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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended April 2, 2005

OR

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

For the transition period from ______________ to ____________

Commission File number 1-10095

DELTA WOODSIDE INDUSTRIES, INC.
-------------------------------
(Exact name of registrant as specified in its charter)


SOUTH CAROLINA 57- 0535180
-------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)


700 North Woods Drive
Fountain Inn, South Carolina 29644
- ------------------------------------------------ -----------------
(Address of principal executive offices) (Zip Code)

864 255-4100
------------
(Registrant's telephone number, including area code)



---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)

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 for 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 [X] No [ ].

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Common Stock, $.01 Par Value--6,034,887 shares as of May 13, 2005









DELTA WOODSIDE INDUSTRIES, INC.

INDEX
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)


Condensed consolidated balance sheets--April 2, 2005 and July 3, 2004 3

Condensed consolidated statements of operations--
Three and nine months ended April 2, 2005 and March 27, 2004 4

Condensed consolidated statements of cash flows--
Nine months ended April 2, 2005 and March 27, 2004 5

Notes to condensed consolidated financial statements 6-10


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-23

Item 3. Quantitative and Qualitative Disclosures about Market Risk 23

Item 4. Controls and Procedures 24

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 24

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24

Item 3. Defaults upon Senior Securities 24

Item 4. Submission of Matters to a Vote of Security Holders 24

Item 5. Other Information 24

Item 6. Exhibits 24

SIGNATURES 25

CERTIFICATIONS 26-33





2




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
Delta Woodside Industries Inc.
(In Thousands)
April 2, 2005 July 3, 2004
----------------- -------------
ASSETS
CURRENT ASSETS

Cash and cash equivalents $ 210 $ 746
Accounts receivable:
Factor 36,470 38,613
Less allowances for returns 324 20
----------------- -------------
36,146 38,593
Inventories
Finished goods 8,785 6,613
Work in process 23,983 18,877
Raw materials and supplies 6,117 6,889
----------------- -------------
38,885 32,379

Deferred income taxes 1,008 634
Other assets 1,286 333
----------------- -------------
TOTAL CURRENT ASSETS 77,535 72,685

ASSETS HELD FOR SALE 2,900 2,495

PROPERTY, PLANT AND EQUIPMENT, at cost 123,492 163,032
Less accumulated depreciation 76,241 99,907
----------------- -------------
47,251 63,125

DEFERRED LOAN COSTS AND OTHER ASSETS 289 372

----------------- -------------
$ 127,975 $ 138,677
================= =============

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 11,159 $ 7,927
Revolving credit facility 27,884 21,388
Accrued employee compensation 4,462 3,144
Accrued income taxes payable 2,389 2,392
Accrued restructuring expenses 1,736
Accrued and sundry liabilities 3,817 5,567
----------------- -------------
TOTAL CURRENT LIABILITIES 51,447 40,418
LONG-TERM DEBT 30,941 31,941
DEFERRED COMPENSATION 626 2,337
NON-CURRENT DEFERRED INCOME TAXES 1,008 634
SHAREHOLDERS' EQUITY
Common Stock - par value $0.01 a share - authorized
50,000,000 shares, issued and outstanding 6,034,887
shares at April 2, 2005 and 6,002,052 shares at
July 3, 2004 60 60
Additional paid-in capital 87,104 87,073
Accumulated deficit (43,211) (23,786)
----------------- -------------
43,953 63,347
COMMITMENTS AND CONTINGENCIES
----------------- -------------
$ 127,975 $ 138,677
================= =============





See notes to condensed consolidated financial statements.


3




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Delta Woodside Industries Inc.
(In Thousands, except per share data)


3 Mths Ended 3 Mths Ended 9 Mths Ended 9 Mths Ended
April 2, March 27, April 2, March 27,
2005 2004 2005 2004
---------------- ----------------- ----------------- ----------------


Net sales $ 40,064 $ 37,919 $ 114,814 $ 129,000

Cost of goods sold 40,192 36,241 116,058 122,290
---------------- ----------------- ----------------- ----------------
GROSS PROFIT (LOSS) (128) 1,678 (1,244) 6,710

Selling, general and administrative expenses 2,423 2,902 7,804 8,713
Impairment and restructuring expenses 7,350
Other operating income 321 28 382 729
---------------- ----------------- ----------------- ----------------
OPERATING LOSS (2,230) (1,196) (16,016) (1,274)

Interest expense (1,352) (1,172) (3,909) (3,540)
Gain on extinguishment of debt 500 500
---------------- ----------------- ----------------- ----------------

LOSS BEFORE INCOME TAXES (3,082) (2,368) (19,425) (4,814)
Income tax benefit (35)
---------------- ----------------- ----------------- ----------------

NET LOSS $ (3,082) $ (2,333) $ (19,425) $ (4,814)
================ ================= ================= ================

Basic and diluted loss per share $ (0.52) $ (0.40) $ (3.27) $ (0.82)
================ ================= ================= ================

Weighted average shares outstanding 5,962 5,893 5,944 5,892
================ ================= ================= ================





See notes to condensed consolidated financial statements.



4





CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Delta Woodside Industries Inc.
(In thousands) 9 Mths Ended 9 Mths Ended
April 2, 2005 March 27, 2004
----------------------- ------------------------

OPERATING ACTIVITIES

Net loss $ (19,425) $ (4,814)
Adjustments to reconcile net loss to net cash
cash (used in) provided by operating activities:
Depreciation 6,030 6,595
Amortization 83 83
Impairment and restructuring expense 7,350
Gain on early retirement of debt (500)
Gains on disposition of property
and equipment (245) (253)
Deferred compensation (527) (2,780)
Changes in operating assets and liabilities (5,136) 6,693
----------------------- ------------------------

NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (12,370) 5,524
----------------------- ------------------------

INVESTING ACTIVITIES
Property, plant and equipment:
Purchases (364) (3,858)
Proceeds of dispositions 6,202 424
----------------------- ------------------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 5,838 (3,434)
----------------------- ------------------------


FINANCING ACTIVITIES
Proceeds from revolving lines of credit 129,579 136,497
Repayments on revolving lines of credit (123,083) (138,619)
Repurchase and retirement of long-term debt (500)
Repurchase common stock (26)
----------------------- ------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 5,996 (2,148)
----------------------- ------------------------

DECREASE IN CASH
AND CASH EQUIVALENTS (536) (58)


Cash and cash equivalents at beginning of period 746 781
----------------------- ------------------------

CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 210 $ 723
======================= ========================








See notes to condensed consolidated financial statements.


5


DELTA WOODSIDE INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Delta
Woodside Industries, Inc. and subsidiaries ("the Company") have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of only normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended April 2, 2005
are not necessarily indicative of the results that may be expected for the year
ending July 2, 2005. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended July 3, 2004.


NOTE B-LONG-TERM DEBT, CREDIT ARRANGEMENTS, AND NOTES PAYABLE

On August 25, 1997, a subsidiary of the Company, Delta Mills, Inc. ("Delta
Mills"), issued $150 million of unsecured ten-year Senior Notes at an interest
rate of 9.625%. These notes will mature in August 2007. At April 2, 2005, the
outstanding balance of the notes was $30,941,000, a decrease of $1.0 million
from the balance of $31,941,000 at July 3, 2004.

Delta Mills has a revolving credit facility with GMAC with a term lasting until
March 2007. Borrowings under this credit facility are limited to the lesser of
$38 million or a "formula amount" based on eligible accounts receivable and
inventories of Delta Mills minus a $7 million availability block. The facility
is secured by the accounts receivable, inventories and capital stock of Delta
Mills. The average interest rate on the credit facility was 5.870% at April 2,
2005 and is based on a spread over either LIBOR or a base rate. Borrowings under
this facility were $27.9 million and $21.4 million as of April 2, 2005 and July
3, 2004, respectively. As of April 2, 2005, the revolving credit facility
availability was approximately $7.9 million, net of the $7 million availability
reduction described above.

