UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K


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

For the fiscal year ended July 2, 2005

                                       OR

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

For the transition period from ___________ to ____________

Commission File Number 333-37617

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

       DELAWARE                                        13-2677657
-----------------------                  ---------------------------------------
(State of Incorporation)                 (I.R.S. Employer Identification No.)

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

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

Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of each exchange
    Title of each class                               on which registered
    -------------------                          ------------------------------

          None                                            Not Applicable

Securities registered pursuant to Section 12(g) of the Act:

                               Title of each class

                                      None





<PAGE>


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 [ ].

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 the common equity stock held by  non-affiliates of
the registrant as of January 1, 2005 was:

           Common Stock, $.01 par value  - 0

The number of shares  outstanding of each of the registrant's  classes of Common
Stock, as of September 30, 2005 was:

         Common Stock, par value $.01        100

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS  (I)(1)(a)
AND (b) OF FORM  10-K  AND IS  THEREFORE  FILING  THIS  FORM  WITH  THE  REDUCED
DISCLOSURE FORMAT.


















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<TABLE>
<CAPTION>


                     FOR THE FISCAL YEAR ENDED JULY 2, 2005
                             FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

PART I                                                                                                          PAGE

<S>            <C>                                                                                               <C>
Item 1.        Business                                                                                           5
Item 2.        Properties                                                                                        11
Item 3.        Legal Proceedings                                                                                 12
Item 4.        Submission of Matters to a Vote of Security Holders                                               12

PART II

Item 5.        Market for Registrant's Common equity and Related Stockholder Matters and Issuer Purchases        12
               of Equity Securities
Item 6.        Selected Financial Data                                                                           13
Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations             14
Item 7A.       Quantitative and Qualitative Disclosures about Market Risk                                        31
Item 8.        Financial Statements and Supplementary Data                                                       32
Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure              53
Item 9A.       Controls and Procedures                                                                           53
Item 9B.       Other Information                                                                                 53

PART III

Item 10.       Directors and Executive Officers of the Registrant                                                53
Item 11.       Executive Compensation                                                                            53
Item 12.       Security Ownership of Certain Beneficial Owners and Management                                    53
Item 13.       Certain Relationships and Related Transactions                                                    53
Item 14.       Principal Accountant Fees and Services                                                            54

PART IV

Item 15.       Exhibits and Financial Statement Schedules                                                        55


</TABLE>




                                       3
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

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

The  forward-looking  statements  in this  document  are based on the  Company's
expectations and are necessarily dependent upon assumptions,  estimates and data
that the Company  believes are  reasonable  and  accurate but may be  incorrect,
incomplete or imprecise. Forward-looking statements are also subject to a number
of business risks and uncertainties,  any of which could cause actual results to
differ  materially  from those set forth in or  implied  by the  forward-looking
statements.  These risks and uncertainties  include, but are not limited to, the
risks and uncertainties listed below  under Item 7. MANAGEMENT'S  DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- In Conclusion.

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

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











                                        4
<PAGE>

PART I.

ITEM 1.  BUSINESS

GENERAL

Delta Mills,  Inc.  ("Delta Mills" or the  "Company") is a Delaware  corporation
with its principal executive offices located at 700 North Woods Drive,  Fountain
Inn, South Carolina 29644  (telephone  number:  864-255-4100).  The Company is a
wholly owned subsidiary of Delta Woodside Industries, Inc. ("Delta Woodside"), a
South  Carolina  corporation,  the common stock of which is listed on the NASDAQ
OTC  Bulletin  Board  under the  symbol  "DLWI".  Unless the  context  otherwise
requires, all references herein to "Delta Mills" or the "Company" refer to Delta
Mills,  Inc. and any of its existing  and future  subsidiaries.  The Company was
incorporated in Delaware in 1971 and acquired by a predecessor of Delta Woodside
Industries, Inc. in 1986.

