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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the Fiscal Year Ended January 3, 2004

OR

For the transition period from              to             

Commission File Number 1-13421

DAN RIVER INC.

(Exact name of registrant as specified in its charter)

2291 Memorial Drive, Danville, Virginia 24541

(Address of principal executive offices)

(434) 799-7000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes  ¨    No  x

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 27, 2003 (based on the last reported closing price per share of Class A Common Stock as reported on the New York Stock Exchange on such date) was approximately $31,979,000.

As of January 3, 2004, the registrant had 20,418,504 and 2,062,070 shares of Class A Common Stock and Class B Common Stock outstanding, respectively.

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INDEX TO FORM 10-K

DAN RIVER INC.

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PART I

Unless otherwise indicated, references in this Annual Report to “we,” “us,” “our” or “Dan River” refer to the business of Dan River Inc. and its subsidiaries. References to a fiscal year refer to our fiscal year, which is the 52- or 53-week period ending on the Saturday nearest to December 31. All fiscal years presented consisted of 52-week periods except for fiscal 2003, which consisted of a 53-week period.

ITEM 1. BUSINESS

General

Founded in 1882, we are a leading designer, manufacturer and marketer of products for the home fashions and apparel fabrics markets. We design, manufacture and market a coordinated line of value-added home fashions products consisting of bedroom furnishings such as comforters, sheets, pillowcases, shams, bed skirts, decorative pillows and draperies. As the pioneer of the complete bed ensemble concept, we market our “Bed-in-a-Bag” ensembles to retailers in all trade classes. We believe the complete bed ensemble has achieved wide acceptance with both retailers and consumers as a highly efficient and convenient way of purchasing in one convenient package all of the components required to dress a bed. We believe we are the leading provider of home fashions products for the juvenile market using a variety of well-known licensed names and trademarks, including our own “Dan River” name. During fiscal 2003, sales of our complete bed ensembles and juvenile products comprised 72% of the net sales in our home fashions business.

We also design, manufacture and market a broad range of high quality woven cotton and cotton-blend apparel fabrics. We market our apparel fabrics to a diverse group of customers which use our fabrics in a wide array of finished products, including career apparel, sportswear, dress shirts, home textiles and upholstery. Additionally, we manufacture and sell specialty engineered yarns and woven fabrics for use in making high-pressure hoses and other industrial products, which we refer to as engineered products.

We operate in three business segments: home fashions, apparel fabrics and engineered products. You can find financial information for these segments, and financial information related to our non-U.S. operations, in Note 13 to our consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.

We are a Georgia corporation, and our principal offices are located at 2291 Memorial Drive, Danville, Virginia 24541. Our telephone number is (434) 799-7000, and our web site address is www.danriver.com. Information contained on our web site is not incorporated by reference into and is not part of this Annual Report on Form 10-K.

Proceedings Under Chapter 11 of the Bankruptcy Code

On March 31, 2004, Dan River Inc. and its domestic subsidiaries (the “Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Georgia (Case Nos. 04-10990 though 04-10993). The Debtors are currently operating their businesses as debtors-in-possession pursuant to the Bankruptcy Code.

On April 1, 2004, the Bankruptcy Court granted interim approval for the Debtors to enter into a $145.0 million debtor-in-possession financing facility (the “DIP Facility”) with Deutsche Bank Trust Company Americas as agent for a syndicate of financial institutions comprised of certain of our pre-petition senior secured lenders. Up to $40 million of the DIP Facility is available during the interim period, which ends on April 28, 2004. A hearing for final approval of the DIP Facility is scheduled for April 27, 2004. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” below for a further discussion regarding the DIP Facility.

In conjunction with the commencement of the Chapter 11 process, the Debtors sought and obtained several orders from the Bankruptcy Court which were intended to enable the Debtors to operate in the normal course of business during the Chapter 11 process. The most significant of these orders

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Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. Under Chapter 11, a debtor is authorized to continue to operate its business in the ordinary course and to reorganize its business for the benefit of its creditors. A debtor-in-possession under Chapter 11 may not engage in transactions outside of the ordinary course of business without the approval of the Bankruptcy Court, after notice and an opportunity for a hearing.

Pursuant to the Bankruptcy Code, pre-petition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors. In addition, any actions to collect pre-petition indebtedness are automatically stayed unless the stay is lifted by the Bankruptcy Court. While under bankruptcy protection, we do not expect to pay the interest obligations on the 12 ³/4% senior notes due 2009 unless ordered to do so by the Bankruptcy Court.

As debtors-in-possession, the Debtors have the right, subject to Bankruptcy Court approval and certain other limitations, to assume or reject executory contracts and unexpired leases. In this context, “assumption” means that the Debtors agree to perform their obligations and cure all existing defaults under the contract or lease, and “rejection” means that the Debtors are relieved from their obligations to perform further under the contract or lease, but are subject to a claim for damages for the breach thereof. Any damages resulting from rejection of executory contracts and unexpired leases will be treated as general unsecured claims in the Chapter 11 process unless such claims had been secured on a pre-petition basis. The Debtors are in the process of reviewing their executory contracts and unexpired leases to determine which, if any, they will reject. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items.

We are in the process of communicating with principal vendors and customers, and we believe that most of our current relationships will continue. The loss of major vendors or customers could have a material adverse effect on our results of operations and financial condition.

The Bankruptcy Code provides that the Debtors have the exclusive right for 120 days (which exclusive period may be extended by the Bankruptcy Court) during which only they may file and solicit acceptances of a plan of reorganization. If the Debtors fail to file a plan of reorganization during the exclusive period or, after such plan has been filed, if the Debtors fail to obtain acceptance of such plan from the requisite impaired classes of creditors and equity holders during the exclusive solicitation period, any party in interest, including a creditor, an equity holder, a committee of creditors or equity holders or an indenture trustee, may file their own plan of reorganization for the Debtors. On April 12, 2004, the United States trustee for the District of Northern Georgia appointed an unsecured creditors committee in accordance with the provisions of the Bankruptcy Code.

After a plan of reorganization has been filed with the Bankruptcy Court, the plan, along with a disclosure statement approved by the Bankruptcy Court, will be sent to all creditors, equity holders and parties in interest. Following the solicitation period, the Bankruptcy Court will consider whether to confirm the plan. In order to confirm a plan of reorganization, the Bankruptcy Court, among other things, is required to find that

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If any impaired class of creditors or equity holders does not accept the plan and, assuming that all of the other requirements of the Bankruptcy Code are met, the proponent of the plan may invoke the “cram down” provisions of the Bankruptcy Code.

Under the “cram down” provisions, the Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. These requirements may, among other things, necessitate payment in full for senior classes of creditors before payment to a junior class can be made. As a result of the amount of pre-petition indebtedness and the availability of the “cram down” provisions, the holders of our common stock may receive no value for their interests under the plan of reorganization. Because of this possibility, the value of our outstanding common stock is highly speculative.

Since the petition date, the Debtors have conducted business in the ordinary course. We are in the process of evaluating our operations as part of the development of a plan of reorganization. After developing a plan of reorganization, the Debtors will seek the requisite acceptance of the plan by impaired creditors and equity holders and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code.

The administrative and reorganization expenses resulting from the Chapter 11 process will unfavorably affect our results of operations. Future results of operations may also be adversely affected by other factors related to the Chapter 11 process. See “Cautionary Statements Relating to Forward Looking Statements” included as Exhibit 99.1 to this Annual Report on Form 10-K for a discussion of risks and uncertainties relating to the Chapter 11 process.

Acquisitions

Cherokee Acquisition. In February 1997, we acquired substantially all of the assets and assumed certain liabilities of The New Cherokee Corporation, which we refer to as Cherokee, for an aggregate purchase price of approximately $65 million. Cherokee, which was a supplier of yarn-dyed fabrics to men’s and women’s shirting manufacturers and of sportswear fabrics to the converting trade, was our primary competitor for these fabrics. In connection with the Cherokee acquisition, we acquired woven fabrics manufacturing facilities located in Spindale, North Carolina and Sevierville, Tennessee, and a finishing facility located in Harris, North Carolina.

Bibb Acquisition. In October 1998, we purchased all the outstanding capital stock of The Bibb Company, which we refer to as Bibb, through a merger transaction for an aggregate purchase price of approximately $240 million. The purchase price consisted of $86 million of cash and 4.3 million shares of our Class A Common Stock. In connection with the acquisition, we also assumed or repaid an aggregate of $95 million of Bibb’s debt. Bibb, which was founded in 1876, was a leading domestic manufacturer of home fashions textile products. Bibb had net sales of $249 million and a net loss of $28 million during its last fiscal year prior to the acquisition.

The Bibb acquisition broadened our home fashions products to include juvenile products and products for the hospitality and health care markets. As a result of the Bibb acquisition, we believe that we are the leading manufacturer of bedding products for the juvenile market under a number of well-known licensed names, as well as our own “Dan River” brand. The Bibb acquisition expanded our home fashions products manufacturing operations by approximately 50%, adding spinning and weaving operations located in Greenville, South Carolina, finishing operations located in Brookneal, Virginia, and sewing facilities located in Fort Valley and Newnan, Georgia, and in Brookneal, Virginia. We also acquired our engineered products business, located in Porterdale, Georgia, from Bibb.

Morven Plant Acquisition. In December 1998, we purchased a 315,000 square foot sewing facility located in Morven, North Carolina, for an aggregate purchase price of approximately $2.4 million. We purchased this facility to reduce our dependence on outside manufacturers for the fabrication of home fashions products.

Mexican Operations. In January 2000, we entered into joint venture agreements with Grupo Industrial Zaga, S.A. de C.V., which we refer to as Zaga, for the purpose of building and operating textile and garment manufacturing plants in Mexico. We invested approximately $750,000 in land designated for the construction of the textile

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operation. Subsequent analysis suggested, however, that certain costs, such as plant construction and utilities, were higher than originally anticipated. These higher costs, together with generally weak apparel fabrics market conditions, reduced anticipated returns from the textile manufacturing plant to a level we considered unacceptable. As a result, we suggested to Zaga that we should not proceed with construction of the Mexican textile manufacturing plant.

We did, however, proceed with the construction of the garment manufacturing plant at Jilotepec in the State of Mexico. This facility is presently manufacturing shirts primarily for sale to the career apparel and retail trades and includes laundry facilities to complement the sewing operations. We produce most of the apparel fabrics used by the plant.

We held approximately a 50% interest in the textile and garment joint ventures at the time they were formed. We and Zaga negotiated an amicable termination of both joint ventures in February 2001, at which time we bought Zaga’s interest in the garment joint venture for $3.2 million in cash and the transfer of the land previously acquired for the textile plant.

ISI Acquisition. In April 2000, we purchased substantially all of the assets of Import Specialists, Inc., which we refer to as ISI, for $15.4 million in cash and the assumption of certain operating liabilities. ISI, an importer of home fashions products complementary to our customer base, including doormats, throws, and rugs manufactured primarily in China and India, became a part of our home fashions business.

Additional Danville Distribution Facility. In May 2000, we acquired an additional 301,200 square foot warehouse and distribution facility adjacent to our Riverpointe distribution facility in Danville, Virginia for $4.3 million. This facility was necessary to service increased demand for our home fashions products which we were experiencing at that time.

Manufacturing Consolidations

We closed our Riverside Plant in the fourth quarter of fiscal 1997 and our Spindale Plant in January 1999. This consolidation reduced the number of apparel fabrics weaving plants from four to two.