The GMAC credit facility has financial covenants that require Delta Mills to
achieve minimum Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) (as defined in the agreement) levels for each quarter of fiscal year
2005 and provides that it will constitute an event of default if Delta Mills and
GMAC fail to agree by the end of fiscal year 2005 to minimum EBITDA levels for
the remainder of the term of the revolving credit facility. If Delta Mills has
net income for fiscal year 2005 and no event of default exists under the credit
facility, interest rates under the credit facility will be reduced by 125 basis
points. Delta Mills was not in compliance with the minimum EBITDA covenant at
April 2, 2005 but has obtained a waiver of this violation from GMAC.
Additionally, GMAC has granted Delta Mills a conditional waiver for the fourth
quarter of fiscal 2005. The conditions of this waiver include achieving trailing
twelve months EBITDA as of fiscal 2005 year end of negative $700,000 and
maintaining undrawn availability of at least $2.5 million for thirty consecutive
days immediately prior to and immediately subsequent to the date on which Delta
Mills delivers to GMAC its draft financial statements for fiscal 2005. The
trailing twelve months EBITDA number of negative $700,000 is based upon the most
recent fourth quarter projection provided to GMAC and with minimal tolerance for
any negative miss. Since March 27, 2004, GMAC previously granted Delta Mills a
waiver (with respect to a predecessor covenant) and amendment on April 19, 2004
and granted Delta Mills additional amendments on August 18, 2004 and October 18,
2004. Delta Mills expects to negotiate additional amendments to its credit
facility with GMAC during the fourth quarter of fiscal 2005. Delta Mills' Senior
Note Indenture provides that a payment default or an acceleration prior to
maturity due to a default under any Delta Mills indebtedness for money borrowed
involving a principal amount of $5 million or more (such as Delta Mills'
revolving credit facility) would constitute an event of default under the
Indenture.

The Delta Mills credit facility contains restrictive covenants that restrict
additional indebtedness, dividends, and capital expenditures. The payment of
dividends with respect to Delta Mills' stock is permitted if there is no event
of default and there is at least $1 of availability under the facility. The
indenture pertaining to Delta Mills' 9.625% Senior Notes also contains
restrictive covenants that restrict additional indebtedness, dividends, and
investments by Delta Mills and its subsidiaries. The payment of dividends with
respect to Delta Mills' stock is permitted if there is no event of default under
the indenture and after payment of the dividend, Delta Mills could incur at

6


least $1 of additional indebtedness under a fixed charge coverage ratio test.
Dividends are also capped based on cumulative net income and proceeds from the
issuance of securities and liquidation of certain investments. Delta Mills may
loan funds to the Company subject to compliance with the same conditions. At
April 2, 2005, Delta Mills was prohibited by these covenants from paying
dividends and making loans to the Company. During the year ended July 3, 2004
and the nine month period ended April 2, 2005, Delta Mills did not pay any
dividends to the Company.

Delta Mills assigns a substantial portion of its trade accounts receivable to
GMAC Commercial Finance LLC (the "Factor") under a factor agreement. The
assignment of these receivables is primarily without recourse, provided that
customer orders are approved by the Factor prior to shipment of goods, up to a
maximum for each individual account. The assigned trade accounts receivable are
recorded on Delta Mills' books at full value and represent amounts due to Delta
Mills from the Factor. There are no advances from the Factor against the
assigned receivables. All factoring fees are recorded in Delta Mills' statement
of operations as incurred as a part of selling, general and administrative
expenses.


NOTE C - SHAREHOLDERS' EQUITY

Activity in shareholders' equity during the nine months ended April 2, 2005 is
as follows (in thousands):



Total
Common Additional Paid- Accumulated Shareholders'
Stock In Capital Deficit Equity
--------------- ------------------ ---------------- ---------------

Balance at July 3, 2004 $60 $87,073 $(23,786) $63,347
Issuance of common stock 31 31
Net loss (19,425) (19,425)
--------------- ------------------ ---------------- ---------------
Balance at April 2, 2005 $60 $87,104 $(43,211) $43,953
=============== ================== ================ ===============



NOTE D - STOCK COMPENSATION

The Company applies the intrinsic value-based method of accounting for its stock
compensation, in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Under this method, compensation expense is recorded on the date
of the grant only if the current market price of the underlying stock exceeded
the exercise price. If the Company had determined compensation expense at fair
value, as under Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation", the Company's net loss and loss per share would
have been as follows:




(In thousands, except per share data) 3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
4/2/2005 3/27/2004 4/2/2005 3/27/2004
------------- ------------- ------------- -------------

Net loss, as reported $ (3,082) $ (2,333) $ (19,425) $ (4,814)

Add stock-based employee compensation expense
included in reported net loss, net of tax 11 50 44 77

Less total stock-based compensation expense
determined under fair value based method, net
of related tax effects (11) (50) (44) (77)
------------- ------------- ------------- -------------

Pro forma net loss $ (3,082) $ (2,333) $ (19,425) $ (4,814)
============= ============= ============= =============

Loss per share:
Basic and diluted - as reported $ (0.52) $ (0.40) $ (3.27) $ (0.82)
============= ============= ============= =============

Basic and diluted - pro forma $ (0.52) $ (0.40) $ (3.27) $ (0.82)
============= ============= ============= =============



7


NOTE E - COMMITMENTS AND CONTINGENCIES

During 1998, the Company received notices from the State of North Carolina
asserting deficiencies in state corporate income and franchise taxes for the
Company's 1994 - 1997 tax years. The total assessment proposed by the State
amounted to $1.5 million, which included interest and penalties at that time.
The assessment was delayed pending an administrative review of the case by the
State. In October 2002, the State proposed a settlement in which the Company
would have paid approximately 90% of the assessed amount plus a portion of
certain penalties for the Company's tax years 1994 - 2000. In January 2005, the
North Carolina Department of Revenue (the Department) notified the Company that
the North Carolina Court of Appeals unanimously upheld the Department's
assessment of corporate income and franchise tax against A&F Trademark and eight
other holding company subsidiaries of the Limited Stores, Inc. (the Limited
Stores Case), ruling that the trademark holding companies were doing business in
the state of North Carolina for corporate income tax purposes. As a result of
the Limited Stores Case ruling, the Department proposed a Voluntary Compliance
Program (the Program) whereby the Company could pay the assessment amount for
the Company's 1994 - 1997 tax years plus interest totaling approximately $1.4
million. Under the Program, the Department would waive all penalties provided
the Company paid the tax and interest and waived all rights to a refund. The
Company rejected the Department's offers and continued with its appeal due to
management's belief that the State's legal position is in conflict with
established principles of federal constitutional law. The Company considers all
exposures in determining probable amounts of payment; therefore, any payment in
settlement of this matter is not expected to result in a material impact on the
Company's results of operations.


NOTE F - DEFERRED COMPENSATION

On January 16, 2004, based on the recommendation of the Company's Compensation
Committee, the Board (with Mr. Garrett abstaining) approved an amendment of the
Company's deferred compensation plan. The deferred compensation plan amendment
provided that each participant's deferred compensation account will be paid to
the participant upon the earlier of the participant's termination of employment
or in accordance with a schedule of payment that will pay approximately 40%,
30%, 20% and 10% of the participant's total pre-amendment account on February 15
of 2004, 2005, 2006 and 2007, respectively. Any such February 15 payment will be
conditioned on there being no default under the Delta Mills Senior Note
Indenture or the Delta Mills revolving credit facility and on Delta Mills
meeting the fixed charge coverage ratio test as defined in the Senior Note
Indenture for the most recently ended four full fiscal quarters, determined on a
pro forma basis. Compliance with the fixed charge coverage ratio test is
required by the Senior Note Indenture only as a condition to Delta Mills taking
certain actions (such as the incurrence of indebtedness or the issuance of
preferred stock) in certain circumstances; however, the amendment of the
deferred compensation plan adopted by the Board requires satisfaction of the
fixed charge coverage ratio test before scheduled payments are made. As a result
of this amendment to the deferred compensation plan, approximately $3.5 million,
which represents the scheduled February 15, 2005 and February 15, 2006 payments,
plus distributions anticipated to occur in the next twelve months due to
participant retirements, is classified on the consolidated balance sheet at
April 2, 2005 as accrued employee compensation in current liabilities. The first
payment of approximately $3.1 million was made in February 2004. As of February
15, 2005, Delta Mills did not meet, for the purpose of the scheduled payment,
the fixed charge coverage ratio test as defined in the Senior Note Indenture for
the most recently ended four full fiscal quarters, determined on a pro forma
basis. Accordingly, any future payment in accordance with the schedule in the
amendment will be delayed until all conditions to such payment can be met.