Since 2001, Delta Mills has closed three plants and has recently announced plans
to close two more, which will leave it with three operating plants once recently
announced  plans are completed.  During fiscal year 2002, the Company  announced
the closing of its Furman  weaving  facility in Fountain Inn, South Carolina and
recently  completed the liquidation of the related assets. The Company announced
the closing of its Catawba yarn manufacturing facility in Maiden, North Carolina
in fiscal year 2003 and the closing of its Estes  weaving  facility in Piedmont,
South Carolina in fiscal year 2005 and completed the  liquidation of the related
assets of both of these facilities in fiscal year 2005. In fiscal year 2005, the
Company also eliminated its yarn  manufacturing  operations at its Beattie Plant
in  Fountain  Inn,  South  Carolina  and began  purchasing  all of its yarn from
independent suppliers.

On August 11, 2005, the Company  announced  implementation  of its comprehensive
fiscal year 2006 business plan, which will result in the Company's exit from the
woven  synthetics  business by the closure of its Pamplico  weaving  facility in
Pamplico, South Carolina and its Delta #2 finishing facility located in Wallace,
South Carolina.  The Company expects to complete the closing of these facilities
in the second quarter of fiscal year 2006 as production requirements dictate.

When the Company  completes the plant closings under its 2006 business plan, its
business  will  consist  of  (1)  the   manufacture   and  sale  of  cotton  and
cotton/synthetic blend fabrics to apparel manufacturers and resellers,  which in
turn  sell  primarily  to  department  stores  and other  retailers  and (2) the
manufacture  and  sale  of  camouflage   print  fabrics   primarily  to  apparel
manufacturers  that contract with the US Government to fulfill its  requirements
for military uniforms.

PRODUCTS, RAW MATERIALS, AND MANUFACTURING

The Company currently manufactures woven textile fabrics from cotton yarn, wool,
flax or  synthetic  fibers  or  from  synthetic  filament  yarns.  Cotton  yarn,
cotton/synthetic blend yarn, wool, flax, synthetic fibers and synthetic filament
yarns are purchased  from a small number of competitive  suppliers.  The Company
purchases  the spun  yarns used in its cotton  weaving  operations  from a small
number of domestic  spinners and  currently  spins the major portion of the spun
yarns used in its synthetic  weaving  operations.  Prior to the  Company's  2005
Realignment  Plan,  which  incorporated  the  closing of its Estes Plant and the
closing of its yarn  manufacturing  operations at its Beattie Plant, the Company
manufactured  the  majority of its cotton and  cotton/synthetic  blend yarn.  In
manufacturing  yarns, the synthetic fibers,  either separately or in blends, are
carded  (fibers  straightened  and  oriented)  and then spun into yarn. In other
fabrics,  filament  yarns are used. The spun or filament yarn is then woven into
fabric on looms.  The  unfinished  fabric at this stage is referred to as greige
goods.  Finished  fabric  refers to fabric  that has been  treated  by  washing,
bleaching,  dyeing and applying  certain  chemical  finishes.  Finished  apparel
fabric is ready to be cut and sewn into  garments.  Subsequent  to July 2, 2005,
the Company's Board of Directors  approved the implementation of a comprehensive
fiscal year 2006  Business  Plan (the "2006  Plan").  The plan was  announced on
August 11, 2005 and includes the Company's  exit from the  synthetics  business.
The Company will close the two plants dedicated to the synthetics product lines:
Its  Pamplico  weaving  facility  in  Pamplico,  SC and its  Delta #2  finishing
facility located in Wallace,  SC. The Company expects to complete the closing of
these  facilities  in the  second  quarter  of fiscal  year  2006 as  production
requirements dictate.