In 2002, we completed a consolidation which included the closure of the Newnan, Georgia home fashions sewing plant and consolidation of its capacity primarily into our Brookneal and Danville, Virginia sewing operations. Additionally, we reduced our apparel fabrics weaving capacity by relocating certain looms from our weaving facility in Danville to the Sevierville, Tennessee plant and replacing those looms with newer, modern looms utilized primarily for weaving home fashions products. In connection with the installation of the newer home fashions looms in Danville, we closed a portion of our home fashions weaving operation at the Greenville, South Carolina plant, resulting in a modest reduction in home fashions weaving capacity.

In 2003, we further consolidated our home fashions and apparel fabrics manufacturing operations by closing our home fashions sewing plant in Fort Valley, Georgia, our home fashions distribution facility in Juliette, Georgia, and our remaining home fashions weaving operations in Greenville, South Carolina. We also announced that we would close our Sevierville, Tennessee weaving facility in fiscal 2004. Certain of these operations are being consolidated in our remaining manufacturing and distribution facilities. As a result of these changes, we eliminated over 850 employees for an estimated annual savings of $13.6 million.

We believe these consolidations provide us with better capacity utilization and reduce our fixed manufacturing costs.

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Home Fashions Products

Products. Our home fashions products include bedroom furnishings such as comforters, sheets, pillowcases, shams, bed skirts, decorative pillows and draperies that we market under our “Dan River” name, as well as under private labels of our major retail customers and under licenses from, among others, “Colours by Alexander Julian” and “Lilly Pulitzer.” We also market home fashions products for the juvenile market under the “Dan River” name, as well as a number of licensed names and trademarks, including among others:

We have also utilized our expertise in juvenile licensing to introduce licensed products in the young adult market. Through a licensing agreement with Seventeen magazine, we have made in-roads into the teenage markets.

We had net sales attributable to home fashions products of:

We offer home fashions products in a wide variety of styles and patterns, including fashion designs and, to a lesser extent, solid colors. Products range from a 120-thread count muslin sheet of blended polyester and cotton to a top-of-the-line 300 thread count percale 100% cotton sheet. Our acquisition of ISI expanded our home fashions product line and enables us to market such niche products as doormats, throws and rugs.

We believe we have established ourselves as an innovator in merchandising home fashions products. We were a leader in introducing the complete bed ensemble to retailers, which we market under the name “Bed-in-a-Bag.” The “Bed-in-a-Bag” complete bed ensemble consists of a comforter with matching sheets, pillowcases, shams and a dust ruffle.

Customers. We design and manufacture our home fashions products to meet the needs of retail, hospitality and healthcare markets. We distribute home fashion products through key retailers in all retail trade classes including:

We also sell home fashions products to the hospitality and healthcare markets primarily through distributors.

During fiscal 2003, we marketed our home fashions products to approximately 600 active customers. We have pursued and established strategic relationships with large, high volume retailers and others including:

Sales of home fashions products to Kmart Corporation and Wal-Mart Stores, Inc. accounted for approximately 19% and 15%, respectively, of our net sales in fiscal 2003. No other home fashions products customer accounted for more than 6% of our net sales in fiscal 2003. During fiscal 2003, sales of home fashions products to customers outside the United States accounted for approximately 3% of our net sales.

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In 2002, Kmart Corporation filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and subsequently announced the closing of approximately 13% of its stores. In 2003, Kmart announced the expected closing of an additional 15% of its original stores. We experienced a very slight decrease in our sales to Kmart during fiscal 2002; however, during fiscal 2003 sales to Kmart continued to decline as Kmart closed additional stores, reduced advertising in its home fashions businesses and sought to tighten control of its inventories.

Sales and Marketing. The home fashions products sales and marketing staff consists of approximately 100 persons. They are headquartered in New York City and have satellite offices in the Atlanta, Chicago, Dallas, Los Angeles, Portsmouth, San Francisco, Bentonville (Arkansas) and Toronto (Canada) areas. These marketing professionals, stylists and product development personnel work as early as one year in advance of a retail selling season to develop new fabrics, styles, colors, constructions and finishes. Together with the marketing group, stylists often work directly with our customers and our licensors to create fabrics and styles that respond to rapidly changing fashion trends and customer needs. New styles are also developed internally for the April and October bed and bath home textile trade shows, where they are shown to buyers and are placed in production based on customer acceptance. Orders for home fashions products are filled from inventory or, if inventory is not available, products are manufactured or sourced from third parties and generally shipped within three weeks to four months of order placement.

Apparel Fabrics

Products. We manufacture a broad range of high quality woven cotton and cotton-blend fabrics, which we market primarily to manufacturers of men’s, women’s and children’s clothing. The specific markets are career apparel, government and military, sportswear and dress shirts. Our yarn-dyed and piece-dyed apparel fabrics include:

We also manufacture and distribute (1) fabrics for use in decorating, crafts and garment sewing, (2) 100% cotton and cotton-blend upholstery fabrics and (3) greige (unfinished) fabrics to converters. We had net sales attributable to apparel fabrics products of:

We believe that we enjoy a reputation as a leader in creating new fabric styles and designs within the apparel fabrics market. Our product development professionals work independently as well as directly with customers to develop new fabric styles and constructions to respond to retailers’ and consumers’ needs and direction. Our development strategy is focused on a variety of novel, functional fabrics and finishes.

We also manufacture and market fabrics utilizing “Tencel” lyocell, an innovative natural fiber which had been used primarily in manufacturing women’s sportswear. Our current product development efforts involve fabrics which incorporate new product finishes for end uses such as stain defense, antimicrobial and odor control, and comfort stretch and other innovative fabrics for use in pants and other product categories outside of our traditional shirting lines. Additionally, we manufacture shirts for career apparel, as well as sport and dress shirts, at our Mexican sewing plant.

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Customers. We distribute our apparel fabrics primarily to domestic manufacturers of men’s, women’s and children’s clothing which, in turn, operate sewing plants throughout the United States, Mexico, Central America and the Caribbean. We market our apparel fabrics to approximately 1,000 customers, none of which accounted for more than 3% of our net sales in fiscal 2003. Customers market clothing manufactured from our apparel fabrics under such brand names as:

as well as under private labels through retailers such as Belk, Inc., J.C. Penney Company, Inc., Kohl’s Corporation and Mervyn’s Inc. We market career apparel fabrics to customers such as Cintas Corporation, VF Corp. and Kazoo. We manufacture a significant percentage of the fabrics utilized in army and air force dress shirts and navy workshirts. We also distribute apparel fabrics to home sewing retailers such as Wal-Mart Stores, Inc., Jo-Ann Stores, Inc., The Longaberger Company, Waverly Fabrics and through various wholesale distributors for use in decorating and crafts, as well as garment sewing. Our upholstery fabrics are sold primarily to furniture manufacturers such as Broyhill Furniture Industries, Inc. and Craftmaster. During fiscal 2003, sales of apparel fabrics to customers located outside the United States accounted for approximately 3% of our net sales.

Our Mexican sewing plant sells primarily to career apparel and retail accounts as well.

Sales and Marketing. Our apparel fabrics sales and marketing staff consists of approximately 40 full time persons as well as commission agents. They are headquartered in New York City and have satellite offices in Chicago, Dallas, Danville and High Point (North Carolina). Apparel fabrics are generally “made to order” products which are manufactured and shipped within six to eight weeks of order placement. Orders for apparel fabrics are based on customer selections from offerings of color, content, construction, design and finish, and fabrics are made to customer specifications, which may be developed jointly with the customer. Presently, two individuals based in Boonesville, Mississippi are primarily responsible for marketing the production of the Mexican sewing plant.

Engineered Products

Products. Our engineered products consist of coated yarns and woven fabrics that are manufactured to customer specification for use in such products as high pressure hoses for the automotive industry, conveyer belts and other industrial applications. We are the only U.S. producer to provide both water- and solvent-based adhesive systems. We had net sales attributable to engineered products of:

Customers. We sell our engineered products primarily to companies serving the automotive industry, which in turn utilize them as components in their own products. We believe our ability to meet stringent industrial certification standards and to provide domestic sourcing to customers has helped us establish strong relationships with our customers. During fiscal 2003, we marketed our engineered products to approximately 90 customers, none of which accounted for more than 3% of our net sales in fiscal 2003. During fiscal 2003, substantially all of our sales of engineered products were to domestic customers.

Sales and Marketing. We have established close working relationships with our engineered products customers in the development of products to meet their specific needs. Sales and marketing of our engineered products is based in the Atlanta, Georgia area.

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Manufacturing Process

We are a vertically integrated manufacturer involved in all aspects of the woven textile manufacturing process, from spinning and weaving to dyeing, finishing, and sewing. We have made significant investments in facility modernization focused on advanced manufacturing technologies in an effort to be a low cost manufacturer in the industry. Within our home fashions operations, we have installed:

We have built a home fashions accessory sewing plant, a distribution center and a graphics printing facility in Danville, Virginia. These facilities are in close proximity to our other Danville home fashions facilities and our Brookneal, Virginia finishing and sewing operations. We believe the proximity of our principal home fashions manufacturing and distribution facilities provides competitive advantages, in that our “Bed-in-a-Bag” complete bed ensembles require the combination into one package of products manufactured at several different facilities. We believe we are well positioned to efficiently service our home fashions customers.

Within our apparel fabrics operations, we have installed high speed looms and modernized our yarn preparation processes through the installation of more efficient, lower cost, open-end spinning, carding, drawing and combing equipment. Our capital improvement programs modernized and streamlined substantially all significant components of our apparel fabrics manufacturing process.

In fiscal 2000, we began manufacturing shirts at our new Mexican sewing plant. This plant includes an industrial laundry and warehouse facilities from which we can ship a complete, packaged, finished garment to our targeted customers.

Our engineered products facilities include specialty coating equipment for yarns and fabrics, looms, and yarn processing equipment. These facilities have achieved ISO 9001 certification.

We have engineered our management information systems and manufacturing processes to meet the quick response delivery requirements of our customers. Quick response techniques reduce the time required to process a particular order, which improves customer service and production efficiency. Furthermore, we have the capability to offer electronic data interchange programs to all of our significant customers. These programs minimize the lead time for customer orders and permit a more efficient, targeted manufacturing schedule, as well as improvements in efficiency, communications, planning and processing times at each stage of production. We have electronic data interchange programs in place with most of our major home fashions products customers.

Raw Materials

We use substantial quantities of cotton in our manufacturing operations. By law, U.S. textile companies are generally prohibited from importing cotton, subject to certain exceptions that take effect primarily when U.S. cotton prices exceed world cotton prices for a period of time. Cotton is an agricultural product subject to weather conditions and other factors affecting agricultural markets. Accordingly, the price of cotton is subject to considerable fluctuation.

We purchase cotton primarily in the domestic market directly from merchants or through brokers. Generally, we seek to purchase sufficient amounts of cotton to cover existing order commitments. We may purchase cotton in advance of orders on terms that we deem advantageous, and while we do not speculate on the price of cotton, we may hedge prices from time to time through forward contracts and in the futures and options markets. Although we attempt to buy more cotton when we believe, based on our experience, that prices are relatively low, we still buy cotton continuously throughout the year, which tends to mitigate the effects of price fluctuations over time. Additionally, our general focus on lighter-weight fabrics tends to lessen the impact on our business of fluctuations in cotton prices. We also use significant quantities of polyester, which is available from several sources.