The Compensation Committee of the Company's Board of Directors is exploring the
possibility of the Board terminating the deferred compensation plan causing all
amounts payable thereunder (approximately $4.1 million as of April 2, 2005) to
be paid to the participants at such time as the Company's financial condition
and prospects and the covenants in the GMAC credit facility and the Senior Note
Indenture make this course of action feasible. The Compensation Committee is
considering this course of action because of federal legislation enacted in late
2004 that has modified the US income tax rules governing deferred compensation
plans and as a measure to retain key employees who, in light of the general
difficulties in the textile industry, have expressed a desire to diversify their
retirement assets.


8


NOTE G - LOSS PER SHARE

Basic and diluted loss per share is based upon the number of weighted average
shares outstanding. Options outstanding at April 2, 2005 and March 27, 2004 of
approximately 351,000 and 371,000 shares, respectively, were excluded from the
calculation of diluted loss per share as the impact would have been
antidilutive.

NOTE H - IMPAIRMENT AND RESTRUCTURING CHARGES

During the second quarter of fiscal 2005, the Company's Board of Directors
approved a comprehensive realignment plan. The plan was announced on October 20,
2004 with the closing of the Estes weaving facility and capacity reductions in
the Company's commercial synthetics business and the elimination of yarn
manufacturing at the Beattie plant. The Company recorded asset impairment and
restructuring charges of $7,350,000, on a pretax basis, associated with its
realignment plan during the quarter ended January 1, 2005.

ASSET IMPAIRMENT
In the second quarter of fiscal 2005, the Company recorded a $3,845,000 non-cash
asset impairment charge to write down assets to be disposed of, including real
estate and machinery, to its estimated fair value, less selling costs, of
$8,857,000. The impaired assets met the criteria under SFAS No. 144 to be
classified as assets held for sale and were reclassified as such in the
consolidated financial statements as of January 1, 2005. The valuation of these
assets was derived from asset sales agreements with third parties executed in
January 2005.

During the quarter ended April 2, 2005, the Company closed sales under certain
of the agreements for cash proceeds of $6,202,000 resulting in a decrease in
assets held for sale to $2,900,000 at April 2, 2005 and a gain on the disposal
of assets, primarily at the Pamplico facility, of $245,000. The remaining assets
held for sale at April 2, 2005 include the Estes and Furman plants, for which
the Company has asset sales agreements that subsequently closed in the fourth
quarter of fiscal 2005 or are expected to close in fiscal 2006, respectively.
There were no changes in the estimated fair value of the impaired properties
during the quarter ended April 2, 2005, and consequently, no impairment charges
were recognized during the quarter ended April 2, 2005.

RESTRUCTURING
The remainder of the charge recognized by the Company during the second quarter
of fiscal 2005 was for restructuring costs, which included employee termination
costs principally for separation pay and benefit costs for the approximately 400
terminated employees, as well as other expenses which included primarily
estimated contract termination costs. These expenses are expected to be paid
over eighteen months beginning in November 2004.

A roll forward of the Company's liability for restructuring is as follows:



Employee
Termination Other
Costs Expenses Total
--------------- --------------- -----------------

Restructuring charge recognized during
the quarter ended January 1, 2005 $ 3,154,229 $ 350,000 $ 3,504,229

Less payments made during the quarter
ended January 1, 2005 959,166 9,059 968,225

Less payments made during the quarter
ended April 2, 2005 754,440 45,324 799,764

--------------- --------------- -----------------
Restructuring liability at April 2, 2005 $ 1,440,623 $ 295,617 $ 1,736,240
=============== =============== =================


No restructuring charges were recognized during the quarter ended April 2, 2005.

In addition to the restructuring and impairment charges recognized by the
Company, during the quarter ended January 1, 2005 the Company recorded $781,000
in costs of goods sold for the write-off of certain supply inventories
associated with equipment to be sold.


9


NOTE I - GAIN ON EXTINGUISHMENT OF DEBT

For the quarter and nine month periods ended March 27, 2004, the Company did not
recognize any gains from the repurchase of debt. For the three months ended
April 2, 2005, Delta Mills, Inc. purchased $1,000,000 face amount of its 9.625%
Senior Notes for $500,000. The Company recognized a gain of $500,000 as a result
of this purchase. This gain from the repurchase of debt is included in loss
before income taxes in the accompanying 2005 condensed consolidated statement of
operations.


























10


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The Company, through its Delta Mills, Inc. operating subsidiary, sells a broad
range of woven, finished apparel fabric primarily to branded apparel
manufacturers and resellers, including Haggar Corp., the Wrangler(R) and Lee(R)
labels of V.F. Corporation, Liz Claiborne, Inc., Levi Strauss and their
respective subcontractors, and private label apparel manufacturers for J.C.
Penney Company, Inc., Sears, Roebuck & Co., Wal-Mart Stores, Inc., and other
retailers. Delta Mills also sells camouflage fabric and other fabrics to apparel
manufacturers for their use in manufacturing apparel for the United States
Department of Defense. We refer to this as our "government business" (however,
Delta Mills itself has no direct contracts with the Department of Defense).
Delta Mills represents the only business segment of the Company.


CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

The following discussion contains various "forward-looking statements". All
statements, other than statements of historical fact, which address activities,
events or developments that the Company expects or anticipates will or may occur
in the future are forward-looking statements. Examples are statements that
concern future revenues, future costs, future capital expenditures, business
strategy, competitive strengths, competitive weaknesses, goals, plans,
references to future success or difficulties and other similar information. The
words "estimate", "project", "forecast", "anticipate", "expect", "intend",
"believe" and similar expressions, and discussions of strategy or intentions,
are intended to identify forward-looking statements.

The forward-looking statements in this document are based on the Company's
expectations and are necessarily dependent upon assumptions, estimates and data
that the Company believes are reasonable and accurate but may be incorrect,
incomplete or imprecise. Forward-looking statements are also subject to a number
of business risks and uncertainties, any of which could cause actual results to
differ materially from those set forth in or implied by the forward-looking
statements. These risks and uncertainties include, but are not limited to:

o changes in the retail demand for apparel products
o the federal government funding and the timing of such funding for the
purchase of military fabrics
o competitive conditions in the apparel and textile industries
o the cost of raw materials
o escalating energy costs
o the relative strength of the United States dollar as against other
currencies
o changes in United States and international trade regulations, including
without limitation the end of quotas on textile and apparel products
amongst WTO member states in 2005
o the federal government policy respecting US sourcing requirements for
military fabrics
o the discovery of unknown conditions, such as environmental matters and
similar items

Accordingly, any forward-looking statements do not purport to be predictions of
future events or circumstances and may not be realized. You should also review
the other cautionary statements we make in this quarterly report and in other
reports and other documents the Company files with the Securities and Exchange
Commission. All forward-looking statements attributable to us, or persons acting
for us, are expressly qualified in their entirety by our cautionary statements.

The Company does not undertake publicly to update or revise the forward-looking
statements even if it becomes clear that any projected results will not be
realized.


11


MANAGEMENT OVERVIEW AND COMPANY OUTLOOK

THE CURRENT ENVIRONMENT. The WTO phased out textile and apparel quotas as of the
end of calendar year 2004 and imports of textile and apparel products surged in
many categories. The phase-out has had some negative effect on our commercial
synthetics business but it is too soon to determine what long term effect it
will have on our commercial cotton business. While we recognize our Asian
competitors will have a cost advantage as tariffs on textile/apparel products
are reduced (but not eliminated), we believe we have competitive advantages
compared to Asian competitors and we must fully utilize those advantages. Among
our advantages are our well-established relationships with our customers, our
ability to respond quickly to customer needs and the logistical advantage
associated with our manufacturing being located in North America. However, there
can be no assurance that these advantages will allow us to successfully compete
with foreign textile producers.

