware of any violation by the Company of the NYSE’s corporate governance listing standards.

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ITEM 6. SELECTED FINANCIAL DATA

Five-Year Selected Financial Highlights

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c)		Fiscal 2000, 2001 and 2003 include special charges related to certain restructuring plans of $65,011,000, $144,092,000 and $7,303,000 respectively. The after-tax impact of these charges on 2000, 2001 and 2003 earnings was ($1.46), ($2.88) and ($0.15) respectively, per diluted share. There were no significant special charges incurred in fiscal 2004 or 2002.
d)		Fiscal 2002 includes a charge of $20,097,000 ($12,621,000, net of tax) associated with the early retirement of long-term indebtedness as described in Note 2 to the consolidated financial statements. The after-tax impact of this charge on 2002 earnings was ($0.39) per diluted share.
e)		Fiscal 2004 and 2003 were favorably impacted by non-recurring tax effects. See Note 6 to the consolidated financial statements for more information on income taxes.
f)		Average of amounts at beginning and end of each fiscal year.
g)		Certain prior year amounts have been reclassified to conform to the fiscal 2004 presentation.
h)		Excludes impact from our acquisition of Brooks Sports since it was purchased at 2004 year end.

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

General

Today, Russell Corporation is a major branded athletic and sporting goods company with a rich history of marketing athletic uniforms, apparel and equipment for a wide variety of sports and fitness activities. Its global position is built on well-known brands and quality products.

With established brands such as Russell Athletic®, JERZEES®, Spalding®, and Brooks®, we have products to meet the needs of everyone, from the serious athlete to the weekend warrior. Other brands include American Athletic®, Huffy Sports®, Mossy Oak®, Cross Creek®, Moving Comfort®, Bike®, Dudley®, Discus®, and Sherrin®.

Founded in 1902, Russell started on a small scale with a few pieces of equipment and a small building. As the company grew, it became a pioneer in the athletic team uniform business and one of the first companies to produce the most popular athletic product of all – the sweatshirt.

In 1998, major restructuring efforts began the transitioning of the company from a vertical manufacturing-driven company with the majority of its production in the U.S., to a customer and consumer-driven apparel company. Over the next three years, we moved away from ownership of certain textile operations (yarn spinning) while successfully shifting the majority of our apparel operations (sewing) to lower cost offshore facilities, primarily Mexico and Central America. In October 2003, we announced an Operational Improvement Program (“OIP”) targeting $50 million in cost reductions to offset anticipated selling price decreases, higher fiber costs and other cost increases for fiscal 2004. During 2004, we increased the targeted savings of that program to $60 million. That plan included improving operating efficiencies and asset utilization, while streamlining processes in both our manufacturing and administrative areas such as: (1) lower full-packaged sourcing costs; (2) increased efficiencies in textile (dyeing and finishing) operations; (3) improved distribution costs; and (4) expanded production with lower cost contractors in Haiti. As part of the OIP, we eliminated approximately 100 positions in 2003, primarily salaried and administrative office staff, and incurred asset impairment charges associated with the closings of two International sales offices and a previously idled domestic finished goods warehouse.

In addition to the OIP, we have a new textile plant for both t-shirt and fleece production under construction in Honduras. Once fully operational in 2006, the Merendon Plant is expected to generate approximately $15 million to $20 million in cost savings versus the costs at the time the project was initiated. Also, we eliminated approximately another 20 salaried and administrative office staff positions in 2004.

During 2003 and 2004, we made five strategic acquisitions to further advance our position in the sports equipment business. On February 6, 2003, we acquired the majority of the assets of Bike Athletic Company (“Bike”) which introduced athletic supporters, knee and elbow pads, braces, and protective equipment into our product offering. On May 16, 2003, we acquired assets of Spalding Sports Worldwide, Inc. (“Spalding”) making us a leading marketer of basketballs and softballs, also selling footballs, soccer balls, and volleyballs. On June 15, 2004, we acquired the net assets of American Athletic, Inc. (“AAI”), a leader in the gymnastics equipment business, but as important to us, provided Spalding a platform for extension into the basketball backboard and backboard systems business. On July 19, 2004, we acquired certain assets, and assumed certain liabilities, of Huffy Sports from Huffy Corporation, further expanding our basketball backboard, backboard systems and accessories business. AAI and Huffy Sports are now part of our Spalding operations.

On December 30, 2004, we entered the athletic footwear business with the acquisition of the Brooks Sports business (“Brooks”). Brooks is a pioneer in the technical footwear industry, and its technical apparel is highly valued in the world of serious runners. Our Moving Comfort® brand also holds a strong position in running and fitness with its performance apparel designed especially for women.

Typically, demand for our apparel products is higher during the third and fourth quarters of each fiscal year. Weather conditions also affect the demand for our apparel products, particularly for our fleece (sweatshirts and sweatpants) products. Generally, we produce, source and store finished goods inventory, particularly fleece, to meet the expected demand for delivery in the upcoming season.

Demand for our basketball and basketball equipment business is typically higher in the second and fourth quarters, but its seasonal pattern is not as pronounced as the fleece business. Components and complete basketball systems may be sourced, with some assembly performed at our operations in the U.S. All of our inflatables (basketballs, footballs, volleyballs, soccer balls, etc.) are manufactured overseas. Likewise, we expect demand for our newest acquisition, Brooks, our athletic footwear and running equipment brand, to be slightly higher in the first half of each year. Brooks sources 100% of its production, primarily from various suppliers in China.

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While product mix affects our overall gross profit, operating profit is similar among products and across our various brands and distribution channels. In cases where we manufacture products, plant utilization levels are important to our profitability because a substantial portion of our total production cost is fixed.

We operate our business in two segments: Domestic and International Apparel. The Domestic segment is further aligned by brands. The two brand groupings in the Domestic segment are Athletic and Activewear. The operating results of Bike, Spalding, AAI, Huffy Sports and Brooks have been included in our consolidated financial statements, as part of the Domestic segment, since their respective acquisition dates. The International Apparel segment generally distributes similar athletic, outdoor and activewear apparel products.

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Critical Accounting Policies

The following discussion and analysis of our financial condition, results of operations, liquidity, and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Generally accepted accounting principles require that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, long-lived assets, deferred income taxes, restructuring reserves, pension benefits, contingencies, and litigation. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that some of our accounting policies involve a higher degree of judgment or complexity than our other accounting policies. We have identified the policies below that are critical to our business operations and the understanding of our results of operations. The impact of these policies on our business operations and their associated risks are discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 to the consolidated financial statements.

Consolidation. The consolidated financial statements include the accounts of Russell Corporation, all of our majority-owned subsidiaries, and any variable interest entities in which we are deemed to be the primary beneficiary, after the elimination of intercompany accounts and transactions.