Although we have always been able to obtain sufficient supplies of both cotton and polyester, any shortage or interruption in the supply or variations in the quality of either could have a material adverse effect on our business. Additionally, unusual fluctuations in cotton and polyester prices could significantly affect our profitability, particularly on a short term basis, since we cannot always mirror such fluctuations in the prices of our products.

We also use various other raw materials, such as dyes and chemicals, in our manufacturing operations. We believe these materials are readily available from a number of sources.

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Outside Sourcing

We supplement our internally produced product offerings with yarns, finished and unfinished fabrics, components of products, and finished products purchased from various foreign and domestic sources. Most often we obtain fabrics, products and product components which:

We also contract with third parties for various manufacturing services, including certain printing, sewing and assembly operations.

During fiscal 2003, sourced products, components and manufacturing services accounted for approximately 17% of our cost of sales. We expect the percentage of our finished products and product components obtained from outside sources to increase in fiscal 2004.

Trademarks and Licenses

We hold licenses to produce and sell home fashions products under:

as well as other names or marks, and to use certain designs on our home fashions products. Such licenses provide that we have the right for a limited period, generally three years subject to renewal for additional periods, to use the respective brand name and/or design in the sale of certain types of products in certain geographic regions. We also hold licenses with respect to the use and advertising of certain processes or synthetic fibers or fabrics. We believe that no single license or trademark other than “Dan River” is material to our business.

Competition

Our competitive position varies by product line. Competitive factors include:

We sell our products primarily to domestic customers and compete with both large, vertically integrated textile manufacturers and numerous smaller companies specializing in limited segments of the market. Our competitors include both domestic and foreign companies, a few of which are larger in size and/or have significantly greater financial resources than we do. We believe that over 70% of the apparel fabrics, much of which are imported in the form of garments, and over 25% of the home fashions products sold in the U.S. are manufactured overseas. Most sport shirts sold in the U.S. are manufactured outside of the U.S. Due in significant part to the competitive

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environment, the U.S. textile industry has experienced significant consolidation over the past several years. We nevertheless have sought and continue to seek opportunities under these circumstances to focus our operations on various value-added businesses that, by their nature, are resistant to imports. Additionally, to supplement our own manufacturing capabilities and product lines, we seek to obtain low cost finished products and product components from a variety of foreign and domestic sources.

We are one of several domestic manufacturers of home fashions products. Certain of our competitors have a significantly greater share of the domestic market than we do, including WestPoint Stevens Inc. and Springs Industries, Inc., which we believe collectively account for over 50% of the home fashions bedding products market. Nevertheless, we believe the proximity of our principal home fashions manufacturing and distribution facilities provide competitive advantages over certain of our domestic and foreign competitors. Our “Bed-in-a-Bag” complete bed ensembles require the combination of products manufactured at several different facilities into one package. Substantially all of our components are manufactured in facilities located in relatively close proximity in the Virginia and North Carolina piedmont, whereas facilities of our competitors are generally scattered over a wider area, thus increasing product costs and shipping times and, we believe, impeding their ability to respond quickly to customer demands for product replenishment. We believe this situation is exacerbated for importers, who must either maintain substantial inventories at their risk or deal with much longer lead times for supplying their customers.

We have made our investments in state of the art business management computer systems, such as the SAP enterprise resource planning and i2 production planning systems. We are currently utilizing our design and product development expertise and our state of the art systems, in cooperation with our customers, to integrate our internal manufacturing capabilities with outside sourcing initiatives in an effort to supply complex, value-added products at attractive price points, with reduced lead times and lower inventory risk.

We believe that we are the last full line producer of finished light weight yarn-dyed woven cotton and cotton-blend apparel fabrics in the U.S. With respect to men’s shirtings, based on net sales, we believe we are the largest producer of oxford cloth and pinpoint oxford cloth and the leading producer of light weight yarn-dyed shirting fabrics in the Western Hemisphere. In the sportswear and upholstery fabrics markets, we are one of a number of domestic producers. In the sport shirt market, we are one of many world-wide producers.

We believe we are in a unique position to service the core demand for fabrics by garment manufacturers desiring to maintain a manufacturing base in the Western Hemisphere. The NAFTA and CBI trade initiatives, as well as our proximity and ability to respond promptly to their needs, help make our products attractive to these core customers in comparison to imported fabrics from other parts of the world. Additionally, certain of our customers, such as career apparel manufacturers, remain focused on a domestic source of supply and are a significant part of our apparel fabrics business. We seek to enhance our core product offerings through our product development efforts as we create new product finishes for special end uses such as stain defense, antimicrobial and odor control, and as we develop comfort stretch and other innovative products for use in pants and other fabric categories outside of our traditional shirting lines. Additionally, we believe our design expertise and our emphasis on shortening production and delivery times allow us to respond quickly to changing fashion trends and to our domestic customers’ delivery schedules.

Trade Regulation

The trade initiatives described below are very complex, especially in the way in which they interact with each other. This complexity is exacerbated by the high degree of variability and unpredictability displayed by the regulatory agencies of each country in interpreting and enforcing the applicable laws. Additionally, governmental monetary and tax policies of US trading partners can have substantial impact on our ability to compete with imports from those countries. We believe that collectively, international trade laws and policies, and particularly the interpretation and enforcement policies adopted by the US and its trading partners, have had an adverse effect on the textile and apparel industries in the US. We cannot assure you that this situation will improve, or that such laws and policies, and the interpretation and enforcement thereof, will not have a further adverse impact on our business in the future.

The extent of import protection afforded by the U.S. government to domestic textile producers has been, and continues to be, subject to considerable domestic political deliberation. NAFTA, which was entered into by the U.S., Canada and Mexico, has created the world’s largest free-trade zone. The agreement contains safeguards sought by the U.S. textile industry, including a rule of origin requirement that products be processed in one of the three countries in order to benefit from NAFTA. NAFTA phases out all trade restrictions and tariffs on textiles and apparel among the three countries. In addition, NAFTA requires merchandise to be made from yarns and fabrics

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originating in North America in order to avoid trade restrictions. Thus, not only must apparel be made from North American fabric, but the fabric must be woven from North American spun yarn. Similar protections are afforded to apparel manufacturers based in certain Caribbean and Central American countries which ship finished garments into the U.S. under Item 9802.00.80 of the Harmonized Tariff Schedule of the U.S. as authorized by the Caribbean Basin Recovery Act, which we refer to as CBI. Item 9802.00.80 reduces certain tariffs which would otherwise apply to apparel garments manufactured outside the U.S. and shipped into the U.S., provided that the garments are manufactured from fabric produced and cut domestically. The Caribbean Basin Trade Partnership Act, which we refer to as CBTPA, became law in 2000. The CBTPA expands the current CBI program by allowing duty-free and quota-free treatment for imports of certain apparel from the Caribbean Basin, and by extending NAFTA-equivalent tariff treatment to a number of other products previously excluded from the CBI program. Specifically, under the CBTPA, garments assembled in one or more CBTPA designated countries from fabrics wholly formed in the U.S. from yarns wholly formed in the U.S., would be eligible for such favorable treatment. We believe that collectively NAFTA and CBI, as modified by CBTPA should be beneficial for us and other domestic producers of apparel fabrics, because they create an attractive manufacturing base for apparel in close proximity to the U.S.

In 1995, the World Trade Organization, or WTO, established mechanisms to progressively liberalize world trade in textiles and clothing by eliminating quotas and reducing duties over a 10-year period beginning in January 1995. The selection of products at each phase is made by each importing country and must be drawn from each of the four main textile groups: tops and yarns, fabrics, made-up textile products and apparel. In 2000, Congress passed and the President signed the African Growth and Opportunity Act, which we refer to as the AGOA, which is intended to promote growth and economic prosperity of certain sub-Saharan African countries through, among other things, greater duty-free access to U.S. markets. The elimination of quotas and the reduction of tariffs under the WTO, together with the effects of the AGOA, have resulted in increased imports of certain textile products and apparel into North America. These factors have made our products less competitive against low cost imports from developing countries. Additionally, macroeconomic factors such as the strength of the dollar versus foreign currencies (particularly Asian currencies) have had and could continue to have an adverse effect on our ability to compete with foreign imports.

Environmental Regulation

We must comply with various federal, state and local environmental laws and regulations limiting the discharge of pollutants and the storage, handling and disposal of a variety of substances. In particular, our dyeing and finishing operations result in the discharge of substantial quantities of wastewater and emissions to the atmosphere. We must comply with the federal Clean Water and Clean Air Acts, and related state and local laws and regulations. Our operations also are governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder, which, among other things, establish cotton dust, formaldehyde, asbestos and noise standards, and regulate the use of hazardous chemicals in the workplace. We believe that we currently comply in all material respects with applicable environmental or health and safety laws and regulations.

We are currently evaluating recent regulatory initiatives under the Clean Air Act which pertain to nitrogen oxide air emissions and hazardous air pollutant emissions. These initiatives could potentially require some combination of process changes or limitations, or additional air emissions monitoring or control equipment at certain of our facilities which, in turn, could require capital expenditures, increase operating costs or limit our operations. Based on the information presently available, we do not believe that the cost of, or any operational constraints or modifications required to, assure future compliance with the above-described laws, regulations and initiatives, or to remediate existing environmental contamination, will have a material adverse effect on our results of operations or financial condition. However, there can be no assurance that:

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During our due diligence at the Morven, North Carolina facility, which we acquired in December 1998, we discovered low levels of groundwater contamination from perchloroethylene. Prior to purchasing the facility, our personnel met with regulatory authorities regarding the options for dealing with this contamination. As a result of those discussions, we elected to pursue a brownfields agreement for the property with the State of North Carolina. Under the North Carolina brownfields program, contaminated industrial sites are placed into productive use by allowing owners to perform less intensive cleanups than would be required for residential sites or drinking water sources. A final agreement with the State of North Carolina has not been completed at this time.

At our closed Abbeville, South Carolina facility, which we plan to dispose of, Bibb previously worked with the South Carolina Department of Health and Environmental Control, which we refer to as DHEC, to identify the source of low levels of freon and certain other volatile organic compounds which were found in a water supply well located on-site. No active on-site remediation is being required by the State at this time; however, DHEC has been conducting further studies of the site in an attempt to confirm the origin of the contamination, and there can be no assurance that DHEC will not determine that further studies or remediation are required with respect to this site.

Order Backlog

Our order backlog was approximately $116 million at January 3, 2004, as compared to approximately $138 million at December 28, 2002. Substantially all of the orders on hand at January 3, 2004 are expected to be filled within four months of that date.

Employees

At January 3, 2004, we had approximately 5,100 employees in the U.S. and Canada, of which approximately 4,200 were hourly employees. Of these hourly employees, approximately 2,600 are located in our Danville, Virginia operations and represented by a collective bargaining agreement that expires in June 2005. We believe that our relations with our employees are good.

Where You Can Find More Information

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act, available (free of charge) on or through our web site located at www.danriver.com, as soon as reasonably practicable after they are filed with or furnished to the SEC.