During the quarter, we completed the implementation of substantially all of the
realignment plan that started in October of 2004. We also successfully completed
a number of the cost savings initiatives that were started during the second
quarter of fiscal 2005. However, we experienced some disappointments during the
initial implementation phase of the plan associated with product flow, operating
schedules, raw material costs, the escalating cost of energy and certain
chemical costs increases. The net result was that, while we were able to achieve
much of the savings that we anticipated from our realignment plan, other factors
caused us to have a disappointing third quarter. We will discuss this and the
expectations for the coming quarter later in this overview under the Realignment
Plan section.

THIRD QUARTER OF FISCAL YEAR 2005. Sales volume was $40.1 million for the
quarter and was slightly up over the second quarter of fiscal 2005 but fell
short of our expectations. Our commercial cotton volume improved due to higher
demand from our major customers. We believe the increase represents an increase
in market share rather than domestic growth for this business. The increase was
somewhat offset by a decline in our commercial synthetics products due to what
we believe to be timing of seasonal adjustments. Our commercial synthetics
customers' orders and assortments have been inconsistent and we are monitoring
our commercial synthetics business very closely. Our government business was
flat comparing last quarter and the prior year quarter, and we fell short of our
expectation. Federal funding for uniform purchases has been delayed, and the
transition to the new uniform has been problematic for some of our garment
manufacturer customers, causing some volatility in the order flow. However, our
order position with government products supports our expectations of future
improvements, and the fundamental indicators in our government business remain
strong. The government procurement agency (DPSC) has made significant long-term
awards in support of its program to equip the standing army adequately during
these troubled times. This coupled with its transitioning into the new uniform
for the Armed Services leads us to believe that our current military business
expectations will materialize.

We reported an operating loss of $2.2 million for the third quarter, which
compared to an operating loss of $1.2 million in the same quarter last year.
With our realignment plan, we had expected to overcome the prior year loss and
report a profit in the third quarter of this year. While we did achieve a
significant portion of our projected savings, the lack of pick-up in our
government business, the shortfall in our synthetics volume, an inability to
meet the customer's specifications for a new program for a key customer, and
significant increases in energy costs more than offset our savings for the
quarter. Also contributing to our shortfall were higher than expected raw
material costs. These losses resulted in a default under the EBITDA covenant in
our GMAC revolving credit facility and, combined with increases in inventory,
resulted in an increase in borrowings under the credit facility. GMAC has waived
this default for the third quarter and has provided a conditional waiver for the
fourth quarter; however, this increased pressure on our liquidity is an added
concern of management and has caused us to delay our planned capital
expenditures at our Delta 3 cotton finishing plant.

There is no assurance that all of these problems are behind us; however, except
for escalating energy and raw material costs and the uncertainties in our
commercial synthetic business, we expect to overcome the majority of the
problems and return to profitability in the foreseeable future. We also estimate
that our improved results will improve liquidity in order to move forward with
our planned capital expenditures at our Delta 3 finishing plant.

We expect over capacity of the domestic textile manufacturing base to continue
to affect pricing, and we expect Asia to continue to disrupt the sourcing
patterns of U. S. retailers and brands. We therefore remain diligent in our
efforts to understand the globally competitive market place and to look within
our Company in order to lower our costs and improve performance.

12


We continue to believe the best opportunity for improving our performance and
protecting the investment of our constituents, is to successfully execute our
Realignment Plan that was announced on October 20, 2004; however, we recognize
the risks that continue to threaten the success of our future plans, namely in
the following areas:

o continued pressure from foreign imports, primarily from China
o the high level of over capacity in the domestic textile industry
o the strength of the U. S. dollar against other currencies
o the federal government policy respecting U. S. sourcing requirements for
military fabrics
o the federal government funding and the timing of such funding for the
purchase of military fabrics
o the Delta Mills' 9.625% Senior Notes' outstanding balance of $30,941,000
due in August 2007
o the continued financial support from our vendors and GMAC
o the realignment plan's dependence on predictable plant operating schedules
supported by timely customer orders in both commercial and government
product lines
o continued high energy costs and the associated effect on the U. S. economy
o the realignment plan's dependence on the ability of the Company to retain
employees notwithstanding the plan's pay and benefit reductions
o the realignment plan's dependence on the ability of the Company to acquire
adequate supplies of yarn and greige fabric at favorable prices

Management believes we can succeed with our realignment plan and return the
Company to profitability provided the negative consequences associated with the
above risks do not become insurmountable.

OUR 2005 REALIGNMENT PLAN.

During the second quarter of fiscal year 2005, the Company's Board of Directors
approved a comprehensive realignment plan (the Plan) that streamlined the
Company's operations and will provide for significant cost reductions. The Plan
was announced on October 20, 2004 with the closing of the Estes weaving facility
and the reduction in staff throughout the organization. Other critical aspects
of the Plan that were initiated beginning in January 2005 are the reduction in
fixed manufacturing costs, benefit costs reductions, salary pay adjustments and
reduced administrative costs.

The Plan resulted in a second quarter charge of $8,863,000 as follows:



Asset Restructuring Cost of
Total Impairment Reserve Goods Sold
-------------------------------------------------------------

Asset impairment charge $3,845,000 $3,845,000
Restructuring costs 3,504,000 3,504,000
Estes and Beattie
run-out costs and
inventory write-down 1,514,000 1,514,000
-------------------------------------------------------------
Total $8,863,000 $3,845,000 $3,504,000 $1,514,000
-------------------------------------------------------------



The asset impairment portion of the charge was determined based upon estimated
proceeds of $8,857,000 associated with asset sales agreements covering our
Catawba, Furman, and Estes plants and equipment located at these closed plants,
as well as some impaired equipment located at our Beattie and Pamplico plants.
The restructuring portion of the charge, estimated to be approximately $3.5
million, is principally for separation pay and benefits costs for the
approximately 400 terminated employees and is expected to be paid over 18 months
beginning in November 2004. The charges recorded in cost of goods sold include
$733,000 of run-out costs at the Estes plant and $781,000 for the write-off of
certain supply inventories associated with equipment to be sold.

Third Quarter Update.
Actual cash restructuring costs that have been paid to date are generally
consistent with our projections and total $1.8 million through the end of the
third quarter. This leaves a balance of $1.7 million that is estimated to be
paid over the next five quarters. The asset sales have also generally occurred
as expected. We signed asset sales contracts for all of the assets to be
disposed of and collected sales proceeds totaling $6.2 million during the third
quarter. To date during the fourth quarter we have collected another $1.0

13


million in sales proceeds. The last remaining asset to be disposed of is the
Furman plant, which is under contract to be sold for $1.9 million and is
expected to close during fiscal year 2006 pending resolution of certain
environmental issues related to an underground storage tank. Activities to date
suggest that we are on plan and do not estimate further adjustments regarding
impairment.

Using fiscal year 2004 as a base line, the realignment plan projections
consisted of $13.6 million of annual cost reduction items and $2.8 million of
annual operational improvements. Our third quarter results, on an annualized
basis, indicate that we accomplished approximately $9.7 million of the cost
reduction initiatives leaving approximately $3.9 million in annualized cost
reduction initiatives that have not materialized as of the end of the third
quarter. Our third quarter represents the first full quarter after adoption of
the realignment plan, and we expect to achieve in the fourth quarter additional
cost reductions of approximately $2.8 million on an annualized basis. On an
annualized basis, this would bring our aggregate costs reductions to $12.5
million representing a shortfall of approximately $1.1 million compared to our
original projections. This shortfall is primarily associated with timing on
expected raw material costs decreases.

Offsetting these cost reduction initiatives were operational losses in the third
quarter attributed to lower than expected operating schedules for the synthetics
product lines, a sales volume shortfall primarily due to the timing of military
fabric purchases, substantial energy cost increases, higher than expected
chemical costs and higher than expected costs to run out the operations of the
Estes weaving facility that closed in October of 2004. These negative forces
more than offset the projected savings in the third quarter.