                                       5
<PAGE>

The Company's principal raw materials are cotton yarn and cotton/synthetic blend
yarn, although it also spins polyester,  wool, linen fiber, acrylic, lyocell and
rayon  fibers and weaves  textured  polyester  filament.  Polyester  is obtained
primarily from two major  suppliers,  both of whom provide  competitive  prices.
Polyester prices  increased  several times during fiscal year 2005, with a price
per pound of $0.62 at the end of fiscal  year 2004  compared to $0.74 at the end
of fiscal year 2005.  In prior  years,  as a part of the  Company's  business of
converting  fiber to  finished  fabric,  the  Company  made raw cotton  purchase
commitments  and then fixed prices with cotton  merchants who buy from producers
and sell to textile  manufacturers.  As part of the 2005  Realignment  Plan, the
Company ceased internal  production of cotton yarns and no longer  purchases raw
cotton In fiscal year 2005, the Company began to enter into cotton yarn purchase
commitments and then fix prices with the yarn vendors The Company  believes that
recent  cotton prices have enabled it to contract for cotton yarn at prices that
will  permit it to be  competitive  with other  companies  in the United  States
textile  industry  when the  cotton  yarn  purchased  for future use is put into
production.  To the extent that cotton prices  decrease  before the Company uses
these future yarn  purchases,  the Company  could be  materially  and  adversely
affected,  as there can be no assurance  that it would be able to pass along its
higher costs to its  customers.  In addition,  to the extent that cotton  prices
increase and the Company has not provided for its requirements  with fixed price
yarn contracts,  the Company may be materially and adversely affected,  as there
can be no assurance that it would be able to pass along these increased costs to
its customers.  The Company  purchases most of its cotton yarn requirements from
one  supplier.  Approximately  92% of  the  Company's  cotton yarn  purchases in
fiscal year 2005 were from this supplier.  While  alternative  sources of cotton
yarn  exist,  a loss of this  supplier  as a source of cotton  yarn could have a
temporary disruptive effect on the Company.

Most of the Company's  raw  materials  are available  from more than one primary
source,  but the Company is  currently  depending  primarily on one supplier for
rayon staple.  The Company does not currently have an alternate  domestic source
for rayon staple.  However,  in light of the Company's  announced  exit from the
Synthetics business,  the Company believes its remaining rayon requirements will
be met by this supplier.

During  fiscal  years  2005,  2004 and  2003,  approximately  84%,  84% and 77%,
respectively,  of the Company's  finished fabric sales were of fabrics made from
cotton or  cotton/synthetic  blends,  while  approximately  16%,  16%,  and 23%,
respectively,  of such sales were of fabrics made from spun synthetics and other
natural fibers,  including various blends of rayon, polyester, and wool. Fabrics
are generally  produced and shipped pursuant to specific purchase orders,  which
minimizes the Company's  uncommitted  inventory levels. The Company's production
of cotton and  cotton/synthetic  blend and spun synthetic finished woven fabrics
was largely  vertically  integrated  until  fiscal  year 2005,  with the Company
performing most of its own spinning,  weaving and finishing. With the closing of
the Estes  Plant and the  closing of the yarn  manufacturing  operations  at the
Beattie  Plant,  the Company now  purchases  from outside  suppliers  all of its
cotton and  cotton/synthetic  blend yarns. The Company's finished fabrics plants
are currently operating at less than full capacity.

SALES AND MARKETING

The  Company has focused its  marketing  efforts in its  commercial  business on
building  close  relationships  with  major  apparel  companies  that have broad
distribution  channels and that the Company believes have positioned  themselves
for  long-term  growth.  The Company has  focused its  marketing  efforts in its
government  business on military uniform awards issued to garment  manufacturers
and discussion with the appropriate  government  procurement  agencies and major
garment  manufacturers in order to stay abreast of the most current  information
and requirements with respect to government funding, uniform fabric requirements
and sourcing needs. The Company sells its fabrics  primarily to numerous apparel
manufacturers   and   apparel   resellers   and  their   subcontractors.   These
manufacturers and resellers include Levi Strauss or its  subcontractors,  Haggar
Corp.,  the  Wrangler  (R) and Lee(R)  divisions  of V.F.  Corporation,  and Liz
Claiborne, Inc. and private label apparel manufacturers for J.C. Penney Company,
Inc.,  Sears,  Roebuck & Co., Wal Mart Stores,  Inc.  and other  retailers.  The
Company  believes  that it is a leading  producer of cotton  pants-weight  woven
fabric used in the manufacture of casual slacks such as Levi Strauss' Dockers(R)
and Haggar Corp.'s  Wrinkle-free(R).  Other apparel items  manufactured with the
Company's  fabrics include women's chino pants,  and career apparel  (uniforms).
The  Company  also  sells  camouflage   fabric  and  other  fabrics  to  apparel
manufacturers  for their use in  manufacturing  apparel  for the  United  States
Department of Defense.  We refer to this as our "government  business" (however,
Delta Mills itself has no direct  contracts  with the Department of Defense and,
therefore,  our government business is not subject to renegotiation of profits).
The Company sells its fabrics through Delta Mills Marketing Inc., a wholly owned
subsidiary  with a marketing  office  based in New York City  (which  serves the

                                       6
<PAGE>

United States,  Canadian and Mexican markets),  with sales agents also operating
in Atlanta, Dallas, San Francisco. During fiscal year 2006, the Company plans to
acquire sales representation in the Caribbean basin.