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FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements include statements generally preceded by, followed by or that include the words “believe,” “expect,” “anticipate,” “plan,” “estimate” or similar expressions. These statements include, among others, statements regarding our expected business outlook, the Chapter 11 process, anticipated financial and operating results, strategies, contingencies, financing plans, working capital needs, sources of liquidity, estimated amounts and timing of capital expenditures, environmental compliance costs and other expenditures, and expected outcomes of litigation.

Forward-looking statements reflect our current expectations and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to these forward-looking statements include, among others, assumptions regarding demand for our products, continued availability of the DIP Facility on an interim basis and final approval of the facility by the Bankruptcy Court, expected pricing levels, raw material costs, the timing and cost of planned capital expenditures, the estimated cost of environmental compliance, expected outcomes of pending litigation, competitive conditions and general economic conditions. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict. Such factors include, but are not limited to, the factors set forth in Exhibit 99.1, “Cautionary Statements relating to Forward Looking Statements,” filed with this Annual Report on Form 10-K, and the following:

You should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events.

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ITEM 2. PROPERTIES

Our home fashions manufacturing and warehousing facilities consist of approximately 4.9 million square feet of space located in Georgia, North Carolina, South Carolina and Virginia. Of this space we own approximately 4.3 million square feet and lease the remainder. We also lease warehouse and office space near Toronto, Canada.

Our apparel fabrics manufacturing and warehousing facilities consist of approximately 2.8 million square feet of space located in North Carolina, Tennessee and Virginia. We own these facilities with the exception of our Sevierville, Tennessee, manufacturing plant, which we lease with an option to purchase for nominal consideration in 2018. We also own an apparel manufacturing plant in Jilotepec, State of Mexico.

Our engineered products are manufactured at a 500,000 square foot facility in Georgia which we own.

We own most of our office space in Danville, Virginia, including corporate and home fashions and apparel fabrics divisional offices. We lease each of our marketing and sales offices, and we lease three outlet stores in Florida, Georgia and South Carolina. These stores average approximately 4,000 square feet of total space each. We own our factory outlet store in Danville, Virginia.

Substantially all of our owned manufacturing, warehousing and office facilities (including the real property and the machinery, equipment, furnishings and fixtures) are subject to security interests in favor of our senior lenders. Additionally, our Sevierville, Tennessee manufacturing plant and our Portsmouth, Virginia office and warehouse facility are subject to leasehold deeds of trust, also in favor of our senior lenders.

Our manufacturing facilities generally operate on a 24 hour, five, six or seven day schedule depending on the nature of the operations and demand for specific products, as well as other factors.

We believe that our existing facilities are adequate to service existing demand for our products. We consider our plants and equipment to be in good condition.

ITEM 3. LEGAL PROCEEDINGS

On March 31, 2004, we and our domestic subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Georgia (Case Nos. 04-10990 though 04-10993). We are currently operating our businesses as debtors-in-possession pursuant to the Bankruptcy Code. As a result of the filing, pre-petition obligations of the Debtors, including obligations under debt instruments, generally may not be enforced against the Debtors, and any actions to collect pre-petition indebtedness are automatically stayed, unless the stay is lifted by the Bankruptcy Court. For more information about the filing, see Item 1. Business —Proceedings Under Chapter 11 of the Bankruptcy Code.

From time to time, we are a party to litigation arising in the ordinary course of our business. We are not currently a party to any litigation that we believe could reasonably be expected to have a material adverse effect on our results of operations or financial condition.

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

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Our Class A Common Stock currently trades on the National Quotation Service Bureau (commonly known as the “Pink Sheets”) under the symbol “DVERQ.” Our Class A Common Stock was listed on the New York Stock Exchange, or the NYSE, under the symbol “DRF” during fiscal 2003 and fiscal 2002. There is no established trading market for the Class B Common Stock. On March 5, 2004, there were approximately 240 holders of record of our Class A Common Stock and seven holders of record of our Class B Common Stock.

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We have not paid cash dividends during our two most recent fiscal years. Our credit agreement prohibits payment of cash dividends or repurchases of stock.

The following table sets forth for the calendar quarter indicated the high and low closing prices per share of our Class A Common Stock as reported in composite trading on the NYSE.

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For information concerning Class A Common Stock to be issued in connection with our equity compensation plans, see Part III, Item 12, of this Annual Report on Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

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

Recent Developments

As more fully described in “Item 1. Business – Proceedings Under Chapter 11 of the Bankruptcy Code,” on March 31, 2004, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Georgia. The Debtors are currently operating their businesses as debtors-in-possession pursuant to the Bankruptcy Code. Management is in the process of stabilizing the businesses of the Debtors and evaluating their operations in connection with the development of a plan of reorganization. After developing a plan of reorganization, the Debtors will seek the requisite acceptance of the plan by creditors, equity holders and third parties and confirmation of the plan by the Bankruptcy Court, all in accordance with the applicable provisions of the Bankruptcy Code.

As a result of the filing, our creditors were automatically stayed from taking certain enforcement actions under their respective agreements with us unless the stay is lifted by the Bankruptcy Court. In addition, the Debtors have entered into the DIP facility, which is more fully described below.

During the Chapter 11 process, we may with Bankruptcy Court approval sell assets and settle liabilities, including for amounts other than those reflected in our financial statements. We are in the process of reviewing the Debtor’s executory contracts and unexpired leases to determine which, if any, we will reject as permitted by the Bankruptcy Code. We cannot presently estimate the ultimate liability that may result from rejecting contracts or leases or from the filing of claims for any rejected contracts or leases, and no provisions have yet been made for these items. The administrative and reorganization expenses resulting from the Chapter 11 process will unfavorably affect our results of operations. Future results of operations may also be affected by other factors related to the Chapter 11 process.

Overview

General. Our long term strategy is to expand our home fashions business primarily through internal growth while maintaining and enhancing our niche position as a producer of light weight yarn-dyed apparel fabrics. In our home fashions business, we emphasize customer specific marketing supported by superior design, excellent systems and flexible manufacturing in order to supply our customers with compelling product as they need it to meet the needs of a discerning consumer. We augment our internally produced sheeting based products with externally sourced finished goods and components. These goods include items such as decorative pillows and quilts and generally come from places such as India and China. In our apparel fabrics business, we focus on diversifying our product offerings into product areas where import competition is less of a factor, while maintaining our leadership in our core light weight yarn-dyed fabric business. We work continuously to develop new apparel fabrics or finishes to differentiate ourselves from our worldwide competitors. We continue to implement cost reductions throughout all areas of our operations, which we believe are critical in order to remain competitive in the global market place.

Home Fashions. More than ten years ago we made the strategic decision to focus on our home fashions products business, which generally is less cyclical than other textile businesses (including our apparel fabrics business), is less import sensitive and has attractive margins. Consistent with this strategy, we acquired The Bibb Company, which we refer to as Bibb, in October 1998, which significantly increased the size of our home fashions products business. As a result of the Bibb acquisition, more than two-thirds of our net sales are now attributable to sales of home fashions products. We believe our increased critical mass has made us more attractive to our home fashions products customers, who need large suppliers to satisfy their requirements.

In fiscal 2003, operating profits from our home fashions segment were $2.9 million, down from $43.6 million in fiscal 2002. The drop in profitability was due to two factors. The first was a dramatic drop in sales of home fashions products during 2003 which began in the second quarter of the year. For all of fiscal 2003, sales of home fashions products were down $99 million or 22.4%; however, approximately $91 million of the decrease occurred in the last three quarters. Sales decreases were experienced in virtually every product area with the adult segment being impacted the greatest. Sales of adult products were down $75 million, with the largest decline being sales of bed ensembles. Sales of juvenile products were down $25 million, with the decline being spread across most of our

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licensed products. We believe the sales declines in both the adult and juvenile areas were caused by a weak retail environment for our product categories. Additionally, we believe that home fashions sales were further impacted by attempts by our retail customers to reduce retail inventory levels as consumer demand weakened.

The second factor that impacted our profitability was the disruption to and inefficiencies in our manufacturing operations caused by the lower unit volume associated with the sales decline, which had a significant adverse impact on our profitability. In order to keep inventory levels in line with demand, we reduced plant running schedules and in some cases curtailed operations. These actions resulted in unabsorbed overhead and higher per unit costs. We reacted to the sales decline by further reducing our manufacturing capacities as we announced the closure of two home fashions manufacturing facilities, a home fashions weaving facility in Greenville, South Carolina and a comforter sewing plant in Fort Valley, Georgia. These closures were completed towards the end of fiscal 2003 and the financial benefits of the closures will not be realized until fiscal 2004.

In fiscal 2002, operating profits for our home fashions segment were $43.6 million on sales of $441.2 million. The higher level of profitability in fiscal 2002 was due to the higher sales level which supported a reasonably full manufacturing schedule. This level of activity allowed the full absorption of fixed costs in fiscal 2002 which resulted in a lower per unit cost.

The difference in profitability between fiscal 2003 and fiscal 2002 in the home fashions segment was substantially related to the decline in unit volume during the last three quarters of fiscal 2003. In fiscal 2003, the Company experienced a profitable first quarter; however, beginning in the second quarter, consumer and retail demand dropped and we responded by further reducing our capacities and fixed costs as quickly as possible. As noted above, we closed two manufacturing facilities. Because we did not begin to realize the financial benefit from these closings until the end of fiscal 2003, the benefits from reducing our costs did not have a significant impact on profitability for fiscal 2003.

Historically, our apparel fabrics business has been more sensitive to downturns within the textile industry. Operating income attributable to the apparel fabrics segment fluctuates significantly with our ability to run a reasonably full manufacturing schedule. In fiscal 2003, our sales declined $29.7 million or 22.6% from fiscal 2002, due primarily to sales declines of our shirting fabrics and sportswear fabrics ($8.5 million and $14.2 million, respectively). The decline in shirting fabrics sales reflected a weak retail environment, while the decline of sportswear fabrics was due to lower sales of a line of pant fabrics which was introduced in fiscal 2002. Other product areas also experienced sales declines to a lesser extent including converter, government military, home textiles, career apparel and commission finishing.

The reduced unit volume associated with the lower sales impacted our capacity utilization, creating manufacturing inefficiencies and unabsorbed overhead which led to higher per unit costs. The combination of lower unit volumes and higher costs caused the division to have an operating loss of $9.0 million in fiscal 2003 compared to an operating profit of $2.2 million in fiscal 2002.

We reacted to our drop in profitability caused by the sales decline by further reducing our capacity. Late in the fourth quarter of fiscal 2003 we announced the closure of our Sevierville, Tennessee apparel fabrics weaving operation. The closure of this plant was necessary to bring our capacity and fixed costs more in line with our expected sales level. The profitability of the operation is directly related to capacity utilization which can be discerned from our recent results. Our apparel fabrics weaving operations ran at 66% of capacity in fiscal 2003 and we had an operating loss of $9.0 million; in fiscal 2002 the operation ran at 88% of capacity and we generated an operating profit of $2.2 million; and capacity was at 66% in fiscal 2001 and we had an operating loss of $8.6 million.

Also included in the apparel fabrics operating loss in fiscal 2003 was a loss of $1.8 million related to our Mexican operation. We came into the year with high expectations for this operation as we expanded the product offerings to include career apparel. Unfortunately, as the economy weakened in the second quarter, this affected the ability of our Mexican operations to attract and retain new programs. For fiscal 2003, sales increased to $4.6 million from $2.7 million in fiscal 2002, but the operation incurred an operating loss of $1.8 million in fiscal 2003 compared with an operating loss of $2.0 million in fiscal 2002.