In January 2003, the FASB issued Financial Interpretation No. 46, Consolidation of Variable Interest Entities, (“FIN 46”). In December 2003, the FASB issued a revised interpretation of FIN 46 (“FIN 46-R”), which supersedes FIN 46 and clarifies certain aspects of FIN 46. FIN 46-R addresses whether business enterprises must consolidate the financial statements of entities known as “variable interest entities”. A variable interest entity is defined by FIN 46-R to be a business entity which has one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and (2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities, or (c) the right to receive the expected residual returns of the entity if they occur, which is the compensation for risk of absorbing expected losses. Under FIN 46-R, the party with an ownership, contractual or other financial interest that absorbs the majority of the variable interest entity’s expected losses, or is entitled to receive a majority of the residual returns, or both, is deemed to be the primary beneficiary, and is required to consolidate the variable interest entity’s assets, liabilities and non-controlling interests. We performed a review of all of our ownership and contractual interests in entities including Frontier Yarns. We have determined that Frontier Yarns meets the criteria for being a variable interest entity and that we are the primary beneficiary of the entity. In accordance with FIN 46-R, we began consolidating Frontier Yarns on April 4, 2004. At January 1, 2005, the consolidation of Frontier Yarns increased our total assets by $24.9 million, total liabilities by $10.8 million and non-controlling interests by $14.0 million. The consolidation of Frontier Yarns did not have a significant impact on our results of operations for 2004.

Revenue recognition. We recognize revenues, net of estimated sales returns, discounts and allowances, when goods are shipped, title has passed, the sales price is fixed, and collectibility is reasonably assured. Substantially all of our sales reflect FOB shipping point terms.

We record provisions for estimated sales returns and allowances on sales in the same period as the related sales are recorded. These estimates are based on historical sales returns, analyses of credit memo data, specific notification of pending returns, and other known factors. If the historical data we use to calculate these estimates do not properly reflect future returns, net sales could either be understated or overstated.

Trade accounts receivable. Trade accounts receivable consist of amounts due from our normal business activities. We maintain an allowance for doubtful accounts to reflect expected credit losses. We provide for bad debts based on collection history and specific risks identified on a customer-by-customer basis. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and the creditworthiness of each customer. Furthermore, these judgments must be continually evaluated and updated. If the financial condition of our customers were to deteriorate causing an impairment of their ability to make payments, additional provisions for bad debts may be required in future periods. On the other hand, if our ultimate recovery on the accounts we have reserved or written off exceeds our estimates, we may need to decrease our reserves in the future.

Inventories. Inventories are carried at the lower of cost or market, with cost for the majority of our inventories determined under the Last-In, First-Out (LIFO) method. We apply the lower of cost or market principle to LIFO inventories in the aggregate, rather than to individual stock keeping units (SKU’s), because it is not practical to establish the LIFO cost of an individual SKU. For the remainder of our inventory that is accounted for under the First-In, First-Out (FIFO) method, we write down individual SKU’s that become

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obsolete and unmarketable to their estimated net realizable value based upon, among other things, assumptions about future demand and market conditions. If actual market conditions are less favorable than we project, additional inventory write-downs may be required.

In 2002, our pre-tax income was unfavorably impacted by $6.0 million due to the liquidation of LIFO inventory quantities carried at higher costs prevailing in prior years as compared with current manufacturing costs. There was no significant impact on pre-tax income from the liquidation of LIFO inventory quantities in 2003 and 2004.

Income Taxes. We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured at the enacted tax rates that will be in effect when the taxes are expected to be paid. We record a valuation allowance to reduce deferred tax assets to the amount we believe is likely to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, if we determine that we will not be able to realize all or part of our net deferred tax assets in the future, we will make an adjustment to increase our valuation allowance for deferred tax assets and that adjustment will be charged to income in the period that we make the determination. Likewise, if we determine that we will be able to realize more of our deferred tax assets than we currently expect, we will adjust our deferred tax assets, which will have the effect of increasing net income in the period that we make the determination.

Property, Plant and Equipment. Property, plant and equipment are stated at historical cost and depreciation is computed using the straight-line method over the lives of the assets. We estimate the depreciable lives of property, plant and equipment based on the period over which the assets will be of economic benefit to us.

We review property, plant and equipment for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Most of our property, plant and equipment are employed in integrated manufacturing and distribution processes. Accordingly, we ordinarily cannot assess impairment of assets held for use at the individual asset level, but rather we aggregate them into logical groups for purposes of testing whether they are impaired. When we identify assets that will be taken out of service through the ordinary course of replacement and modernization or through restructuring activities, we shorten the remaining useful lives and adjust the salvage values, as appropriate, to recognize depreciation over the shortened remaining estimated useful lives. Otherwise, we classify assets as held for sale, write down the carrying value to fair value (less cost to sell) and suspend depreciation on the assets when we formulate a plan of disposal and there is no operational requirement to continue their use. We determine fair value, in most cases, by reference to third-party appraisals, and, in other cases, we perform internal analyses based upon recent sales prices of comparable assets (when available). We periodically evaluate the carrying values of assets held for sale to determine whether revisions are needed to reflect changed circumstances, including market conditions.

In 2004, we realized approximately $0.4 million of net gains on the disposal of three properties. In 2003, we recorded $2.0 million of impairment charges on certain assets, which is net of $1.1 million of realized gains on the disposal of five properties. At January 1, 2005, we have three idled properties along with equipment remaining to be sold, which are reflected in our consolidated balance sheet at approximately $2.0 million, representing our best estimate of ultimate selling prices less disposal costs. Although we do not anticipate further significant charges, the actual proceeds from the sales of these facilities and the actual costs to dispose of these assets may differ from our current estimates, which would require us to recognize a charge or credit to future earnings.

Impairment and Amortization of Intangible Assets. Under FASB Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, amortization of goodwill is eliminated; however, an annual two-step impairment test is required. The first step determines if goodwill is impaired by comparing the fair value of the reporting unit as a whole to the book value. If a deficiency exists, the second step measures the amount of the impairment loss as the difference between the implied fair value of goodwill and its carrying value. In performing these annual impairment tests, we make assumptions regarding estimated future cash flows and other factors to determine whether the carrying values are impaired, and then, if impaired, to determine the amount of any impairment loss required to reduce the carrying value to fair value. If these estimates or assumptions change, we may be required to record impairment charges for these assets.