We originally estimated our aggressive cost reduction initiative would improve
pretax earnings on an annualized basis by $11.0 to $16.0 million when compared
to fiscal 2004 results. As noted above, we believe that the measures included in
the Plan will provide us an aggregate of approximately $12.5 million of
annualized savings. However, the additional factors described above that
affected us during the third quarter will likely offset a portion of the savings
provided by the Plan. We currently estimate that the net effect of the Plan and
the other factors described above will be a net annualized improvement of
approximately $4.0 to $8.0 million although there can be no assurance to this
effect. The uncertainty associated with these anticipated cost reductions
primarily relates to the Company's manufacturing performance, the timing of
funding of military fabric purchases, improvement in the synthetics products
volume, rising energy prices, rising chemical prices, and increased raw material
costs.

We are grateful for the effort and support put forth by our employees. We are
equally grateful for the support of our lenders, shareholders, customers and
suppliers. We are committed to the success of our realignment plan and will
continue to put forth every effort to achieve our goals with respect to those
items that are under management's control.























14


RESULTS OF OPERATIONS
THIRD QUARTER OF FISCAL 2005 VERSUS THIRD QUARTER OF FISCAL 2004

The following table summarizes the Company's results for the third quarter of
Fiscal 2005 versus the third quarter of Fiscal 2004. All numbers are in
thousands except percentages and loss per share.



Increase/ (Decrease)
3 Months 3 Months From 2004 to 2005
Ended Ended ---------------------------
4/2/2005 3/27/2004 $ %
--------------------------------------------------------------

Net Sales $40,064 $37,919 $ 2,145 5.66 %
% of Net Sales 100.00 % 100.00 %

Gross Profit (Loss) (128) 1,678 (1,806) (107.63)%
% of Net Sales (0.32)% 4.43 %

Selling, General and Administrative Expenses 2,423 2,902 (479) (16.51)%
% of Net Sales 6.05 % 7.65 %

Other Income 321 28 293 1046.43 %

Operating Loss (2,230) (1,196) (1,034) (86.45)%
% of Net Sales (5.57)% (3.15)%

Interest Expense (1,352) (1,172) 180 15.36 %
% of Net Sales (3.37)% (3.09)%

Gain on extinguishment of debt 500 500 N/A

Loss Before Income Taxes (3,082) (2,368) (714) (30.15)%
% of Net Sales (7.69)% (6.24)%

Income Tax Benefit (35) 35 100.00 %
% of Net Sales 0.00 % (0.09)%

Net Loss $ (3,082) $ (2,333) (749) (32.10)%
% of Net Sales (7.69)% (6.15)%

Net Loss per share $ (0.52) $ (0.40) (0.12) (30.00)%



15


NET SALES:
The 5.7% increase in net sales was the result of a 7.7% increase in unit sales
partially offset by a 1.9% decline in average sales price. The increase in unit
sales was primarily due to an increase in the Company's commercial cotton
products brought on by higher demand from our major customers. This increase in
unit sales was somewhat offset by a decline in unit sales of the Company's
commercial synthetics business. The increase in unit sales of commercial cotton
products, which is the Company's lowest price product category, accounted for
the majority of the average sales price decline.

GROSS PROFIT (LOSS):
The decline in gross profit was primarily due to a decline in profit margins in
all commercial product categories. The high level of over capacity in the
textile industry, pressure from foreign imports and inconsistent demand at
retail were the primary factors contributing to the declines in profit margin in
the commercial product categories. Additionally, the Company incurred a loss of
approximately $750,000 associated with an inability to meet the customer's
specifications for a new product to be produced for Levi Strauss. Also
contributing to the decline in gross profit were increased energy costs of
approximately $600,000 as well as increased raw material costs, including
certain chemicals used in dyeing and finishing. These factors were somewhat
offset by the cost reductions associated with the Company's realignment plan.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The decline in selling, general and administrative expenses was primarily due to
lower salary and benefit costs due to staff reductions related to the
realignment plan.

OTHER INCOME:
Other income for the third quarter of fiscal 2005 was primarily associated with
the disposal of assets at the Company's Pamplico facility for cash proceeds in
excess of the carrying value of the assets. Other income for the prior year
quarter consisted primarily of discounts taken for early payment of accounts
payable invoices.

OPERATING LOSS:
The increase in the operating loss was primarily the result of the items
discussed above.

INTEREST EXPENSE:
The average interest rate on Delta Mills' credit facility is based on a spread
over either LIBOR or a base rate. The increase in interest expense was primarily
due to increases in interest rates in connection with the amendment of the Delta
Mills revolving credit facility and increases in LIBOR due to changes in market
rates. Also contributing to the increase in interest expense was a higher
outstanding balance on the Delta Mills credit facility. The average interest
rate on the revolving credit facility was 2.84% as of March 27, 2004, compared
to an average interest rate of 5.87% as of April 2, 2005.

GAIN ON EXTINGUISHMENT OF DEBT:
During the third quarter of fiscal 2005, Delta Mills, Inc. purchased $1,000,000
face amount of its 9.625% Senior Notes for $500,000. The Company recognized a
gain of $500,000 as a result of this purchase. There were no such purchases in
the prior year quarter.

INCOME TAX BENEFIT:
The Company's net deferred tax assets at April 2, 2005 and March 27, 2004 are
reduced by valuation allowances. As a result of the Company's having provided
these valuation allowances for any income tax expense (benefit) that would
result from the application of a statutory tax rate to the Company's net
operating losses, no significant income tax expense (benefit) was recognized in
the third quarter of either the current or prior year.

NET LOSS:
The increase in net loss for the third quarter of fiscal year 2005 was primarily
due to the deterioration in gross profit as described above.

16


RESULTS OF OPERATIONS
FIRST NINE MONTHS OF FISCAL 2005 VERSUS FISCAL 2004

The following table summarizes the Company's results for the nine months ended
April 2, 2005 versus the nine months ended March 27, 2004. All numbers are in
thousands except percentages and net loss per share.



Increase/ (Decrease)
9 Months 9 Months From 2004 to 2005
Ended Ended ---------------------------
4/2/2005 3/27/2004 $ %
--------------------------------------------------------------

Net Sales $114,814 $129,000 $ (14,186) (11.00)%
% of Net Sales 100.00 % 100.00 %

Gross Profit (Loss) (1,244) 6,710 (7,954) (118.54)%
% of Net Sales (1.08)% 5.20 %

Selling, General and Administrative Expenses 7,804 8,713 (909) (10.43)%
% of Net Sales 6.80 % 6.75 %

Impairment and restructuring expenses 7,350 7,350 N/A

Other Income 382 729 (347) (47.60)%

Operating Loss (16,016) (1,274) (14,742) (1157.14)%
% of Net Sales (13.95)% (0.99)%

Interest Expense (3,909) (3,540) 369 10.42 %
% of Net Sales (3.40)% (2.74)%

Gain on extinguishment of debt 500 500 N/A

Loss Before Income Taxes (19,425) (4,814) (14,611) (303.51)%
% of Net Sales (16.92)% (3.73)%

Net Loss $ (19,425) $ (4,814) (14,611) (303.51)%
% of Net Sales (16.92)% (3.73)%

Net loss per share $ (3.27) $ (0.82) (2.45) (298.78)%

Order Backlog $ 61,930 $ 50,958 $ 10,972 21.53 %




17


NET SALES:
The 11.0% decline in net sales was the result of a 12.8% decline in unit sales
partially offset by a 2.0% increase in average sales price. The decline in unit
sales was primarily due to a decline in the Company's commercial cotton products
brought on by the high level of over capacity in the textile industry, pressure
from foreign imports and inconsistent demand at retail. The decline in unit
sales of commercial cotton products, which is the Company's lowest price product
category, accounted for the majority of the average sales price increase.

GROSS PROFIT (LOSS):
The decline in gross profit was primarily due to a decline in profit margins in
the commercial cotton and synthetic product categories. The high level of over
capacity in the textile industry, pressure from foreign imports and inconsistent
demand at retail were the primary factors contributing to the declines in profit
margin in the commercial product categories. Additionally, run-out costs and
inventory write-downs associated with the closing of the Estes plant and the
Beattie plant yarn manufacturing totaling approximately $1.5 million are
included in the 2005 gross loss. In addition, the Company incurred a loss of
approximately $750,000 associated with an inability to meet the customer's
specifications for a new product to be produced for Levi Strauss. Also
contributing to the decline in gross profit were increased raw material costs,
including certain chemicals used in dyeing and finishing, and energy costs.
These factors were somewhat offset by the cost reductions associated with the
Company's realignment plan.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The decline in selling, general and administrative expenses was primarily due to
lower salary and benefit costs due to staff reductions related to the
realignment plan and lower distribution costs associated with reduced unit
sales.