Outlook. In fiscal 2004 we expect our quarterly sales levels to be slightly above the sales levels we experienced during the last three quarters of fiscal 2003. We do not yet know the impact that our recent bankruptcy filing will have with respect to our customers, vendors, and licensors. We have engaged in an active dialogue with these

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constituencies to impress upon them that our operational capabilities have not been affected by the bankruptcy filing. Should we fail to retain the support of these important constituencies, it could have a material adverse effect on our results of operations.

Performance By Segment

We operate in three industry segments: products for the home fashions markets, products for the apparel fabrics markets and engineered products for the automotive and industrial markets. The following table sets forth segment results for fiscal 2003, 2002 and 2001.

Results of Operations

Comparison of 53 Weeks Ended January 3, 2004 (“fiscal 2003”) to 52 Weeks Ended December 28, 2002 (“fiscal 2002”)

Net Sales

Net sales for fiscal 2003 were $477.4 million, a decrease of $135.5 million or 22.1% from net sales of $612.9 million for fiscal 2002.

Home Fashions. Net sales of home fashions products were $342.1 million for fiscal 2003, a decrease of $99.0 million or 22.4% from net sales of $441.2 million for fiscal 2002. This decline reflected slow consumer demand as well as the consolidation by our largest customer, Kmart Corporation, of their store base during the year as they implemented their bankruptcy exit plan. Volume was lower in all major channels of distribution with the exception of the institutional bedding area. Price and mix was also a negative factor contributing to lower sales during the year.

Apparel Fabrics. Net sales of apparel fabrics for fiscal 2003 were $101.8 million, a decrease of $29.7 million, or 22.6%, from fiscal 2002 net sales of $131.5 million. This decrease was caused by lower unit volume in most product categories, reflecting a weak economic environment. The most significant decreases were in sales of sportswear fabrics, which decreased $14.2 million, and sales of men’s shirting fabrics, which decreased by $8.5 million. The decrease in sales of sportswear fabrics was attributable primarily to a line of pant fabrics which was originally introduced in fiscal 2002. Volume was greater in fiscal 2002 primarily because of the amount of fabric required for the initial roll out of this product to retail as compared to sales in fiscal 2003, which were mainly for replenishment of retail stock. In addition, a portion of this program was replaced in fiscal 2003 by a substitute product which we do not make. Sales in our Mexico garment operation increased by $1.8 million, due mostly to higher unit volume of shirts to career apparel customers.

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Engineered Products. Net sales of engineered products were $33.6 million for fiscal 2003, a decrease of $6.8 million or 16.7% from net sales of $40.3 million for fiscal 2002. The decrease was caused by lower unit sales in all product categories, particularly in sales of industrial yarns, reflecting soft demand.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $63.7 million for fiscal 2003 (13.3% of net sales), a decrease of $5.1 million or 7.4% from $68.8 million (11.2% of net sales) for fiscal 2002. Incentive compensation expense, which is based on the achievement of operating income targets, decreased by $3.2 million in fiscal 2003. Bad debt expense was $1.8 million lower in fiscal 2003 compared to fiscal 2002, which included $1.6 million in bad debt expense attributable to Kmart Corporation’s January 2002 bankruptcy filing. Other ongoing selling, general and administrative expenses decreased modestly in fiscal 2003, in part because of the staff reductions discussed below. However, these decreases were offset by $0.6 million in professional fees for debt-related matters.

Operating Income

The Company had a consolidated operating loss of $131.7 million for fiscal 2003, compared to $44.3 million in operating income for fiscal 2002.

Home Fashions. Operating income for the home fashions segment decreased to $2.9 million in fiscal 2003 from $43.6 million in fiscal 2002, primarily due to a $44.6 million reduction in gross profit. Gross profit as a percentage of net sales decreased from 20.9% in fiscal 2002 to 13.9% in fiscal 2003, reflecting a less profitable product price/mix assortment as well as higher fixed costs per unit due to the significant reduction in volume without a commensurate reduction in capacity. The reduction in fiscal 2003 gross profit was partially offset by lower selling, general and administrative expenses of $44.6 million compared to $48.4 million in fiscal 2002, a reduction of $3.8 million primarily due the absence of accrued management incentive compensation in fiscal 2003.

Apparel Fabrics. The apparel fabrics segment had an operating loss of $9.0 million in fiscal 2003, compared to a $2.2 million operating profit for fiscal 2002 due primarily to a reduction in gross profit of $12.7 million. The lower gross profit is due to a lower level of sales which accounted for $5.0 million of the decrease, and to the reduced unit volume which caused higher per unit costs related mainly to underabsorbed overhead costs. The decrease in gross profit was partially offset by a $1.6 million decrease in selling, general and administrative expenses. Included in the apparel segment are the results of our shirt manufacturing operations in Mexico which had an operating loss of $1.8 million in fiscal 2003, compared to an operating loss of $2.0 million in fiscal 2002. The $1.8 million increase in sales volume for this business (discussed above) did not have a greater effect on the operating loss because of pricing pressures and inefficiencies in manufacturing.

Engineered Products. The engineered products segment had a $3.4 million operating loss for fiscal 2003, compared to a $1.5 million operating loss for fiscal 2002. Operating results in both periods were hampered by low sales volume, a competitive pricing environment and inefficient manufacturing performance. The higher loss in fiscal 2003 was generally caused by the decrease in sales.

Corporate Items.

Impairment of goodwill

Due to the deterioration in the performance of our home fashions bedding business that occurred in fiscal 2003, which is considered an indication of possible impairment under accounting guidelines, we evaluated goodwill for impairment as of the third quarter of fiscal 2003, rather than waiting for the annual impairment review that is normally performed in the fourth quarter of the fiscal year. With the assistance of an outside consultant, we completed the impairment test, which, based on a comparison of the fair value of the home fashions bedding business to its book value, indicated that the goodwill was, in fact, fully impaired. Accordingly, we recorded a $91.7 million charge for impairment of goodwill, which represented the write-off of the entire remaining balance of goodwill, all of which relates to our home fashions bedding unit.

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Other operating costs, net

Other operating costs, net for fiscal 2003 totaled $28.0 million, and consisted of: $23.4 million in pre-tax charges relating to plant closures and staff reductions, all of which result from actions we took to reduce manufacturing capacity and fixed costs in light of the recent decline in sales volume; a $5.1 million pre-tax charge for impairment of fixed assets in our engineered products segment; and a $0.4 million pre-tax gain from the sale of surplus equipment.

On June 11, 2003 we announced that we would be closing the remainder of our home fashions weaving facility located in Greenville, South Carolina and a comforter sewing plant in Ft. Valley, Georgia, in order to rationalize capacity in our home fashions business. In connection with the closings, a $12.2 million pre-tax charge was recorded in the second quarter of fiscal 2003, consisting of a $10.2 million non-cash writedown of fixed assets, and $2.0 million of other exit costs, primarily severance and benefits associated with the termination of 630 employees. In the fourth quarter of fiscal 2003, we reversed $0.4 million of the charge for other exit costs due to a change in estimate, which resulted in the net pre-tax charge associated with the plant closures being reduced to $11.8 million. The shutdown of the plants was substantially completed in the third quarter of fiscal 2003, and we expect that substantially all severance and exit costs will be paid by the end of the first quarter of fiscal 2004.

On August 22, 2003 we announced that, in order to reduce overhead costs, we had eliminated approximately 80 salaried positions throughout the Company’s operations. Pre-tax charges of $0.8 million and $0.1 million were recorded in the third and fourth quarters of fiscal 2003, respectively, representing the estimated severance and employee benefit costs associated with the staff reductions. Substantially all of these costs are scheduled to be paid by the end of the first quarter of fiscal 2004.

On November 10, 2003 we announced that we would be closing our apparel fabrics weaving facility in Sevierville, Tennessee and our home fashions distribution center in Juliette, Georgia. In connection with the closings, a $10.7 million pre-tax charge was recorded in the fourth quarter of fiscal 2003, consisting of a $9.3 million non-cash writedown of fixed assets, and $1.3 million in estimated severance and benefit costs associated with the termination of 410 employees. The non-cash writedown includes $7.2 million for equipment at the closed Greenville, South Carolina plant we had originally planned to relocate to Danville, Virginia. We expect that the shutdown of the Sevierville and Juliette facilities will be completed in the first half of fiscal 2004 and that substantially all of the severance and benefits costs will be paid out by the end of the year.

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Due to the Company’s recent operating performance, we performed an impairment review of fixed assets as of the end of fiscal 2003. Based on this review, it was determined that the fixed assets of our engineered products business were impaired, because forecasted cash flows did not support the carrying value of the assets of the business. Accordingly, an impairment writedown of $5.1 million was recorded, which represents management’s best estimate of the excess of the carrying amount of the engineered products net assets over their fair value. In determining fair value, both a market approach and cash flow approach were considered. It is reasonably possible that an impairment review of the Company’s long-lived assets in the near future could indicate that other assets are impaired or that the assets of the engineered products business are further impaired.

Other operating costs, net for fiscal 2002 consisted of a $0.6 million pre-tax gain from reversal of a portion of the charge recorded in fiscal 2001 related to a plant consolidation program announced in December 2001. See discussion below.

Other corporate items

Other items not allocated to segments, which consist of idle facility costs and other items not directly related to segment business, totaled $2.6 million (expense) for fiscal 2003 compared to $0.5 million (expense) for fiscal 2002. The increase in fiscal 2003 was due to $0.6 million in professional fees for debt-related matters and higher idle facility costs caused by additional plant closures.

Other Income, Net

Other income, net was $1.6 million for fiscal 2003, compared to $0.5 million for fiscal 2002. The fiscal 2003 amount consists of $1.6 million in gains related to life insurance policies, $0.6 million in foreign exchange rate gains,

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$0.3 million of interest income and various other income items of $0.4 million, offset by a $1.3 million expense for the write-off of unamortized costs associated with debt retired in connection with our refinancing completed in April 2003. The fiscal 2002 amount consists of $0.1 million in interest income, a $0.1 million gain from the sale of land, and sundry other items totaling $0.3 million.

Interest Expense

Interest expense was $28.7 million for fiscal 2003, an increase of $1.8 million from $26.9 million for fiscal 2002. The increase resulted from higher average interest rates in fiscal 2003, which caused approximately a $3.1 million increase in interest, offset in part by approximately a $1.3 million decrease in interest attributable to lower average debt levels. The increase in average interest rates is due to the 12 ³/4% senior notes, which were issued in connection with our refinancing completed on April 15, 2003 (see discussion below under “Liquidity and Capital Resources”). The notes were issued at a discount, and their calculated effective yield is in excess of 14%. Average debt levels were approximately $29 million lower in fiscal 2003 compared to fiscal 2002, except for a 30-day period during which both our 10 ¹/8% senior subordinated notes due 2003 and our 12 ³/4% senior notes were outstanding.