Purchased intangibles with indefinite economic lives are tested for impairment annually using a lower of cost or fair value approach. In determining whether an intangible has an indefinite life, we consider the expected use of the asset; the expected useful lives of other assets to which the asset may relate; any legal, regulatory or contractual provisions; the level of maintenance expenditures required to obtain the expected future cash flows from the asset; and the effects of obsolescence, demand and other economic factors. In performing these annual impairment tests, we make assumptions regarding estimated future cash flows and other factors to determine whether the carrying values are impaired, and then, if impaired, to determine the amount of any impairment loss required to reduce the

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carrying value to fair value. If these estimates or assumptions change, we may be required to record impairment charges for these assets.

Other intangibles continue to be amortized over their estimated useful lives, ranging from 2.4 to 40 years, and reviewed for impairment using a process similar to that used to evaluate property, plant and equipment.

Pension Benefits. We account for defined benefit pension plans in accordance with SFAS No. 87, Employers’ Accounting for Pensions, which requires us to recognize pension costs and liabilities based on actuarial evaluations. Inherent in these valuations are key assumptions including the discount rate at which the pension obligations could be effectively settled, the anticipated rate of future salary increases, and the assumed long-term rate of return on plan assets. In determining the discount rate, we consider current yields on high-quality fixed-income investments. The salary increase assumption is based upon historical experience and anticipated future management actions. The assumed long-term rate of return on plan assets is based upon the historical rate of return on the invested funds of the pension plan and projected future market returns. Periodic changes in these key assumptions could have a significant impact on the amount of recorded pension liabilities and on future pension benefit costs, although SFAS No. 87 permits the effects of the performance of the pension plan’s assets and changes in pension assumptions on our computation of pension expense to be amortized over future periods. For instance, given the continued decrease in interest rates, we plan to reduce the discount rate from 6.25% in 2004 to 5.90% in 2005. This assumption change, along with changes in the plan participants’ demographics and other factors, is expected to increase pension expense by approximately $2.0 million from fiscal 2004 to fiscal 2005.

Although our actual return on pension plan assets was positive in 2004, our after-tax minimum pension liability in stockholders’ equity increased $5.7 million to $24.3 million at January 1, 2005.

Stock Compensation. Awards under our incentive compensation plans (as more fully described in Note 7 to the consolidated financial statements) may include incentive stock awards, nonqualified stock options, reload stock options and restricted shares. On January 5, 2003, we adopted the prospective transition provisions of SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation, as amended by SFAS No. 148. SFAS No. 148 uses a fair value based method of accounting for employee stock awards using assumptions such as a risk-free interest rate, expected dividend yield, expected life of the stock award and the expected volatility of our stock price. By electing the prospective transition method of SFAS No. 148, our results of operations and our financial position are not affected by stock compensation awards granted prior to January 5, 2003. We recognized approximately $5.2 million ($3.6 million after-tax) and $0.6 million ($0.4 million after-tax) in stock compensation in 2004 and 2003, respectively. For stock compensation awards granted prior to January 5, 2003, we used the intrinsic value approach under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. See Note 7 to the consolidated financial statements for a comparison of reported results versus proforma results that assumes the fair value based method of SFAS No. 148 had been applied to all stock compensation awards granted.

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Results of Operations

The following information is derived from our audited consolidated statements of income for our fiscal years ended January 1, 2005 (fiscal 2004 – a 52-week period), January 3, 2004 (fiscal 2003 – a 52-week period) and January 4, 2003 (fiscal 2002 – a 53-week period).

2004 vs. 2003

Net Sales. In fiscal 2004 (a 52-week period), our net sales increased $112.1 million, or 9.4%, to $1.298 billion versus $1.186 billion in fiscal 2003 (a 52-week period).

The following table is a breakdown of net sales (in thousands):

Net sales from our 2004 acquisitions (AAI and Huffy) along with incremental 2004 net sales from our 2003 acquisitions (Spalding and Bike) were $77.4 million. As Brooks Sports was acquired effective December 30, 2004, there are no sales included in our 2004 results of operations. Excluding the increase in 2004 due to acquisitions, net sales increased 2.9% to $1.221 billion in 2004 versus $1.186 billion in 2003.

For the 2004 fiscal year, net sales in our Domestic segment totaled $1.175 billion, an increase of $90.6 million, or 8.4%, from net sales of $1.085 billion in fiscal 2003. Net sales from our 2004 acquisitions (AAI and Huffy) along with incremental 2004 net sales from our 2003 acquisitions (Spalding and Bike) contributed $71.6 million to the Domestic segment. Excluding the increase in 2004 due to acquisitions, net sales in our Domestic segment increased 1.7% to $1.104 billion in 2004 versus $1.085 billion in 2003.

For the 2004 fiscal year in our Domestic segment:

•

Net sales in our Athletic business increased $81.6 million, or 16.9%, to $563.2 million. The increase in net sales was primarily driven by our 2004 acquisitions of AAI and Huffy Sports along with incremental 2004 net sales from our 2003 acquisitions of Spalding and Bike. Excluding the increase in 2004 due to acquisitions, Athletic sales increased 2.1% to $491.5 million in 2004. This increase is primarily related to a shift in product mix as increased sales in higher priced apparel more than offset a 2.4% overall decline in apparel units shipped versus the prior year.

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•

Net sales in our Activewear business were $612.3 million, an increase of $9.0 million, from fiscal 2003. This increase was principally driven by volume increases despite lower sales of our JERZEES® activewear in the mass channel of certain spring items during the first half, and lower sales to distributors in the second half versus 2003. Overall, dozens of Activewear products shipped were up 8.3% versus 2003. The favorable impact from the increase in volume year over year was substantially offset by continued price reductions in the distributor market.

In fiscal 2004, net sales for our International Apparel segment were $122.8 million, an increase of 21.1%, or $21.4 million over fiscal 2003. Net sales in 2004 include incremental net sales from our 2003 acquisitions of approximately $5.7 million. Excluding the increase in 2004 due to acquisitions, net sales in the International Apparel segment increased 15.5% to $117.1 million in 2004. This 15.5% sales increase is due to a 3.2% increase in apparel products shipped (primarily in Europe), increased licensing revenue in Japan and favorable changes in foreign currency exchange rates. These favorable items were partially offset by lower pricing.

Gross Profit. Our gross profit was $363.9 million, or 28.0% of net sales, for fiscal 2004 versus a gross profit of $344.1 million, or 29.0% of net sales, in the prior year. During fiscal 2004, our gross profit percent was positively impacted by our acquisitions of Spalding and AAI and our ongoing cost savings initiatives. The benefits we realized in 2004 from the factors above were more than offset by: (1) pricing reductions, primarily in the distributor market; (2) additional costs for new product features; (3) higher pension and medical insurance costs; (4) higher raw material costs for cotton and polyester; and (5) the dilutive effect of Huffy Sports, which was acquired in 2004.