For fiscal  year 2005,  the  Company  had one  customer,  Levi  Strauss  and its
subcontractors,  which exceeded 10% of consolidated net sales. The Company's net
sales to this customer totaled $22 million,  or approximately  14%, of net sales
in fiscal year 2005. For fiscal year 2004,  the Company had two customers,  V.F.
Corporation, and Levi Strauss, which exceeded 10% of consolidated net sales. The
Company's net sales to these  customers  totaled $45 million,  or  approximately
26%,  of net sales in fiscal year 2004.  For fiscal  year 2003,  the Company had
three customers, Levi Strauss, Haggar Apparel and V.F. Corporation, net sales to
each of which exceeded 10% of consolidated net sales. The Company's net sales to
these  customers  totaled $71  million,  or  approximately  40%, of net sales in
fiscal year 2003. There is a trend towards selling directly to subcontractors of
major apparel  companies  either in addition to or in lieu of sales  directly to
the major apparel  companies  themselves.  The foregoing  amounts  include sales
directly to subcontractors of the named apparel companies.  In addition,  during
fiscal  years 2005,  2004,  and 2003,  net sales of military  fabrics to apparel
customers  accounted for approximately 47%, 44%, and 33%,  respectively,  of the
Company's  total  net  sales.  The loss of any of these  accounts  could  have a
material adverse effect on the results of the Company.

Part of the Company's  competitive  business strategy is to develop and maintain
well-established relationships with its customers. This requires that we respond
quickly  to  customer  needs,   particularly  to  assist  customers  with  their
replenishment  programs,  but also requires us to bill-and-hold  when customers'
schedules  are  delayed.  Goods are  ordered by our  customers  for the  express
business  purpose  of  providing  finished  apparel  fabric  to  the  customer's
specification  in order to fulfill the customer's  requirements  associated with
the customer's garment manufacturing operation.  From the time of the customer's
order to the  time of the  completion  of our  manufacturing  of the  customer's
goods, the customer may realize a need to change its manufacturing  schedule. In
these instances the customer may request a delay in shipment of the goods,  and,
at the customer's  request,  we will bill and hold the goods.  As a result,  the
Company  records a portion of its  revenues on a bill and hold basis,  invoicing
goods that have been produced,  packaged and made ready for shipment.  The goods
are effectively  segregated from inventory which is available for sale. The risk
of ownership of the goods has passed to the customer,  and remittance  terms are
consistent with all other sales by the Company.  The Company  recognized revenue
from such bill-and-hold sales of approximately $38.8 million,  $52.5 million and
$71.9 million in fiscal years 2005, 2004 and 2003,  respectively.  The Company's
sales  agreements  do not give the buyer a right of  return.  When  returns  and
allowances are  authorized by the Company,  returns and allowances are accounted
for as a  reduction  to  sales,  and  sales  are  reported  net of  returns  and
allowances.  Allowances  are charged  against sales at the full dollar amount of
the allowance.

ORDER BACKLOG

The Company's  order backlog at July 2, 2005 was $56.8  million,  an increase of
$15.2 million from the $41.6 million order backlog at July 3, 2004. The increase
in the order backlog was  primarily  due to a recent  increase in the demand for
the Company's  commercial cotton products,  as well as an increase in the demand
for fabrics in our government business.

Over the last several  years many of the  Company's  commercial  customers  have
shortened lead times for delivery  requirements.  Because of shortened lead time
coupled with inconsistent  demand at retail,  management believes that the order
backlog at any given point in time may not be an indication of future sales. The
Company  expects  to ship the  majority  of the  orders  that  make up its order
backlog during the next twelve months.


COMPETITION

The  cyclical  nature of the textile and apparel  industries,  characterized  by
rapid shifts in fashion,  consumer demand and competitive pressures,  results in
both price and demand  volatility.  The demand for any particular product varies
from time to time based largely upon changes in consumer preferences and general
economic  conditions  affecting  the  textile and  apparel  industries,  such as
consumer  expenditures  for non-durable  goods. In recent years, the Company has
seen a trend toward  shorter lead times for its customers'  orders.  The textile
and  apparel  industries  are also  volatile  because  the supply of  particular
products changes as competitors enter or leave the market.