Income Taxes

We recorded a $5.8 million income tax benefit for fiscal 2003, compared to a $10.5 million income tax provision for fiscal 2002. A reconciliation of the differences between the provision (benefit) for income taxes and income taxes computed using the statutory federal income tax rate of 35% follows:

As of January 3, 2004 our net deferred tax assets, a substantial portion of which consist of future tax benefits for net operating loss and tax credit carryforwards, were fully offset by a $21.9 million valuation allowance. The valuation allowance was recorded because, in light of the net operating loss incurred in fiscal 2003 and other available evidence, management does not believe that it is more likely than not that the tax benefits associated with the deferred tax assets, to the extent they exceed the valuation allowance, will be realized. At December 28, 2002 the valuation allowance totaled $1.5 million and was solely attributable to our operations in Mexico. The valuation allowance was established because of the uncertainty regarding the future profitability of these operations and therefore our ability to realize tax benefits associated with foreign net operating loss carryforwards.

The $2.8 million increase in taxes reflected in the above reconciliation for fiscal 2002 was attributable to the Job Creation and Worker Assistance Act, enacted in March 2002. The Act changed the period for carrying back taxable losses generated in fiscal 2001 from 2 to 5 years, which resulted in our receiving a $5.5 million refund of taxes in July 2002. However, the carryback also freed up investment credits that had previously offset tax in the carryback years. A $2.8 million increase to the income tax provision was recorded in the first quarter of fiscal 2002, representing the amount of these freed up credits that could not be used to offset tax before their expiration.

Net Income and Earnings Per Share

For fiscal 2003, we reported a net loss of $153.0 million or $6.96 per diluted share. Before the cumulative effect of the accounting change for goodwill impairment discussed below, net income was $7.4 million or $0.33 per diluted share in fiscal 2002.

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Adoption of New Accounting Standard

Effective as of the beginning of fiscal 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” This standard eliminates the amortization of goodwill and intangible assets with indefinite useful lives. Instead these assets must be tested at least annually for impairment. For purposes of this test, we selected the first day of our fourth fiscal quarter as the annual testing date.

SFAS No. 142 also requires that a transitional impairment test of goodwill be performed as of the first day of the year of adoption. With the assistance of an outside consultant, we completed the transitional impairment review of goodwill during the third quarter of fiscal 2002 and determined that goodwill in our apparel fabrics, engineered products and import specialty businesses was impaired. As a result, we recorded a non-cash charge of $20.7 million, representing goodwill impairment of $23.4 million less the deferred tax effect of $2.7 million. The transitional impairment writedown was primarily attributable to differences between the fair value approach required under SFAS No. 142 and the undiscounted cash flow approach that was used to evaluate goodwill under previous accounting guidance. The charge was reported as a cumulative effect of a change in accounting principle retroactive to the first day of fiscal 2002, and therefore increased the previously reported net loss per share for the first quarter of fiscal 2002 from $0.24 to $1.19. The carrying value of goodwill remaining after the transitional impairment charge, $91.7 million, was written off against operating income in fiscal 2003, as discussed above.

Comparison of 52 Weeks Ended December 28, 2002 (“fiscal 2002”) to 52 Weeks Ended December 29, 2001 (“fiscal 2001”)

Net Sales

Net sales for fiscal 2002 were $612.9 million, a decrease of $18.1 million or 2.9% from net sales of $631.1 million for fiscal 2001.

Home Fashions. Net sales of home fashions products were $441.2 million for fiscal 2002, a decrease of $28.7 million or 6.1% from net sales of $469.9 million for fiscal 2001. This decline reflected sluggish consumer demand and the lack of aggressive inventory reduction efforts in fiscal 2002 in comparison with fiscal 2001. Substantially all of the decrease was attributable to a $31.4 million decline in sales of adult bedding products, particularly off-quality goods, closeouts and promotional items. These decreases were offset in part by a $4.8 million increase in sales of juvenile bedding products, primarily as a result of an increase in the volume sold.

Apparel Fabrics. Net sales of apparel fabrics for fiscal 2002 were $131.5 million, an increase of $12.6 million or 10.6% from net sales of $118.9 million for fiscal 2001. Substantially all of the increase was attributable to a $16.4 million increase in sales of sportswear fabrics, offset by a $5.0 million decrease in sales of dress shirting fabrics. The increase in sales of sportswear fabrics was primarily attributable to a line of stain-resistant pant fabrics not previously marketed by us.

Engineered Products. Net sales of engineered products were $40.3 million for fiscal 2002, a decrease of $2.0 million or 4.8% from net sales of $42.3 million for fiscal 2001. The decrease reflected soft demand from the industrial fabrics sector and a very competitive pricing situation in the market for yarns used in the automotive sector.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $68.8 million for fiscal 2002 (11.2% of net sales), an increase of $0.9 million or 1.3% from $67.9 million (10.8% of net sales) for fiscal 2001. The increase was due to an increase in incentive compensation of $3.3 million based on the achievement of operating income targets. This was offset in part by a decrease of $1.9 million in bad debt expense attributable to Kmart Corporation and other net decreases in expense of $0.5 million. In fiscal 2001, we recorded $3.5 million in bad debt expense attributable to Kmart Corporation’s January 2002 bankruptcy filing based on our estimated loss on receivables from Kmart that were outstanding at year end. In fiscal 2002, bad debt expense attributable to pre-bankruptcy receivables from Kmart was $1.6 million.

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Operating Income

Consolidated operating income was $44.3 million for fiscal 2002, compared to a $7.3 million operating loss for fiscal 2001.

Home Fashions. Operating income for the home fashions segment increased to $43.6 million in fiscal 2002 from $10.9 million in fiscal 2001, primarily due to a $33.6 million increase in gross profit. Gross profit as a percentage of sales was 20.9% for fiscal 2002 compared to 12.4% for fiscal 2001. Most of the improvement in fiscal 2002 was the result of lower manufacturing costs, including approximately $20 million in overhead cost savings resulting from a combination of better plant capacity utilization and cost savings from the plant consolidation program completed in fiscal 2002 discussed below, and a $6 million improvement resulting from lower raw material prices. In addition, gross profit was favorably impacted by a better sales mix in fiscal 2002. While net sales decreased by $28.7 million in fiscal 2002 compared to fiscal 2001, the decrease was generally due to lower sales of less profitable products, such as off-quality goods, closeouts and promotional items, which resulted in a higher overall gross profit margin in fiscal 2002. The favorable impact of the better sales mix more than offset the effects of the lower sales volume, resulting in a $5 million increase in gross profit in fiscal 2002, exclusive of cost savings. The increase in gross profit in fiscal 2002 was partially offset by a $0.9 million increase in selling, general and administrative expenses, which was the result of higher incentive compensation, offset by lower bad debt expense as discussed above.

Apparel Fabrics. Operating income for the apparel fabrics segment was $2.2 million for fiscal 2002 compared to an operating loss of $8.6 million for fiscal 2001. The improved operating results is attributable to a $10.8 million increase in gross profit from $9.1 million (7.6% of net sales) in fiscal 2001 to $19.9 million (15.1% of net sales) in fiscal 2002. The higher sales volume in fiscal 2002 contributed approximately $1.5 million to the increase in gross profit. The remainder of the increase resulted from lower manufacturing costs, including approximately $6 million in overhead cost savings resulting from a combination of better plant capacity utilization and cost savings from the plant consolidation program completed in fiscal 2002 discussed below, and a $3.5 million improvement resulting from lower raw material prices. Losses attributable to our shirt manufacturing facility in Mexico, included in operating results for the apparel fabrics segment, were $2.0 million and $1.7 million for fiscal 2002 and 2001, respectively. These losses were due to low sales volume. Prior to the buyout of our joint venture partner in the first quarter of fiscal 2001, results from this business were reported as “Equity in loss of joint venture.”

Engineered Products. The engineered products segment had a $1.5 million operating loss for fiscal 2002, compared to a $0.8 million operating loss for fiscal 2001. Operating results in both periods were hampered by low sales volume, a competitive pricing environment and inefficient manufacturing performance.

Corporate Items. Amortization of goodwill was $3.6 million in fiscal 2001. As required under SFAS No. 142, which we adopted in the first quarter of fiscal 2002, we discontinued amortization of goodwill beginning in the first quarter of fiscal 2002.

Other operating costs, net for fiscal 2001 totaled $4.3 million, consisting of a $4.7 million pre-tax charge relating to a plant consolidation program and a $0.4 million pre-tax gain from reversal of the unused portion of a reserve established in 1995 for environmental and equipment removal costs associated with an idle research facility.

The plant consolidation program was announced in December 2001. In connection with the consolidation, we closed a home fashions cut and sew facility in Newnan, Georgia and a portion of a home fashions weaving facility in Greenville, South Carolina. In addition, we idled apparel looms in Danville, Virginia and transferred looms from Danville to Sevierville, Tennessee, resulting in a net reduction in apparel fabric weaving capacity of approximately 20%. We also installed modern home fashions sheeting looms in the vacant space in the Danville plant created by these moves which, with the capacity reduction noted above, resulted in a slight reduction in home fashions weaving capacity. In connection with the consolidation, we recorded a pre-tax charge of $4.7 million in fiscal 2001, including a $3.3 million non-cash writedown of fixed assets, $1.3 million for severance and benefits associated with the termination of approximately 380 employees, and other exit costs of $0.1 million.

We completed substantially all aspects of the plant consolidation in fiscal 2002, and reversed $550,000 of the prior year charge. Of this amount, $300,000 resulted from the receipt of $350,000 in net proceeds from the sale of our Newnan, Georgia facility and surplus equipment, compared to a carrying value of $50,000, and $250,000 represents a change in the reserve for estimated exit costs due primarily to lower than expected healthcare continuation costs for employees severed in connection with the consolidation.

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Other items not allocated to segments totaled $0.5 million (expense) for fiscal 2002 compared to $1.0 million (expense) for fiscal 2001. The fiscal 2002 amount included $1.2 million of idle facility costs and other expenses not directly related to segment business, offset by income items of $0.2 million related to a litigation settlement and $0.5 million from a net decrease in intersegment profits remaining in inventory. The fiscal 2001 amount consists of idle facility costs and other expenses.

Interest Expense

Interest expense was $26.9 million for fiscal 2002, a decrease of $5.2 million from $32.1 million for fiscal 2001. Approximately $4.2 million of the decrease was attributable to lower average debt levels. In addition, lower average interest rates on our variable rate debt resulted in a decrease of approximately $2.5 million in interest expense. These decreases were partially offset by a $1.5 million increase in amortization of debt costs, which resulted principally from expenses associated with the December 2001 amendment to our credit agreement.

Income Taxes

We recorded a $10.5 million income tax provision for fiscal 2002, compared to a $18.1 million income tax benefit for fiscal 2001. A reconciliation of the differences between the provision (benefit) for income taxes and income taxes computed using the statutory federal income tax rate of 35% follows:

The $2.8 million increase in taxes reflected in the above reconciliation for fiscal 2002 was attributable to the Job Creation and Worker Assistance Act, enacted in March 2002. The Act changed the period for carrying back taxable losses generated in fiscal 2001 from 2 to 5 years, which resulted in our receiving a $5.5 million refund of taxes in July 2002. However, the carryback also freed up investment credits that had previously offset tax in the carryback years. A $2.8 million increase to the income tax provision was recorded in the first quarter of fiscal 2002, representing the amount of these freed up credits that could not be used to offset tax before their expiration.

The $5.0 million benefit for the reversal of income tax liabilities reflected in the above reconciliation for fiscal 2001 resulted from a review of our tax position after the Internal Revenue Service completed its examination of our federal income tax returns through tax year 1999. Based on the results of the examination, which was completed in the third quarter of fiscal 2001, we determined that it was appropriate to reverse $5.0 million of income tax accruals recorded in prior years.