Selling, General and Administrative (“SG&A”). For fiscal 2004, our SG&A expenses were $269.6 million, or 20.8% of net sales, versus $246.5 million, also 20.8% of net sales, in the prior year. SG&A expenses increased primarily due to our acquisitions of Spalding, AAI and Huffy. In addition, we incurred approximately $5.2 million in stock compensation expense in 2004 versus $0.6 million in 2003 primarily related to the 2004 grants of performance and restricted share awards under our Executive Incentive Plan. During fiscal 2004, we incurred $0.8 million of charges primarily related to the reduction in our salaried and administrative office staff as part of a reorganization of our Domestic segment sales and marketing organization. Other reasons for the increase in SG&A expense include incremental expenses to comply with the Sarbanes-Oxley Act of 2002 of approximately $1.4 million, higher marketing expenses of $2.1 million, and $2.1 million of additional SG&A expense from the consolidation of Frontier Yarns. These increases were partially offset by lower general and administrative costs primarily in our Activewear business as cost reductions associated with the OIP took effect.

Other-Net. Other-net was income of $6.5 million in fiscal 2004 versus expense of $4.0 million in fiscal 2003. Other income during fiscal 2004 was primarily attributable to a $4.4 million gain on the sale of our minority interest in Marmot Mountain, Ltd. and the favorable impact from foreign currency transactions in 2004 versus 2003. The 2003 fiscal year was negatively impacted by asset impairment and other charges of approximately $2.7 million on assets held for sale, otherwise, other-net was an expense of $1.3 million in fiscal 2003.

Operating Income. Our consolidated operating income for fiscal 2004 was $100.8 million, or 7.8% of net sales, versus $93.6 million, or 7.9% of net sales, in fiscal 2003. This year-over-year increase in operating income was primarily attributable to higher sales volumes, cost savings associated with our announced OIP, and the sale of our minority interest in Marmot Mountain, Ltd. These factors were partially offset by higher raw material costs for cotton and polyester, and the other factors described above in both the Gross Profit and the SG&A sections of this report.

In fiscal 2004, our Domestic segment operating income was $112.9 million, or 9.6% of the segment’s net sales, versus $112.6 million, or 10.4% of the segment’s net sales, in fiscal 2003. The increase of $0.3 million in operating income for the segment was primarily attributable to higher sales volumes and ongoing cost savings initiatives, partially offset by higher raw material costs for cotton and polyester, and the other factors described above, including the impact of the lower operating margins associated with the Huffy Sports business.

In fiscal 2004, our International Apparel segment operating income was a profit of $5.5 million versus $0.5 million in fiscal 2003. The increase of $5.0 million in operating income for the segment primarily reflects sales growth in Europe of higher margin products.

Income Taxes. Our effective tax rate for 2004 of 29.4% decreased 3.3 percentage points from 32.7% in fiscal 2003. This decrease was mainly due to a benefit resulting from the closure of federal tax audits for 2002 and prior years along with the effects of our foreign operations. For information concerning income tax provisions, as well as information regarding other differences between our effective tax rates and applicable statutory tax rates, see Note 6 to the consolidated financial statements.

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2003 vs. 2002

Net Sales. In fiscal 2003 (a 52-week period), our net sales increased $21.9 million, or 1.9%, to $1.186 billion versus $1.164 billion in fiscal 2002 (a 53-week period).

The following table is a breakdown of net sales (in thousands):

Net sales from our 2003 acquisitions (Spalding and Bike) along with incremental 2003 net sales from our 2002 acquisition of Moving Comfort were $75.0 million. Excluding the increase in 2003 due to acquisitions, net sales decreased 4.6% to $1.111 billion in 2003 versus $1.164 billion in 2002.

For the 2003 fiscal year, net sales in our Domestic segment totaled $1.085 billion, an increase of $8.5 million, or 0.8%, from net sales of $1.076 billion in fiscal 2002. Net sales from our 2003 acquisitions (Spalding and Bike) along with incremental 2003 net sales from our 2002 acquisition of Moving Comfort were $75.0 million. Excluding the increase in 2003 due to acquisitions, net sales in our Domestic segment decreased 6.2% to $1.010 billion in 2003 versus $1.076 billion in 2002.

For the 2003 fiscal year in our Domestic segment:

•

Net sales in our Athletic Group increased $81.2 million, or 20.3%, to $481.6 million. The increase in net sales was primarily driven by our 2003 acquisitions of Spalding and Bike along with incremental sales from our 2002 acquisition of Moving Comfort. Excluding the increase in 2003 due to acquisitions, net sales in our Athletic business were up $6.2 million, or 1.6%, in fiscal 2003 versus the prior year. This increase is primarily related to the 3.5% increase in apparel units shipped versus the prior year.

•

Net sales in our Activewear Group were down 10.8% to $603.3 million versus fiscal 2002. The greatest reduction in sales was experienced in the Artwear market, the result of industry-wide lower prices coupled with a shift in sales mix toward lower-priced promotional products. Sales of our JERZEES® activewear products in the mass retail channel increased slightly despite a $26 million reduction in sales of our JERZEES® activewear products to Kmart and lower sock sales into the mass channel, the result of an overall reduction of sock inventories at retail.

In fiscal 2003, net sales for our International Apparel segment were $101.4 million, an increase of 15.2%, or $13.4 million, and total dozens shipped increased 1.8% over fiscal 2002. The increase in net sales and dozens shipped for the segment primarily reflects the favorable changes in foreign currency exchange rates and sales growth in markets such as Europe and Canada.

Gross Profit. Our gross profit was $344.1 million, or 29.0% of net sales, for fiscal 2003 versus a gross profit of $338.5 million, or 29.1% of net sales, in the prior year. During fiscal 2003, our gross profit was positively impacted by: (1) the acquisitions of Spalding, Bike and Moving Comfort; (2) our ongoing cost savings initiatives; and (3) lower 2003 inventory reserves for our Russell Athletic distribution center.

The benefits we realized in 2003 from the factors above were offset by: (1) pricing pressures and lower volumes, primarily in the distributor market of the Artwear channel; (2) additional costs for new product features; (3) higher pension and medical insurance costs; and (4) higher raw material costs for cotton and polyester.

Selling, General and Administrative (“SG&A”). For fiscal 2003, our SG&A expenses were $246.5 million, or 20.8% of net sales, versus $235.8 million, or 20.3% of net sales, in the prior year. During fiscal 2003, we incurred $4.6 million of special charges primarily related to the reduction in our salaried and administrative office staff as part of our OIP. Excluding these charges, our SG&A expenses for fiscal 2003 would have been $241.9 million, or 20.4% of net sales. On a comparative basis, excluding the charge of $5.0

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million related to our pre-petition receivables from Kmart, our SG&A expenses for fiscal 2002 would have been $230.8 million, or 19.8% of net sales.