IMPAIRMENT AND RESTRUCTURING EXPENSES:
Impairment and restructuring expenses related to the Company's Realignment plan
for the first nine months of fiscal 2005 include asset impairment charges of
$3.8 million and cash restructuring expenses, primarily related to employee
termination costs, of $3.5 million.

OTHER INCOME:
Other income for the nine months of fiscal 2005 was primarily associated with
the disposal of assets at the Company's Pamplico facility for cash proceeds in
excess of the carrying value of the assets. Other income for the prior year nine
months was primarily attributable to asset disposals associated with the
Company's closed Furman and Catawba facilities.

OPERATING LOSS:
The increase in the operating loss was primarily the result of the items
discussed above.

INTEREST EXPENSE:
The average interest rate on Delta Mills' credit facility is based on a spread
over either LIBOR or a base rate. The increase in interest expense was primarily
due to increases in interest rates in connection with the amendment of the Delta
Mills revolving credit facility and increases in LIBOR due to changes in market
rates. The average interest rate on the revolving credit facility was 2.84% as
of March 27, 2004, compared to an average interest rate of 5.87% as of April 2,
2005.

GAIN ON EXTINGUISHMENT OF DEBT:
During the nine months of fiscal 2005, Delta Mills, Inc. purchased $1,000,000
face amount of its 9.625% Senior Notes for $500,000. The Company recognized a
gain of $500,000 as a result of this purchase. There were no such purchases in
the prior year nine months.

INCOME TAX BENEFIT:
The Company's net deferred tax assets at April 2, 2005 and March 27, 2004 are
reduced by valuation allowances. As a result of the Company's having provided
these valuation allowances for any income tax expense (benefit) that would
result from the application of a statutory tax rate to the Company's net
operating losses, no significant income tax expense (benefit) was recognized in
the nine months of either the current or prior year.

NET LOSS:
The increase in net loss for the nine months of fiscal year 2005 was primarily
due to the deterioration in gross profit and impairment and restructuring
expenses as described above.

18


ORDER BACKLOG:
The increase in the order backlog was primarily due to a recent increase in the
demand for the Company's commercial cotton products, as well as an increase in
the demand for fabrics in our government business.

Over the last several years many of the Company's commercial customers have
shortened lead times for delivery requirements. Because of shortened lead time
coupled with inconsistent demand at retail, management believes that the order
backlog at any given point in time may not be an indication of future sales.

LIQUIDITY AND SOURCES OF CAPITAL

SOURCES AND USES OF CASH. The Company's primary sources of liquidity are cash
flows from operations and Delta Mills' revolving credit facility with GMAC. In
the first nine months of fiscal year 2005, the Company used $12.4 million in
cash from operating activities principally as the result of the $19.4 million
net loss discussed above, net of the non-cash asset impairment charge of $3.8
million and $6.1 million in depreciation and amortization expense. Additionally,
$1.8 million of the $3.5 million cash restructuring costs were actually paid
during the period. The changes in operating assets and liabilities were
principally the result of increases of $6.5 million in inventories due primarily
to customer delays in assortments and shipments of Government fabrics, decreases
of $1.8 million in accrued liabilities due to the payment of accrued interest
and property taxes on their respective due dates, somewhat offset by an increase
of $3.2 million in trade accounts payable due primarily to the outsourcing of
yarn manufacturing associated with the closing of the Estes Plant.

Availability on the revolving credit facility was $7.9 million at April 2, 2005.
Delta Mills was not in compliance with the credit facility's financial covenant
at April 2, 2005; however the Delta Mills credit facility lender GMAC has
granted Delta Mills a waiver with respect to this default. Additionally, GMAC
has granted Delta Mills a conditional waiver for the fourth quarter of fiscal
2005. The conditions of this waiver include achieving trailing twelve months
EBITDA as of fiscal 2005 year-end of negative $700,000 and maintaining undrawn
availability of at least $2.5 million for thirty consecutive days immediately
prior to and immediately subsequent to the date on which Delta Mills delivers to
GMAC its draft financial statements for fiscal 2005. The trailing twelve months
EBITDA number of negative $700,000 is based upon the most recent fourth quarter
projection provided to GMAC with minimal tolerance for any negative miss.

Capital expenditures during the first nine months of fiscal years 2004 and 2005
were primarily used for the second phase of the modernization of the Company's
Delta 3 cotton finishing plant. On November 6, 2002, the Company announced that
it had started a major capital project to modernize its Delta 3 cotton finishing
plant in Wallace, S.C. This plan was divided into three phases. The first phase
consisted of the installation of a new dye range that was completed in June of
fiscal year 2003. The majority of the $6.4 million in capital expenditures for
fiscal year 2003 were for this project. The second phase consisted of the
installation of a new print range and a new prep range that was completed in
early fiscal year 2005. The majority of the $5.1 million in capital expenditures
for fiscal year 2004 were for this project. With the completion of phases one
and two of this modernization plan, the Company is positioned to provide
long-term support for its government business and long-term support for an
improved quality product for its commercial cotton business. The third phase
consists of the installation of a new dye range that will be designed for wide
fabric finishing. The third phase, previously scheduled to start during the
third and fourth quarters of fiscal year 2005, has been deferred due to
operating cash requirements projected for the fourth quarter of fiscal 2005 and
the first fiscal quarter of 2006. The completion of phase three will further
enhance the Company's ability to meet the needs of its cotton business on a cost
effective and profitable basis and compete more effectively in the industry. The
Company has not yet determined the exact timing of the implementation of phase
three.

For the fourth fiscal quarter of 2005, the Company anticipates increased sales
and production volumes relative to recent periods. Attainment of this increased
volume will be largely dependent on government garment manufacturers working
through the problems experienced with the transition to the new uniform and
there being no further delays in federal funding for uniform purchases. This
anticipated increase in volume is projected to occur toward the latter part of
the fourth quarter requiring an increase in working capital. The net effect of
this projected increase in volume on liquidity is a projected increase in
borrowings and a corresponding decrease in availability under the credit
facility. Availability at the end of June is estimated to be in a range of $3.0
to $5.0 million as compared to $7.9 million at April 2, 2005. Although a
material operating loss in the fourth quarter could lead to further tightening
of liquidity, the Company believes that the cash flows generated by its
operations and funds available under Delta Mills' credit facility should be
sufficient to service its debt and satisfy its day-to-day working capital needs.

19


During the fourth fiscal quarter of 2005, the Company expects to negotiate
amendments to Delta Mills' revolving credit facility with GMAC for the purpose
of, among other matters, establishing financial covenants for fiscal year 2006.
Based on discussions it has had with GMAC concerning the likely terms of these
amendments and assuming that the Company's government business achieves the
anticipated levels, for fiscal year 2006 the Company estimates that cash flows
generated by its operations and funds available under Delta Mills' credit
facility should be sufficient to service its debt, to satisfy its day-to-day
working capital needs and to fund its planned capital expenditures that were
delayed during the third and fourth quarters of fiscal year 2005. This
expectation by the Company could be adversely affected if the Company is unable
to obtain the anticipated amendments to Delta Mills' revolving credit facility
or if the Company's operating results do not improve as anticipated.

DELTA MILLS' 9.625% SENIOR NOTES. On August 25, 1997, Delta Mills issued $150
million of unsecured ten-year Senior Notes at an interest rate of 9.625%. These
notes will mature in August 2007. At April 2, 2005, the outstanding balance of
the notes was $30,941,000, a reduction of $1,000,000 from the balance at July 3,
2004. This reduction is the result of a purchase by Delta Mills of $1,000,000
face amount of its 9.625% Senior Notes for $500,000 during the third fiscal
quarter of 2005.