The change in valuation allowance for both fiscal 2001 and 2002 relates to foreign net operating loss carryforwards attributable to our operations in Mexico. Due to the uncertainty surrounding the future profitability of these operations, we have established a valuation allowance against the entire deferred tax asset associated with the loss carryforwards.

Net Income and Earnings Per Share

For fiscal 2002, we reported a net loss of $13.3 million or $0.60 per diluted share. Before the cumulative effect of the accounting change for goodwill impairment, discussed above, net income was $7.4 million or $0.33 per diluted share in fiscal 2002, compared to a net loss of $20.9 million or $0.96 per diluted share in fiscal 2001.

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Liquidity and Capital Resources

General. Prior to the Bankruptcy filing date, internally generated cash flow, supplemented by borrowings under our borrowing base facility, provided for our working capital needs, capital improvements and debt service requirements. Our total debt to total capital ratio at January 3, 2004 was 76.9%.

With the filing of our petition for reorganization on March 31, 2004, our administrative expenses of the proceedings, working capital needs, and capital improvements are provided for by cash from operations and the DIP financing facility, discussed below.

Working Capital. Our operations are working capital intensive. Our operating working capital (accounts receivable and inventories less accounts payable and accrued expenses) typically increases and decreases in relation to sales and operating activity levels.

During fiscal 2003, operating working capital generated $10.1 million of cash primarily comprised of reductions of accounts receivables levels and inventories, offset by a decrease in payables and accrued expenses. Net income plus non-cash expense items (net) generated $2.1 million in cash during the year, and changes in operating assets and liabilities generated $6.0 million. Changes in operating assets and liabilities were comprised of a $10.1 million decrease in working capital, an increase of $4.7 million in prepaid expense and other assets and a $0.6 million increase in other liabilities. As a result, operating activities in fiscal 2003 provided net cash of $8.1 million.

During fiscal 2002, operating working capital generated $12.6 million of cash primarily due to reductions of inventories and receivables levels and increases in accounts payable. Net income plus non-cash expense items (net) generated $63.3 million in cash during the year, and changes in operating assets and liabilities generated $16.1 million. Those changes in operating assets and liabilities were comprised of a $12.6 million decrease in working capital, a decrease of $2.6 million in prepaid expense and other assets and a $1.0 million increase in other liabilities. As a result, operating activities in fiscal 2002 provided net cash of $79.5 million.

In connection with purchasing cotton for anticipated manufacturing requirements, we may enter into cotton futures and option contracts in order to reduce the risks associated with future price fluctuations. We generally cover open order requirements, which average approximately three months of product, through direct purchase, futures and options transactions, and we may shorten or lengthen that period in accordance with our perception of the direction of cotton prices. Effective as of the beginning of fiscal 2001, we adopted SFAS No. 133, as amended, which requires that derivative instruments be reported on the balance sheet at fair value. Gains and losses related to futures and options during the three years ended January 3, 2004 were not material to our results of operations. There were no material cotton futures or options outstanding at January 3, 2004, December 28, 2002 and December 29, 2001.

Bibb Financing Facility. In order to finance our 1998 acquisition of the Bibb Company, we entered into a five-year secured credit facility which originally consisted of a $125 million amortizing term loan and a $150 million working capital line of credit. Subsequent amendments modified the facility to increase the term loan by $12.9 million and to implement additional limitations on mergers and consolidations, affiliated transactions, incurrence of liens, disposal of assets and investments. In December 2001 the credit facility was amended again to partially defer amortization of the term loan, to convert the working capital line of credit into an asset-based line, and to establish new performance covenants. This working capital line was non-amortizing and the borrowing base was determined weekly by valuation of the eligible inventories and accounts receivable. We were required to make interest payments on a monthly basis for all outstanding loans, and to meet a minimum cumulative EBITDA covenant (as defined) and an interest coverage ratio covenant (as defined) on a monthly basis. The loans under the credit facility could bear interest at prime rate or LIBOR, at our option, and the interest rate margin on the loans was established by our leverage ratio, as defined. Following a prepayment of $3 million during the first quarter of fiscal 2003, the term loan had an outstanding principal balance of $53.9 million at March 29, 2003. Early in the second quarter of fiscal 2003, an additional $3 million prepayment and a scheduled $10 million amortization payment further reduced the outstanding term loan to $40.9 million. As of March 29, 2003, $62.5 million was outstanding under the working capital loan and $61.1 million was unused and available for borrowing. The average interest rate on debt outstanding under the term loan and the working capital loan was 3.75% and 3.67%, respectively. In addition, at March 29, 2003 we had an aggregate of $120 million outstanding of our 10 ¹/8% senior subordinated notes due 2003. All of the outstanding indebtedness under our credit facility and our senior subordinated notes was due at maturity on September 30, 2003 and December 15, 2003, respectively.

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Debt Refinancing of April 2003. On April 15, 2003 we completed the refinancing of substantially all of our outstanding long-term debt. We entered into a new senior secured credit facility, consisting of a five-year $40 million term loan and a five-year $160 million revolving credit facility. The revolving credit facility included borrowing availability of up to $25 million for letters of credit. In addition, the refinancing included the sale, at 95.035% of par, of $157 million aggregate principal amount of our 12 ³/4% senior notes due 2009, yielding approximately 14%, in a private offering pursuant to Rule 144A and Regulation S under the Securities Act of 1933. The coupon rate on the notes was increased by 25 basis points effective in September 2003, and an additional 25 basis points effective in December 2003, since a registration statement had not been declared effective, resulting in a coupon rate of 13.25% at January 3, 2004. The indenture restricted, among other things, additional indebtedness, restricted payments, lien creation, asset sales, and mergers. The semi-annual coupon on the senior notes is payable on October 15 and April 15. The coupon payment due October 15, 2003 was made as scheduled, but the payment due April 15, 2004 was not made due to the Chapter 11 filing.

The net proceeds from the senior notes offering, together with borrowings under the senior credit facility, were used to: (i) repay all borrowings outstanding under our existing credit agreement; (ii) provide for the redemption, on May 15, 2003, of our outstanding 10 ¹/8% senior subordinated notes due 2003 for $120 million (par value) plus accrued interest; and (iii) pay related fees and expenses.

The credit facility of April 2003 was secured by substantially all of our assets. Availability under the revolving credit facility was based upon a borrowing base determined by reference to eligible accounts receivable and inventory. Amounts outstanding under the senior credit facility bore interest at either a prime rate or LIBOR, at our option, plus a margin. The margin was dependent on our leverage ratio, and ranged from 1.0-2.0% on prime rate loans and 2.0-3.0% on LIBOR loans. In addition, a 0.375% commitment fee was paid by us on the unused line. At April 10, 2004, the obligations outstanding under the revolving credit facility and the term loan were $65.5 million and $34.3 million, respectively, with average interest rates of 5.40% and 4.20%, respectively.

Under the senior credit facility, we were required to maintain a minimum fixed charge ratio and to not exceed a maximum leverage ratio. The senior credit facility also imposed restrictions relating to, among other things, capital expenditures, asset sales, incurrence or guarantee of debt, acquisitions, sale or discount of receivables, certain payments and investments, affiliate and subsidiary transactions, payment of dividends and repurchases of stock, derivatives, and excess cash. The term loan required scheduled calendar quarterly principal payments of $1.4 million that began on June 30, 2003, with a final scheduled amortization payment of $11.4 million on April 15, 2008, the maturity date. In addition, mandatory prepayments on the term loan were required if annual cash flow exceeded certain limits or for certain events, such as the sale of assets and the issuance of capital securities or indebtedness. Once the term loan was paid in full other than through a refinancing, the senior notes were to become secured by a second priority lien on substantially all of the Company’s real property, equipment and other fixed assets. At that time, we would have been required to offer to repurchase a pro rata portion of the senior notes if annual cash flow exceeded certain limits.

We incurred fees and expenses of approximately $10.5 million in connection with the refinancing, which are being amortized to interest expense over the terms of the related debt. Unamortized fees and expenses of $1.3 million relating to the existing credit agreement and 10 ¹/8% senior subordinated notes that were paid in connection with the refinancing were written off and charged to other expense during the second quarter of 2003.

Prior to the end of the third quarter of fiscal 2003, we advised our senior secured lenders that we expected to violate the covenant specifying the maximum leverage ratio at the end of the third quarter of 2003. On October 10, 2003, we entered into an amendment and waiver agreement with the lenders pursuant to which the lenders permanently waived this covenant violation. We paid an amendment fee in the amount of $250,000. The amendment and waiver agreement also contained, among other provisions, new requirements specifying minimum levels of excess availability under the revolving credit facility and monthly operating EBITDA during the fourth quarter of fiscal 2003.

In advance of the end of the fourth quarter of fiscal 2003, we again advised our senior secured lenders that we expected to violate the covenant specifying the maximum leverage ratio and fixed coverage charge ratio at the end of the fourth quarter of 2003. On December 19, 2003, we entered into a second amendment and waiver agreement with the lenders pursuant to which the lenders permanently waived these covenant violations. The amendment and waiver agreement also contained, among other provisions, additional liquidity and cash flow projection reporting, further limitations on capital expenditures through the first fiscal quarter of 2004 and monthly operating EBITDA, as defined, covenants for the first fiscal quarter of 2004. We paid an amendment fee in the amount of $350,000 for the second amendment.

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At our request on January 16, 2004, the senior secured lenders temporarily modified the minimum levels of excess availability permitted by the credit facility in order to accommodate anticipated seasonal borrowing needs pursuant to a third amendment and waiver. This adjustment expired on March 8, 2004. There was no fee paid to the Lenders for this third amendment.

Because it was probable that we would violate the covenants specifying minimum fixed charge and maximum leverage ratios at the end of the first quarter of 2004, we were required to report our senior secured debt as long-term debt due currently as of January 3, 2004. Additionally, all senior debt which would be subject to cross acceleration in the event the senior secured lenders elected to accelerate the debt under the senior credit facility has been reported as current.

DIP Financing Facility. On April 1, 2004, in connection with our Chapter 11 bankruptcy filing, the Bankruptcy Court approved a $145 million DIP financing facility on an interim basis. The DIP financing order authorized us to borrow up $40.0 million under the DIP financing facility on an interim basis. The facility is secured by superpriority liens on substantially all of our assets. This facility includes borrowing availability of up to $15 million for letters of credit. The Bankruptcy Court will hold a final hearing on our motion to approve the DIP facility on April 27, 2004.

Upon the entry of a final DIP financing order in the form proposed by us and our lenders, the remaining $70.0 million in revolving loans, over and above the $40.0 million in revolving loans approved by the interim DIP financing order of the Bankruptcy Court, is expected to become available to us. At the final hearing on our motion for DIP financing, we will also seek to repay $34.3 million on the term loan which was outstanding on the bankruptcy filing date with proceeds of the term loan of the DIP facility. Borrowings under the interim and final DIP financing facility will bear interest at our option at the rate of the London Interbank Offering Rate (“LIBOR”) plus 3.50% (4.64% as of April 14, 2004), or the Alternate Base Rate plus 2.50% (6.50% as of April 14, 2004) for borrowings under the revolving credit, and at the rate LIBOR plus 3.75% (4.89% as of April 14, 2004), or the Alternate Base Rate plus 2.75% (6.75% as of April 14, 2004), for borrowings under the term loan. Loans outstanding under the LIBOR option can be drawn for periods of one, two, three or six months, at our option. In addition, there is a fee of 0.50% on the unused commitment and a fee of 3.50% on letters of credit outstanding. The DIP financing facility expires on the earlier of the completion of a new financing or April 1, 2005.