Excluding the charges in both years, the increase in SG&A expenses in fiscal 2003 compared to fiscal 2002 was mainly the result of incremental expenses from our acquisitions (Spalding, Bike and Moving Comfort) and higher marketing expenses of $15.4 million. In addition, we incurred approximately $0.6 million in stock compensation expense related to our adoption of SFAS No. 123 during fiscal 2003. These increases were partially offset by lower general and administrative costs mainly in our Artwear business.

Other-Net. Other-net was expense of $4.0 million in fiscal 2003 versus income of $2.2 million in fiscal 2002. Excluding the $2.7 million impact of the 2003 special charges, other-net was an expense of $1.3 million in fiscal 2003. Other income during fiscal 2002 was primarily attributable to gains of $2.5 million on the sale of non-core assets.

Operating Income. Our consolidated operating income for fiscal 2003 was $93.6 million, or 7.9% of net sales, versus $104.9 million, or 9.0% of net sales, in fiscal 2002. Excluding $7.3 million of special charges in the 2003-third and fourth quarters, our operating income for fiscal 2003 would have been $100.9 million, or 8.5% of net sales. On a comparative basis, excluding the charge of $5.0 million in the 2002-third quarter related to our pre-petition receivables from Kmart and the $2.5 million gain associated with the sale of non-core assets, our operating income would have been $107.4 million, or 9.2% of net sales, in fiscal 2002. This year-over-year decrease in operating income was primarily attributable to lower sales and volumes in the Artwear channel, higher raw material costs for cotton and polyester, and the other factors described above in both the Gross Profit and the SG&A sections of this report.

In fiscal 2003, our Domestic segment operating income was $112.8 million, or 10.4% of the segment’s net sales, versus $124.0 million, or 11.5% of the segment’s net sales, in fiscal 2002. Excluding the $5.0 million charge related to our pre-petition receivables from Kmart and the $2.5 million gain associated with the sale of non-core assets, the Domestic segment operating income for 2002 would have been $126.5 million, or 11.8% of the segment’s net sales. The decrease of $13.7 million in operating income for the segment was primarily attributable to lower sales in our Artwear channel, higher raw material costs for cotton and polyester, and the other factors described above in the Gross Profit and SG&A sections of this report.

In fiscal 2003, our International Apparel segment operating income was a profit of $0.5 million versus a loss of $0.8 million in fiscal 2002. The increase of $1.3 million in operating income for the segment primarily reflects favorable changes in foreign currency exchange rates and sales growth in markets such as Europe and Canada.

Income Taxes. Our effective tax rate for 2003 of 32.7% decreased 4.5 percentage points from 37.2% in fiscal 2002. This decrease was primarily due to $2.6 million of non-recurring tax benefits and other deferred tax adjustments realized in 2003. For information concerning income tax provisions, as well as information regarding other differences between our effective tax rates and applicable statutory tax rates, see Note 6 to the consolidated financial statements.

Liquidity and Capital Resources

Our total debt to capitalization ratio of 41.4% at January 1, 2005, increased 6.1 percentage points versus 35.3% at January 3, 2004. Our debt outstanding at January 1, 2005 was $116.6 million higher than our debt outstanding on January 3, 2004. The increase in our debt was primarily due to $158.4 million of investments in acquisitions and $13.9 million in debt from the consolidation of Frontier Yarns partially offset by cash generated from operating activities and proceeds from the sale of non-core assets.

Cash From Operating Activities. Our operations generated approximately $81.3 million of cash during 2004, versus $58.0 million during the same period in 2003. The increase in inventory from January 3, 2004 to January 1, 2005 was more than the increase in inventory from January 4, 2003 to January 3, 2004 due to the consolidation of Frontier Yarns and our acquisitions. Excluding the impact from acquisitions and Frontier Yarns, inventory levels at January 1, 2005 are 6.8% higher than the prior year.

The increase in accounts receivable from January 3, 2004 to January 1, 2005 was less than the increase in accounts receivable from January 4, 2003 to January 3, 2004 primarily due to lower than normal accounts receivable levels at December 2002 and our working capital management.

The increase in accounts payable and accrued expenses was primarily due to lower 2003 employee performance awards paid out in 2004 versus the 2004 employees performance awards to be paid out in 2005.

We made $10.4 million in contributions to our qualified pension plans in 2004 versus $7.3 million in contributions in 2003.

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Cash From Investing Activities. Net cash used in investing activities was $178.4 million in 2004 versus $109.9 million in the prior year. Our investing activities in 2004 have consisted primarily of capital expenditures of $35.5 million and acquisitions of $158.4 million (Brooks Sports, AAI and Huffy Sports) less $13.7 million of proceeds from the sale of non-core assets. In 2003, our investing activities primarily consisted of capital expenditures of $38.6 million and acquisitions of $86.7 million (Bike and Spalding) less $14.8 million of proceeds from the sale of non-core assets.

For fiscal 2005, we are forecasting capital expenditures to be in the range of $55 million to $60 million. The majority of planned fiscal 2005 capital expenditures are to further enhance our manufacturing and distribution capabilities, including construction of the new textile facility in Honduras, and to improve our information systems capabilities to support our business initiatives.

Cash From Financing Activities. We paid $5.2 million, $5.2 million and $5.1 million in dividends ($0.16 per share) in 2004, 2003 and 2002, respectively. We review our dividend policy from time to time and based upon current projected earnings and cash flow requirements, we anticipate continuing to pay a quarterly dividend for the foreseeable future.

On January 1, 2005, our debt facilities and outstanding debt obligations included:

•

$310 million in Senior Secured Credit Facilities (the “Facilities”). The Facilities include a $300 million Senior Secured Revolving Credit Facility (the “Revolver”) due April 2007, of which $110.1 million was outstanding, and $10 million outstanding under our Senior Secured Term Loan (the “Term Loan”), due ratably through December 2006; and

•	$250 million in 9.25% Senior Unsecured Notes (the “Senior Notes”) due 2010.

•	$27.9 million of other outstanding borrowings, of which $14.0 million related to our line of credit used in the International Apparel segment and $13.9 million primarily related to a line of credit and capital leases held by Frontier Yarns for machinery and equipment used in operations.

On April 18, 2002, we completed a refinancing of our debt structure. We used the net proceeds of the Senior Notes offering (together with $132.4 million of initial borrowings under the Facilities) to repay the outstanding balances, accrued interest, prepayment penalties and expenses under our previous revolving credit facility and long-term notes, and to pay issuance costs. During the second quarter 2002, we incurred a $20.1 million ($12.6 million after-tax) charge associated with the early retirement of debt. The charge consisted of $15.0 million related to prepayment penalties, fees and expenses associated with the early termination of our previous notes payable and the write-off of $5.1 million of unamortized loan costs associated with the extinguished debt.