THE GMAC REVOLVING CREDIT FACILITY. Delta Mills has a revolving credit facility
with GMAC with a term lasting until March 2007. Borrowings under this credit
facility are limited to the lesser of $38 million or a "formula amount" based on
eligible accounts receivable and inventories of Delta Mills minus a $7 million
availability block. The facility is secured by the accounts receivable,
inventories and capital stock of Delta Mills. The average interest rate on the
credit facility was 5.870% at April 2, 2005 and is based on a spread over either
LIBOR or a base rate. Borrowings under this facility were $27.9 million and
$21.4 million as of April 2, 2005 and July 3, 2004, respectively. As of April 2,
2005, the revolver availability was approximately $7.9 million, net of the $7
million availability reduction described above.

The GMAC credit facility has financial covenants that require Delta Mills to
achieve minimum EBITDA levels for each quarter of fiscal year 2005 and provides
that it will constitute an event of default if Delta Mills and GMAC fail to
agree by the end of fiscal year 2005 to minimum EBITDA levels for the remainder
of the term of the revolving credit facility. If Delta Mills has net income for
fiscal year 2005 and no event of default exists under the credit facility,
interest rates under the credit facility will be reduced by 125 basis points.
Delta Mills was not in compliance with the minimum EBITDA covenant at April 2,
2005 but has obtained a waiver of this violation from GMAC. Since March 27,
2004, GMAC previously granted Delta Mills a waiver (with respect to a
predecessor covenant) and amendment on April 19, 2004 and granted Delta Mills
additional amendments on August 18, 2004 and October 18, 2004. Delta Mills
expects to negotiate additional amendments to its credit facility with GMAC
during the fourth quarter of fiscal 2005. Delta Mills' Senior Note Indenture
provides that a payment default or an acceleration prior to maturity due to a
default under any Delta Mills indebtedness for money borrowed involving a
principal amount of $5 million or more (such as Delta Mills' revolving credit
facility) would constitute an event of default under the Indenture.

RESTRICTIVE COVENANTS. The Delta Mills credit facility contains restrictive
covenants that restrict additional indebtedness, dividends, and capital
expenditures. The payment of dividends with respect to Delta Mills' stock is
permitted if there is no event of default and there is at least $1 of
availability under the facility. The indenture pertaining to Delta Mills' 9.625%
Senior Notes also contains restrictive covenants that restrict additional
indebtedness, dividends, and investments by Delta Mills and its subsidiaries.
The payment of dividends with respect to Delta Mills' stock is permitted if
there is no event of default under the indenture and after payment of the
dividend, Delta Mills could incur at least $1 of additional indebtedness under a
fixed charge coverage ratio test. Dividends are also capped based on cumulative
net income and proceeds from the issuance of securities and liquidation of
certain investments. Delta Mills may loan funds to the Company subject to
compliance with the same conditions. At April 2, 2005, Delta Mills was
prohibited by these covenants from paying dividends and making loans to the
Company. During the nine months ended April 2, 2005 and the year ended July 3,
2004, Delta Mills did not pay any dividends to the Company.

OTHER MATTERS. Delta Mills assigns a substantial portion of its trade accounts
receivable to GMAC Commercial Finance LLC (the "Factor") under a factor
agreement. The assignment of these receivables is primarily without recourse,
provided that customer orders are approved by the Factor prior to shipment of
goods, up to a maximum for each individual account. The assigned trade accounts
receivable are recorded on Delta Mills' books at full value and represent
amounts due to Delta Mills from the Factor. There are no advances from the
Factor against the assigned receivables. All factoring fees are recorded in
Delta Mills' statement of operations as incurred as a part of selling, general
and administrative expenses.

20


The Company has entered into agreements, and has fixed prices, to purchase
cotton for use in its manufacturing operations. At April 2, 2005, minimum
payments under these contracts with non-cancelable contract terms were $0.9
million.

During 1998, the Company received notices from the State of North Carolina
asserting deficiencies in state corporate income and franchise taxes for the
Company's 1994 - 1997 tax years. The total assessment proposed by the State
amounted to $1.5 million, which included interest and penalties at that time.
The assessment was delayed pending an administrative review of the case by the
State. In October 2002, the State proposed a settlement in which the Company
would have paid approximately 90% of the assessed amount plus a portion of
certain penalties for the Company's tax years 1994 - 2000. In January, 2005, the
North Carolina Department of Revenue (the Department) notified the Company that
the North Carolina Court of Appeals unanimously upheld the Department's
assessment of corporate income and franchise tax against A&F Trademark and eight
other holding company subsidiaries of the Limited Stores, Inc. (the Limited
Stores Case), ruling that the trademark holding companies were doing business in
the state of North Carolina for corporate income tax purposes. As a result of
the Limited Stores Case ruling, the Department proposed a Voluntary Compliance
Program (the Program) whereby the Company could pay the assessment amount for
the Company's 1994 - 1997 tax years plus interest totaling approximately $1.4
million. Under the Program, the Department would waive all penalties provided
the Company paid the tax and interest and waived all rights to a refund. The
Company has rejected the Department's offers and continued with its appeal due
to management's belief that the State's legal position is in conflict with
established principles of federal constitutional law. The Company considers all
exposures in determining probable amounts of payment and has determined that any
likely settlement will not exceed established reserves; therefore, any payment
in settlement of this matter is not expected to result in a material impact on
the Company's results of operations.

On January 16, 2004, based on the recommendation of the Company's Compensation
Committee, the Board (with Mr. Garrett abstaining) approved an amendment of the
Company's deferred compensation plan. The deferred compensation plan amendment
provided that each participant's deferred compensation account will be paid to
the participant upon the earlier of the participant's termination of employment
or in accordance with a schedule of payment that will pay approximately 40%,
30%, 20% and 10% of the participant's total pre-amendment account on February 15
of 2004, 2005, 2006 and 2007, respectively. Any such February 15 payment will be
conditioned on there being no default under the Delta Mills Senior Note
Indenture or the Delta Mills revolving credit facility and on Delta Mills
meeting the fixed charge coverage ratio test as defined in the Senior Note
Indenture for the most recently ended four full fiscal quarters, determined on a
pro forma basis. Compliance with the fixed charge coverage ratio test is
required by the Senior Note Indenture only as a condition to Delta Mills taking
certain actions (such as the incurrence of indebtedness or the issuance of
preferred stock) in certain circumstances; however, the amendment of the
deferred compensation plan adopted by the Board requires satisfaction of the
fixed charge coverage ratio test before scheduled payments are made. As a result
of this amendment to the deferred compensation plan, approximately $3.5 million,
which represents the scheduled February 15, 2005 and February 15, 2006 payments,
plus distributions anticipated to occur in the next twelve months due to
participant retirements, is classified on the consolidated balance sheet at
April 2, 2005 as accrued employee compensation in current liabilities. The first
payment of approximately $3.1 million was made in February 2004. As of February
15, 2005, Delta Mills did not meet, for the purpose of the scheduled payment,
the fixed charge coverage ratio test as defined in the Senior Note Indenture for
the most recently ended four full fiscal quarters, determined on a pro forma
basis. Accordingly, any future payment in accordance with the schedule in the
amendment will be delayed until all conditions to such payment can be met.

The Compensation Committee of the Company's Board of Directors is exploring the
possibility of the Board terminating the deferred compensation plan, causing all
amounts payable thereunder (approximately $4.1 million as of April 2, 2005) to
be paid to the participants at such time as the Company's financial condition
and prospects and the covenants in the GMAC credit facility and the Senior Note
Indenture make this course of action feasible. The Compensation Committee is
considering this course of action because of federal legislation enacted in late
2004 that has modified the US income tax rules governing deferred compensation
plans and as a measure to retain key employees who, in light of the general
difficulties in the textile industry, have expressed a desire to diversify their
retirement assets.


CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions.

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Impairment of Long - Lived Assets: In accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," long-lived assets such as property, plant and equipment, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized as the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of by sale are separately presented in the consolidated balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated.