The DIP financing facility contains financial covenants which require us to maintain minimum levels of earnings before certain corporate items, interest, taxes, depreciation, and amortization (“Operating EBITDA”), as defined, as early as May 2004 and thereafter. Capital expenditures are restricted to $1.2 million during any month and $11.5 million over the duration of the facility. In addition, the DIP financing facility also imposes restrictions relating to, among other things, asset sales, incurrence or guarantee of debt, acquisitions, sale or discount of receivables, certain payments and investments, affiliate and subsidiary transactions, payment of dividends and repurchases of stock, derivatives, and excess cash. The DIP financing facility also requires strict adherence with a weekly cash flow budget, and that proceeds from sales of certain assets be used to repay specified borrowings and permanently reduce the commitment amount under the facility. Until the final DIP facility is approved, we must maintain excess availability under the borrowing base of at least $15 million. Failure to satisfy these covenants could result in an event of default that could cause, absent the receipt of appropriate waivers, an interruption in cash availability, which could cause an interruption of our normal operations.

Availability under the DIP financing facility is established by a borrowing base determined by reference to eligible accounts receivable and inventory, as defined. At April 10, 2004, there was $9.2 million outstanding in borrowings under this interim $40.0 million facility at an average interest rate of 6.75%, and $4.9 million in letters of credit. We had approximately $22.4 million in unused capacity available.

Based on information currently available, we believe that we should be able to meet the monthly covenant requirements in the DIP financing facility, and accordingly, anticipate that we will have sufficient liquidity under the facility to provide for expected working capital needs and debt service obligations approved to be paid by the Court during the remainder of fiscal 2004. If we experience violations of the monthly covenants discussed above, and the lenders do not grant such additional forbearance, waivers or amendments as may be required with respect to the DIP financing facility, we will be in default and will be unable to borrow under the facility, and the lenders could exercise remedies against us, including acceleration of the debt outstanding.

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Off-Balance Sheet Arrangements and Contractual Obligations. We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations or liquidity that would be considered material to investors. See Note 10 to the consolidated financial statements for a description of our leasing arrangements.

The following summarizes our significant contractual obligations at January 3, 2004:

Purchase obligations consist of agreements to purchase goods and services that are enforceable and legally binding on us and that specify all significant terms. Our purchase obligations consist principally of contracts to purchase raw materials, utilities and fixed assets.

The above table excludes pension funding obligations. We currently estimate that we will contribute $11.3 million to our qualified pension plans in fiscal 2004 to meet ERISA minimum funding requirements. This amount could be impacted materially from changes in pension regulations and other factors.

At January 3, 2004 we had $6.5 million in standby and trade letters of credit outstanding, all of which expire in fiscal 2004.

Capital Improvements. We made capital expenditures aggregating $11.5 million, $12.4 million and $18.2 million in fiscal 2003, 2002 and 2001, respectively. During fiscal 2003 capital expenditures were funded primarily through our reduction in working capital. We anticipate capital expenditures of approximately $11 million in fiscal 2004, which will be used primarily for maintenance.

Risk Management

Interest Rate Risk. We have exposure to floating interest rates through our borrowings under our credit facility. Therefore, interest expense will fluctuate with changes in LIBOR and the prime rate. As of January 3, 2004, a 10% increase in interest rates in effect on our variable rate borrowings would increase interest expense by $0.4 million on an annual basis.

Commodity Price Risk. We use many types of fiber, both natural and man-made, in the manufacture of our textile products. We believe that future price levels of all fibers will depend primarily upon supply and demand conditions, weather conditions, general inflation and domestic and foreign governmental regulations and agricultural programs. We manage our exposure to changes in commodity prices primarily through our procurement practices.

We enter into contracts to purchase cotton under the Southern Mill Rules ratified and adopted by the American Textile Manufacturers Institute, Inc. and American Cotton Shippers Association. Under these contracts and rules, nonperformance by either the buyer or seller may result in a net cash settlement of the difference between the current market price of cotton and the contract price. If we had a net cash settlement of our open firm commitment cotton contracts at January 3, 2004, and market prices of contracted cotton decreased by 10%, we would be required to pay a net settlement provision of approximately $1.7 million.

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Recent Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, “Rescission of Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 will generally require gains and losses on extinguishment of debt to be classified as income or loss from continuing operations rather than as extraordinary items. We adopted the provisions of SFAS No. 145 in fiscal 2003, which did not have a material impact on the financial statements.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 addresses when a company should consolidate in its financial statements the assets, liabilities and activities of a variable interest entity (“VIE”). It defines VIEs as entities that either do not have any equity investors with a controlling financial interest, or have equity investors that do not provide sufficient financial resources for the entity to support its activities without additional subordinated financial support. FIN 46 also requires disclosures about VIE’s that a company is not required to consolidate, but in which it has a significant variable interest. A modification to FIN 46 (“FIN 46(R)”) was released in December 2003. FIN 46(R) delayed the effective date for VIEs created before February 1, 2003, with the exception of special-purpose entities (“SPE”), until the first fiscal year or interim period ending after March 15, 2004. We have not identified any interests in special purpose entities applicable to the provisions of this statement and will apply the provisions of FIN 46(R) in the first quarter 2004 financial statements

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, a financial instrument that embodies an obligation for the issuer is required to be classified as a liability (or an asset in some circumstances). SFAS No. 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 as of July 1, 2003 did not have a material impact on our consolidated financial condition or results of operations.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the use of estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of commitments and contingencies. Management bases its estimates on various assumptions and historical experience which are believed to be reasonable. However, due to the inherent nature of estimates, actual results may differ significantly. We believe that the following critical accounting policies and practices incorporate estimates and judgements having the most significant impact on our financial statements.

Accounts Receivable. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments to us. The amount of the allowance is based on the creditworthiness of customers, the age of unpaid amounts, and other relevant information. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

We also maintain allowances against accounts receivable for future product returns, and for various customer programs and incentive offerings, including special pricing agreements and volume-based incentives. By nature, these allowances involve considerable estimation. If actual product returns or customer use of various incentives differ from our estimates, adjustments to these allowances, and corresponding adjustments to revenues, would be required.

Excess and Obsolete Inventory. Inventories are valued at the lower of cost or market value. We write down excess and obsolete inventory for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Property, Plant and Equipment. Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of the assets. In addition, assets are reviewed for impairment when events or changes in business conditions indicate that their carrying value may not be recoverable. The estimates, assumptions and judgements used by management in applying our property, plant and equipment and impairment policies reflect both historical experience and expectations regarding future industry conditions and operations. The use of different estimates, assumptions and judgements could result in materially different carrying values of assets and results of operations. At January 3, 2004, assets held for sale, mostly resulting from plant closures, were carried on the balance sheet at $9.8 million. This amount represents our estimate of the future net proceeds we will receive from sale of these assets. The actual net proceeds may be materially different. To the extent actual net proceeds differ from the carrying amounts, the difference will be charged or credit to operations.

Goodwill. As discussed in Note 3 to the Consolidated Financial Statements, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” as of the beginning of fiscal 2002. Under this standard, goodwill must be tested at least annually for impairment. In addition, a transitional impairment test was required, to determine whether goodwill was impaired as of the beginning of the fiscal year of adoption. Goodwill impairment testing involves the assignment of goodwill to business units, and the determination of the fair values and book values of those business units. These determinations involve considerable estimation and judgement. In particular, determining the fair value of a business unit involves, among other things, developing forecasts of future cash flows and appropriate discount rates. Although we believe we have based our impairment testing on reasonable estimates and assumptions, the use of different estimates and assumptions could result in materially different results.

Based on the results of the transitional test, we recorded a non-cash charge of $20.7 million, representing goodwill impairment of $23.4 million, less the deferred tax effect of $2.7 million. The charge was reported as a cumulative effect of a change in accounting principle retroactive to the first day of fiscal

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2002. In the third quarter of fiscal 2003, additional impairment testing indicated that our remaining goodwill, all of which relates to our home fashions bedding unit, was fully impaired. Accordingly, we recorded an impairment writedown of $91.7 million, which was charged to operating income.

Accruals for Employee Benefits. We are self-insured for a substantial portion of the cost of employee medical insurance and workers compensation benefits. For health and medical costs, we establish reserves as of each balance sheet date based on current and historical experience in claims costs, known trends in health care costs and other information available from the third party company that administers our claims. For workers compensation costs we monitor the number and severity of accidents to develop appropriate reserves for the estimated cost to provide both medical care and benefits during the period an employee is unable to work. We believe that the assumptions and information used to develop these reserves are reasonable. However, changes in expected medical and health care costs, changes in the severity of previously reported claims or legislative changes affecting the administration of these plans could significantly impact the determination of appropriate reserves in future periods.

Pension Plans. The valuation of our pension plans requires the use of assumptions and estimates that are used to develop actuarial valuation of expenses, assets and liabilities. These assumptions include discount rates, investment returns, projected salary increases, and mortality rates. The actuarial assumptions used in our pension reporting are reviewed annually and compared with external benchmarks to ensure that they accurately account for our future pension obligations. Changes in assumptions and future investment returns could potentially have a material impact on pension expense and related funding requirements.

Income Taxes. As part of the process of preparing our financial statements we are required to estimate our actual current tax exposure and to assess temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We are required to record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. The accounting guidance states that forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. As a result of our recent losses, we have recorded a 100% valuation allowance of $21.9 million against our net deferred tax asset as of the end of fiscal 2003. If, after future assessments, we determine a lesser allowance is required, we would record a decrease to the valuation allowance and a corresponding income tax benefit in the period of such determination.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See Part III, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management.”

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SEE FOLLOWING PAGES

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders

Dan River Inc.

We have audited the accompanying consolidated balance sheets of Dan River Inc. and subsidiaries as of January 3, 2004 and December 28, 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended January 3, 2004. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dan River Inc. and subsidiaries at January 3, 2004 and December 28, 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended January 3, 2004, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

The accompanying financial statements have been prepared assuming that Dan River Inc. will continue as a going concern. As discussed in Note 1 to the financial statements, on March 31, 2004, the Company filed a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code (“chapter 11”). The Company is currently operating its business under the jurisdiction of chapter 11 and the United States Bankruptcy Court in the Northern District of Georgia (the “Bankruptcy Court”), and continuation of the Company as a going concern is contingent upon, among other things, the ability to formulate a plan of reorganization which will be approved by the requisite parties under the United States Bankruptcy Code and be confirmed by the Bankruptcy Court, the ability to comply with its debtor in possession financing facility, obtain adequate financing sources, and the Company’s ability to generate sufficient cash flows from operations to meet its future obligations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that may result from the outcome of this uncertainty.

As discussed in Note 3 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets in 2002.

/s/ Ernst & Young LLP

Greensboro, North Carolina

February 20, 2004

except for Note 1 and paragraphs 2-5, 8 and 18 of Note 5, as to which the date is

April 1, 2004

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CONSOLIDATED BALANCE SHEETS

January 3, 2004 and December 28, 2002

See accompanying notes.

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CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended January 3, 2004, December 28, 2002 and December 29, 2001