Borrowings under our Facilities are subject to mandatory prepayment equal to: (1) 100% of the net proceeds received by us from the issuance of any new or replacement debt securities (excluding the issuance of the Senior Notes); and (2) 50% of the net proceeds received from the sale of certain of our assets.

The Facilities and the Senior Notes impose certain restrictions on us, including restrictions on our ability to: incur debt; grant liens; provide guarantees in respect of obligations of any other person; pay dividends; make loans and investments; sell our assets; issue redeemable preferred stock and non-guarantor subsidiary preferred stock; make redemptions and repurchases of capital stock; make capital expenditures; prepay, redeem or repurchase debt; engage in mergers or consolidation; engage in sale/leaseback transactions and affiliate transactions; change our business; amend certain debt and other material agreements, including the indenture governing the Senior Notes and other documents governing any subordinated debt that we may issue in the future; issue and sell capital stock of subsidiaries; and restrict distributions from subsidiaries. On March 11, 2003, we amended the Facilities to, among other things: (1) lessen some of the restrictions on our ability to make acquisitions, (2) permit us to make additional investments and guarantees, and (3) allow us to repurchase a portion of our Senior Notes and capital stock, subject to annual limitations.

The Facilities require us to achieve a fixed charge coverage ratio of 1.25 to 1.0. We also must maintain a maximum leverage ratio of 3.5 to 1.0. We were in compliance with these covenants at the end of fiscal year 2004, and we expect to remain in compliance with them in the foreseeable future.

Under the Facilities, pricing is adjusted quarterly based on our consolidated fixed charge coverage ratio. For the majority of fiscal 2004, variable interest on the Revolver was either LIBOR plus 2.00% (4.52% at January 1, 2005), or Base Rate plus 0.50% (5.75% at January 1, 2005), and on the Term Loan was either LIBOR plus 2.50% (5.02% at January 1, 2005), or Base Rate plus 1.00% (6.25% at January 1, 2005), with an annual commitment fee on the unused portion of the Facilities of 0.375%. For the first quarter of 2005, variable interest on the Revolver will be either LIBOR plus 1.75% or Base Rate plus 0.25% and on the Term Loan will be either LIBOR plus 2.25% or Base Rate plus .75% with an annual commitment fee on the unused portion of the Facilities of 0.375%.

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For the majority of fiscal 2003, variable interest on the Revolver was either LIBOR plus 1.75% (2.84% at January 3, 2004), or Base Rate plus 0.25% (4.25% at January 3, 2004), and on the Term Loan was either LIBOR plus 2.25% (3.34% at January 3, 2004), or Base Rate plus 0.75% (4.75% at January 3, 2004), with an annual commitment fee on the unused portion of the Facilities of 0.375%.

If we violate the loan covenants and are unable to obtain waivers from our lenders, our debt under these agreements would be in default and could be accelerated by our lenders. If our indebtedness is accelerated, we may not be able to repay or refinance it. Even if we are able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us. Cross default provisions exist in the indenture governing our Senior Notes whereby a default on our Senior Notes would occur if we default on any covenant of any other debt agreement (which has an outstanding balance in excess of $25 million) and such default causes an acceleration of the maturity date of the other indebtedness. Also, under cross default provisions in our Facilities, a default would occur if we default on any covenant of any other debt agreement (which has an outstanding balance in excess of $5 million) and such default causes an acceleration of the maturity date of the other indebtedness.

Pension Funding Considerations. Our actual return on plan assets has significantly improved from a 7.1% loss in 2002 to a positive return of 21.0% in 2003 and 11.3% in 2004; however, we still have an after-tax minimum pension liability of approximately $24.3 million at January 1, 2005. In fiscal 2003 and 2004, we contributed $7.3 million and $10.4 million, respectively, to our qualified pension plans. Although we are required to make a contribution of only $0.3 million to our qualified pension plans in 2005, we are currently projecting aggregate contributions of $45 million to $50 million over the next five years, out of which we expect to contribute approximately $4 million in 2005.

Adequacy of Borrowing Capacity. Availability under our Revolver is subject to a borrowing base limitation that is determined based on eligible accounts receivable and inventory. As of January 1, 2005, we had $110.1 million in outstanding borrowings under the Revolver and approximately $143.4 million of availability remaining. Excluding Frontier Yarns, we also had $22.6 million in cash available to fund ongoing operations. Although there can be no assurances, we believe that cash flow available from operations, along with the availability under our Revolver and cash on hand, will be sufficient to operate our business; satisfy our working capital, capital expenditure and pension funding requirements; and meet our foreseeable liquidity requirements, including debt service on our Senior Notes and the Facilities until the maturity of our Facilities in 2007.

Contingencies. For information concerning our ongoing litigation, see Note 8 to the consolidated financial statements.

Commitments. The following table summarizes information about our contractual cash obligations, including those of Frontier Yarns, as of January 1, 2005 (in millions):

Other commercial commitments at January 1, 2005 include outstanding letters of credit of approximately $12.8 million for the purchase of inventories, $2.3 million for the guarantee of debt of a non-affiliated foreign contractor, $6.8 million related to workers’ compensation self-insured programs and customs bonds, and $2.3 million related to utility bonds and other matters. All outstanding letters of credit are set to expire in 2005.

Outlook

Russell expects sales for fiscal 2005 to increase approximately 15% to 17%, to approximately $1.50 billion to $1.52 billion. We expect earnings per share, on a fully diluted basis, to be in the $1.55 to $1.65 range for 2005.

The expected increase in sales in 2005 assumes the full year of sales of our three strategic acquisitions (AAI, Huffy Sports and Brooks) made in 2004 along with growth in Activewear and continued solid performance from our base Athletic business despite the loss of the Major League Baseball licensed apparel business, which represented approximately 1.4% of the Company’s 2004 net sales.

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The expected increase in diluted earnings per share in 2005 assumes Brooks will be accretive by at least $.05 to $.07 per diluted share and Huffy Sports will break-even or be slightly accretive. In addition, we expect Activewear to have strong earnings growth primarily due to sales growth and lower costs in 2005. Our new Honduras textile operation is expected to be slightly dilutive in the first half of the year but start generating a return in the second half of 2005.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks relating to fluctuations in interest rates, currency exchange rates and commodity prices. Our financial risk management objectives are to minimize the potential impact of interest rate, foreign exchange rate and commodity price fluctuations on our earnings, cash flows and equity. To manage these risks, we may use various financial instruments, including interest rate swap agreements, commodity futures contracts and forward currency exchange contracts. We only use traded instruments with major financial institutions as the counterparties to minimize the risk of credit loss. Refer to Notes 1 and 4 of the consolidated financial statements for a more complete description of our accounting policies and the extent of our use of such instruments.