In estimating the future undiscounted cash flows expected to be generated by
long-lived assets to be held and used, major assumptions and estimates include
expected period of operation, projected future product pricing, future raw
material costs and market supply and demand. Changes in any of these estimates
and assumptions could have a material effect on the estimated future cash flows
to be generated by the Company's assets. With the deterioration of the
competitive conditions in the textile industry, we have had changes in these
estimates and assumptions based on strategic changes in management's plan of
operations, including the planned closure and sale of three facilities: Furman,
Catawba, and Estes. As management planned for closure of each of these
facilities, it was necessary to first analyze held-for-use or held-for sale
status of the assets and project future cash flows accordingly. These changes in
assumptions have resulted in asset impairment charges in each of the last three
fiscal years. It is reasonably likely that these assumptions could change in the
future. Estimates of future cash flows and asset selling prices are inherently
uncertain. Different estimates could result in materially different carrying
amounts.

For example, when management decided to close the Furman plant in fiscal 2002,
an $8.2 million impairment charge was recognized reducing the carrying amount of
this asset from $12.1 million to $3.9 million. When the Company entered into a
contract to sell the Furman Plant real property in August 2004, the sales price,
net of selling costs, was approximately $847,000 less than the then carrying
amount resulting in an additional impairment charge of $847,000. When the
Company announced its 2005 realignment plan in November 2004, it estimated its
non-cash impairment charge would range from $5.0 to $8.0 million. The Company
revised this estimate upward in its 10-Q for the first quarter of fiscal 2005;
however, the Company subsequently contracted to sell its facilities at more
favorable sales prices for certain of its property, plant and equipment than it
initially expected, and the actual impairment charge was $3.8 million. There can
be no assurance that these numbers will represent the final charges until the
consummation of the sales of these assets, which are expected to occur in the
fourth quarter of fiscal 2005 and in fiscal 2006. If any sale does not close,
the actual net sales proceeds received in a subsequent transaction could be
lower resulting in an increase in the corresponding impairment charge.

Income Taxes: The Company accounts for income taxes under the asset and
liability method in accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes ("SFAS 109"). The Company recognizes
deferred income taxes, net of any valuation allowances, for the estimated future
tax effects of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their tax bases and net operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Changes in deferred tax assets and liabilities are recorded in the provision for
income taxes. As of April 2, 2005 and July 3, 2004, the Company did not have any
deferred tax assets, net of valuation allowances and deferred tax liabilities.

The Company evaluates on a regular basis the realizability of its deferred tax
assets for each taxable jurisdiction. In making this assessment, management
considers whether it is more likely than not that some portion or all of its
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent on the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers all available evidence, both positive and negative, in making this
assessment. The Company's pre-tax operating losses in each of 2004, 2003 and
2002 represent negative evidence, which is difficult to overcome under SFAS 109,
with respect to the realizability of the Company's deferred tax assets.

The Company's net deferred tax assets at April 2, 2005 and July 3, 2004 are
reduced by valuation allowances. As a result of the Company's having provided
these valuation allowances for any income tax expense (benefit) that would
result from the application of a statutory tax rate to the Company's net
operating losses, no material income tax expense (benefit) has been recognized
in the first nine months of fiscal year 2005.

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If the body of evidence considered by management in determining the valuation
allowance, including the generation of pre-tax income, were to improve, the
Company would consider reversal of the valuation allowance and record a net
deferred tax asset on its balance sheet, resulting in tax benefit on its
statement of operations for the period in which the reversal occurs. The Company
believes consummation of its restructuring plan will return it to profitability;
however, there can be no assurance to this effect.

In addition, management monitors and assesses the need to change estimates with
respect to tax exposure reserve items, resulting in income tax expense increases
or decreases occurring in the period of changes in estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". This
statement amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4,
"Inventory Pricing," and removes the "so abnormal" criterion that under certain
circumstances could have led to the capitalization of these items. SFAS No. 151
requires that idle facility expense, excess spoilage, double freight and
rehandling costs be recognized as current period charges regardless of whether
they meet the criterion of "so abnormal" as defined in ARB No. 43. SFAS No. 151
also requires that allocation of fixed production overhead expenses to the costs
of conversion be based on the normal capacity of the production facilities. SFAS
No. 151 is effective for all fiscal years beginning after June 15, 2005. The
Company is currently evaluating the impact that the adoption of SFAS No. 151
will have on its consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123(R)"). SFAS No. 123(R) will require companies to measure
all employee stock-based compensation awards using a fair value method and
record such expense in its financial statements. In addition, the adoption of
SFAS No. 123(R) requires additional accounting and disclosure related to the
income tax and cash flow effects resulting from share-based payment
arrangements. SFAS No. 123(R) is effective beginning as of the first annual
reporting period beginning after June 15, 2005. The Company is currently
evaluating the impact that the adoption by the Company of SFAS No. 123(R) will
have on its consolidated financial statements. The cumulative effect of
adoption, if any, will be measured and recognized in the consolidated statement
of operations on the date of adoption.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Risk Sensitivity

As a part of the Company's business of converting fiber to finished fabric, the
Company makes raw cotton purchase commitments and then fixes prices with cotton
merchants who buy from producers and sell to textile manufacturers. Daily price
fluctuations are minimal, yet long-term trends in price movement can result in
unfavorable pricing of cotton. Before fixing prices, the Company looks at supply
and demand fundamentals, recent price trends and other factors that affect
cotton prices. The Company also reviews the backlog of orders from customers as
well as the level of fixed price cotton commitments in the industry in general.
As of April 2, 2005, a 10% decline in market price of the Company's fixed price
contracts would have had a negative impact of approximately $0.1 million on the
value of the contracts. As of July 3, 2004, such a 10% decline would have had a
negative impact of $0.7 million. The decrease in the potential negative impact
from July 3, 2004 to April 2, 2005 is due to a lower level of fixed price cotton
commitments at the more recent date. This decline in fixed price cotton
commitments is due primarily to the Company's closing of its Estes plant and its
yarn manufacturing at the Beattie plant.


Interest Rate Sensitivity

Delta Mills' revolving credit facility expiring in 2007 is sensitive to changes
in interest rates. Interest is based on a spread over LIBOR or a base rate. An
interest rate increase would have a negative impact to the extent the Company
borrows against the revolving credit facility. The impact would be dependent on
the level of borrowings incurred. As of April 2, 2005, an increase in the
interest rate of 1% on the amount then outstanding would have a negative impact
of approximately $279,000 annually. As of July 3, 2004, an increase in the
interest rate of 1% on the amount then outstanding would have had a negative
impact of approximately $214,000 annually. The increase in the potential
negative impact from July 3, 2004 to April 2, 2005 is due to the increase in
borrowings under the facility.

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An interest rate change would not have an impact on the payments due under Delta
Mills' fixed rate ten year Senior Notes.


Item 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are our controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

The Company's principal executive officer and its principal financial officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), have
concluded that, as of April 2, 2005, the Company's disclosure controls and
procedures were adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries would be made known to
them by others within those entities.

Changes in Internal Controls

During the quarter ended January 1, 2005, as part of the Company's Realignment
Plan, staffing reductions were made throughout the Company. These reductions
affected all functional areas, including accounting, procurement, information
technology and administrative staff at the corporate and facility level. As a
result of these staffing reductions, certain duty segregations and detail review
controls previously in place are no longer possible. Although we believe we will
be able to develop and implement higher level review controls and other controls
that are adequate, there can be no assurance that these changes will not
materially affect the Company's internal control over financial reporting.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings (not applicable)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(not applicable)

Item 3. Defaults upon Senior Securities (not applicable)

Item 4. Submission of Matters to a Vote of Security Holders (not applicable)

Item 5. Other Information (not applicable)

Item 6. Exhibits

Listing of Exhibits


4.3.1.10 Waiver dated May 12, 2005 from GMAC Commercial Finance LLC as
lender and agent to Delta Mills, Inc.

4.3.1.11 Waiver dated May 17, 2005 from GMAC Commercial Finance LLC as
lender and agent to Delta Mills, Inc.

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10.1.1 Resolution of the Compensation Committee of the Board of
Directors dated February 11, 2005 respecting Fiscal Year 2005
Incentive Bonus Plan.

31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.

31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.

32.1 Certification of CEO Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.

32.2 Certification of CFO Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



Delta Woodside Industries, Inc.
------------------------------------
(Registrant)




Date May 17, 2005 By: /s/ W. H. Hardman, Jr.
-------------------------- --------------------------------
W.H. Hardman, Jr.
Chief Financial Officer














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