The following analyses present the sensitivity of the market value, earnings and cash flows of our significant financial instruments to hypothetical changes in interest rates, exchange rates and commodity prices as if these changes had occurred at January 1, 2005. The range of changes chosen for these analyses reflects our view of changes that are reasonably possible over a one-year period. Market values are the present values of projected future cash flows based on the interest rate assumptions or quoted market prices where available. These forward-looking disclosures are selective in nature and only address the potential impacts from financial instruments. They do not include other potential effects which could impact our business as a result of changes in interest rates, exchange rates or commodity prices.

Interest Rate and Debt Sensitivity Analysis. At January 1, 2005, our outstanding debt totaled $398.0 million, which consisted of fixed-rate debt of $259.8 million and variable-rate debt of $138.2 million. Based on our 2004 average outstanding borrowings under our variable-rate debt, a one-percentage point increase in interest rates would negatively impact our annual pre-tax earnings and cash flows by approximately $0.9 million. A one-percentage point increase in market interest rates would decrease the fair market value of our fixed-rate debt at January 1, 2005, by approximately $3.3 million. Changes in the fair value of our fixed rate debt will not have any impact on us unless we repurchase the debt in the open market.

Currency Exchange Rate Sensitivity. We have foreign currency exposures related to buying, selling and financing in currencies other than our functional currencies. We also have foreign currency exposure related to foreign denominated revenues and costs translated into U.S. dollars. These exposures are primarily concentrated in the euro and British pound sterling and to a lesser extent, the Australian dollar and Japanese yen. We enter into foreign currency forward contracts to manage the risk associated with doing business in foreign currencies. Our policy is to hedge currency exposures of firm commitments and anticipated transactions denominated in non-functional currencies to protect against the possibility of diminished cash flow and adverse impacts on earnings. A five-percentage point adverse change in the foreign currency spot rates would decrease the fair market value of our foreign currency forward contracts held at January 1, 2005, by $4.4 million. Changes in the fair value of our foreign currency forward contracts will not have any impact on our results of operations unless these contracts are deemed to be ineffective at hedging currency exposures of anticipated transactions. We generally view our net investments in foreign subsidiaries that have a functional currency other than the U.S. dollar as long-term. As a result, we generally do not hedge these net investments.

Commodity Price Sensitivity. The availability and price of cotton is subject to wide fluctuations due to unpredictable factors such as weather conditions, governmental regulations, economic climate or other unforeseen circumstances. We are purchasing yarn from Frontier Yarns, Frontier Spinning and other third parties, and our yarn pricing will continue to be directly impacted by the price of cotton. We did not have any outstanding cotton futures contracts at January 1, 2005.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets
January 1, 2005 and January 3, 2004
(In thousands, except share data)

See notes to consolidated financial statements.

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Consolidated Statements of Income
Years ended January 1, 2005, January 3, 2004 and January 4, 2003
(In thousands, except share and per share data)

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows
Years ended January 1, 2005, January 3, 2004 and January 4, 2003
(In thousands)

See notes to consolidated financial statements.

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Consolidated Statements of Stockholders’ Equity
Years ended January 1, 2005, January 3, 2004 and January 4, 2003
(In thousands, except share data)

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

Note 1: Description of Business and Significant Accounting Policies

We are an authentic athletic and sporting goods company with over a century of success. Our brands include: Russell Athletic®, Jerzees®, Spalding®, Brooks®, American Athletic®, Huffy Sports®, Mossy Oak®, Cross Creek®, Moving Comfort®, Bike®, Dudley®, Discus®, and Sherrin®.

We design, market and manufacture or source a variety of apparel products including fleece, t-shirts, casual shirts, jackets, athletic shorts, socks and camouflage attire for men, women, boys, and girls. We supply team uniforms and related apparel to college, high school and organized sports teams. We are the official uniform supplier to the U.S. Olympic baseball team and Little League Baseball and an official uniform supplier to Minor League Baseball. The Russell name has been associated with high quality apparel for over 100 years and with team uniforms since 1932.

With our 2003 acquisition of the brand and related assets of Bike Athletic Company, we now also market and source athletic supporters, knee and elbow pads, braces and protective equipment. Furthermore, with the acquisition of the brands, contracts and related assets of the sporting goods business of Spalding Sports Worldwide, Inc. in 2003, we now sell basketballs, footballs, soccer balls, and volleyballs. Spalding is the official basketball supplier for the NBA and the WNBA; the official football for the Arena Football League; the official soccer ball of the Major Indoor Soccer League; and the official volleyball for the NCAA and American Volleyball Association.

In 2004, we made three strategic acquisitions to further advance our position in the sports equipment business. In June, we acquired American Athletic, Inc. (“AAI”). Founded in 1954, AAI manufactures a variety of products including basketball and volleyball equipment, athletic mats and gymnastics apparatus under a variety of brands, including American Athletic and BPI. AAI markets these products to high schools, universities, professional teams, and athletic clubs globally.

In July, we acquired Huffy Sports from Huffy Corporation further expanding our basketball backboard, backboard systems and accessories business. Huffy Sports sells basketball equipment, including backboards and inflatable balls under the Huffy Sports®, Sure Shot®, and Hydra Rib® brands.

In December, we entered the athletic footwear business with the acquisition of Brooks Sports. Brooks is a provider of performance footwear, apparel and accessories to running enthusiasts worldwide. Brooks’ products are sold predominately through specialty running stores and other retail outlets specializing in high quality, performance running products.

Revenue Recognition. We recognize revenues, net of estimated sales returns, discounts and allowances, when goods are shipped, title has passed, the sales price is fixed and collectibility is reasonably assured. Substantially all of our sales reflect FOB shipping point terms.

Trade Accounts Receivable. Trade accounts receivable consists of amounts due from our normal business activities. We maintain an allowance for doubtful accounts to reflect expected credit losses. We provide for bad debts based on collection history and specific risks identified on a customer-by-customer basis. A considerable amount of judgment is required to assess the ultimate realization of accounts receivable and the credit-worthiness of each customer. Furthermore, these judgments must be continuously evaluated and updated. Uncollected accounts are written off through the allowance for doubtful accounts. Finance charges on past due receivables are recognized on a cash basis.

Promotional Programs. We offer various types of promotional programs to our customers, including the following:

Cooperative Advertising. Under cooperative advertising arrangements, we agree to reimburse our customer for all, or a portion, of the costs incurred by the customer to advertise and promote our products. Cooperative advertising costs are charged to selling, general and administrative expense in the year incurred.

Growth Incentive Rebates. We offer rebates to customers in certain distribution channels. Under incentive programs of this nature, we estimate the anticipated rebate to be paid and allocate a portion of the estimated costs of the rebate to each underlying sales transaction. These rebates are recorded as a reduction of net sales.

Seasonal Markdowns, Discounts and Allowances. The cost of these incentives is recognized when the related sale is recorded or, for retroactive credits, on the date the incentive is offered. The cost of these incentives is recorded as a reduction of net sales.

Shipping and Handling Costs. Shipping and handling revenues and costs are included as a component of net sales and cost of goods sold, respectively.

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Cost of Goods Sold and Selling, General and Administrative Expenses. The significant components of the line item “Cost of goods sold” are raw materials (including inbound freight and handling costs), energy expenses, production and supervisory labor, internal transfer costs, depreciation, and other indirect costs associated with the manufacturing and procurement processes. The significant components of the line item “Selling, general and administrative expenses” are costs for warehousing and distribution of finished goods, marketing, advertising, selling expenses (including payroll and related payroll benefits for sales persons), royalties and other corporate general and administrative expenses.

Principles of Consolidation. The consolidated financial statements include the accounts of Russell Corporation, all of our majority-owned subsidiaries, and any variable interest entities in which we are deemed to be the primary beneficiary, after the elimination of intercompany accounts and transactions.

In 2004, we adopted Financial Interpretation No. 46, Consolidation of Variable Interest Entities, (“FIN 46”) which addresses whether business enterprises must consolidate the financial statements of entities known as “variable interest entities”. In accordance with FIN 46, we began consolidating Frontier Yarns on April 4, 2004. At January 1, 2005, the consolidation of Frontier Yarns increased our total assets by $24.8 million, total liabilities by $10.8 million and non-controlling interests by $14.0 million. The consolidation of Frontier Yarns did not have a significant impact on our results of operations for 2004.

Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Inventories. Inventories of finished goods, work-in-process and raw materials are carried at the lower of cost or market, with cost for the majority of our inventories determined under the Last-In, First-Out (LIFO) method. Certain inventories are carried under the First-In, First-Out (FIFO) method, or the average cost method, and were valued at approximately $158.6 million in 2004 and $64.1 million in 2003. Inventories are summarized as follows:

In 2002, our pre-tax income was unfavorably impacted by $6.0 million, due to the liquidation of LIFO inventory quantities carried at higher costs prevailing in prior years as compared with the current manufacturing costs. There was no significant impact on pre-tax income from the liquidation of LIFO inventory quantities in 2003 and 2004.

Property, Plant and Equipment. Property, plant and equipment are stated at cost, net of accumulated depreciation and impairment write-downs. The provision for depreciation of property, plant and equipment has been computed generally on the straight-line method based upon their estimated useful lives. Initial estimated useful lives range from 15 to 40 years for buildings and land improvements and from 3 to 15 years for machinery and equipment. When events and circumstances indicate that the useful lives or salvage values may have changed, we adjust the related useful life and record depreciation over the shortened useful life after giving consideration to the revised salvage values.

Property, plant and equipment, net are summarized as follows:

At January 1, 2005, we held for sale three idled properties and certain equipment with an adjusted carrying value of approximately $2.0 million, which have been included in property, plant and equipment as part of the Domestic segment.

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Goodwill and Other Intangibles. On December 30, 2001, we adopted FASB Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which eliminates amortization of goodwill and requires an annual impairment test. SFAS No. 142 requires that impairment be tested at the reporting unit level, using a two-step approach. The first step determines if goodwill is impaired by comparing the fair value of the reporting unit as a whole to the book value. If a deficiency exists, the second step measures the amount of the impairment loss as the difference between the implied fair value of goodwill and its carrying value. Purchased intangibles with indefinite economic lives are tested for impairment annually using a lower of cost or fair value approach. Other intangibles continue to be amortized over their estimated useful lives, ranging from 2.4 to 40 years, and reviewed for impairment when indicators exist.

We have completed the annual impairment tests of goodwill and other intangible assets as required by SFAS No. 142 and concluded that our goodwill and indefinite-lived intangible assets were not impaired.

Debt Issuance Costs. Debt issuance costs are deferred and amortized over the terms of the debt to which they relate using the straight-line method.

Investments (Trading Portfolio). We hold a portfolio of marketable debt and equity securities in various trusts and segregated accounts in connection with employee benefit and deferred compensation plans. We mark these securities to market, using quoted market prices, through income. Realized and unrealized gains and losses on our trading portfolio have not been significant in any of the last three years.

Investments In and Advances to Unconsolidated Entities. Investments in companies in which we have the ability to influence the operations are accounted for by the equity method. Investments in companies in which we cannot exert such influence are accounted for at cost.

Long-Lived Assets. On December 30, 2001, we adopted the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which superseded SFAS No. 121, Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to Be Disposed of. Similar to the provisions of SFAS No. 121, SFAS No. 144 requires that when events and circumstances indicate that assets may be impaired, and the undiscounted cash flows estimated to be generated from those assets are less than their carrying values, we record an impairment loss equal to the excess of the carrying value over fair value.

Income Taxes. We account for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured at the enacted tax rates that will be in effect when the taxes are expected to be paid.

Advertising, Marketing and Promotions Expense. The cost of advertising, marketing and promotions is expensed as incurred. We incurred approximately $48.6 million, $48.0 million, and $36.0 million in such costs during 2004, 2003 and 2002, respectively.

Stock-Based Compensation. We issue awards under incentive compensation plans as described in Note 7. On January 5, 2003, we adopted the prospective transition provisions of SFAS No. 123, Accounting and Disclosure of Stock-Based Compensation, as amended by SFAS No. 148. By electing the prospective transition method of SFAS No. 148, our results of operations and our financial position are not affected by stock compensation awards granted prior to January 5, 2003. We recognized approximately $5.2 million ($3.6 million after-tax) and $0.6 million ($0.4 million after-tax) of stock-based employee compensation in 2004 and 2003, respectively. For stock compensation awards granted prior to January 5, 2003, we used the intrinsic value approach under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The table below presents a comparison of reported results versus proforma results that assumes the fair value based method of accounting had been applied to all stock compensation awards granted. For the purposes of this disclosure, we estimated the fair value of employee stock options at the date of grant using the Black-Scholes option valuation model.

The fair values derived for options granted during fiscal years 2004, 2003 and 2002 and key assumptions used to determine these values were as follows:

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For purposes of calculating the pro forma disclosures below, the estimated fair value of the options is amortized to expense over the options’ vesting period.