                                       7
<PAGE>

The Company sells  primarily to domestic  apparel  manufacturers,  many of which
operate offshore sewing operations.  The Company competes with numerous domestic
and foreign fabric manufacturers,  including companies larger in size and having
greater financial resources than the Company. The principal  competitive factors
in the woven fabrics  markets are price,  service,  delivery  time,  quality and
flexibility,  with the relative  importance  of each factor  depending  upon the
needs of particular  customers  and the specific  product  offering.  Management
believes  that the Company can  maintain its ability to compete  effectively  by
providing  its  customers  with  a  broad  array  of  high-quality   fabrics  at
competitive prices on a timely basis.

The Company's  competitive  position  varies by product line.  There are several
major domestic  competitors in the finished  cotton and  cotton/polyester  blend
woven  fabrics  business,  none of  which  dominates  the  market.  The  Company
believes,  however,  that it has a strong competitive position in the all cotton
pants-weight fabrics business. In addition,  the Company believes that it is one
four finishers that print  camouflage for sale to apparel  suppliers of the U.S.
Government  and the only supplier that is vertically  integrated  for camouflage
production.  We believe additional competitive strengths of the Company include:
knowledge  of its  customers'  business  needs;  its ability to produce  special
fabrics such as textured  blends;  state of the art weaving and fabric finishing
equipment;  vertical integration;  and its ability to communicate electronically
with its customers.

Foreign  competition is a significant factor in the United States fabric market.
The  Company   believes  that  its  relatively  small  manual  labor  component,
highly-automated  manufacturing  processes and domestic manufacturing base allow
the Company to compete on a price basis and to respond more quickly than foreign
producers to changing  fashion  trends and to its domestic  customers'  delivery
schedules.  In  addition,  the Company  benefits  from  protections  afforded to
apparel  manufacturers  based in certain Latin American and Caribbean  countries
that ship finished  garments  into the United  States.  The North  American Free
Trade Agreement  (often referred to as "NAFTA") entered into force on January 1,
1994. NAFTA has effectively  eliminated all tariffs and quotas on goods imported
from Mexico if such goods are made from fabric originating in Canada, Mexico, or
the United States.  The Caribbean Basin Trade Partnership Act (often referred to
as  "CBTPA")  became  effective  on  October  1,  2000.  CBTPA  has  effectively
eliminated  tariffs and quotas on apparel products  imported from  participating
Caribbean  and Central  American  nations if such  products are made from fabric
woven in the  United  States of U.S.  yarn.  Because  NAFTA and CBTPA  create an
incentive to use fabric  manufactured in the United States,  they are beneficial
to the Company and other  domestic  producers of apparel  fabrics.  In contrast,
apparel not meeting the origin requirements of these trade preference agreements
is subject to tariffs. If NAFTA or CBTPA were repealed or altered in whole or in
part,  the  Company  believes  that  it  could  be  at  a  serious   competitive
disadvantage  relative  to  textile  manufacturers  in other  parts of the world
seeking to enter the United States market,  which would have a material  adverse
effect on the  Company.  Moreover,  there can be no  assurance  that the current
favorable  regulatory  environment  will continue or that other geographic areas
will not be afforded similar regulatory advantages.

The World Trade  Organization  (often referred to as the "WTO"),  a multilateral
trade  organization,  was formed in  January  1995 and is the  successor  to the
General  Agreement  on Tariffs  and Trade or  "GATT".  This  multilateral  trade
organization  has set forth mechanisms by which world trade in clothing is being
progressively  liberalized by phasing-out  quotas and reducing  duties.  The WTO
phased out textile and  apparel  quotas as of the end of calendar  year 2004 and
imports of textile and apparel  products  have  surged in many  categories.  The
phase-out has had some negative effect on our commercial synthetics business but
it is too soon to determine what long-term effect it will have on our commercial
cotton business.  While we recognize that our Asian competitors will have a cost
advantage  as  tariffs  on   textile/apparel   products  are  reduced  (but  not
eliminated),  we  believe  we have  competitive  advantages  compared  to  Asian
competitors and we must fully utilize those advantages. Among our advantages are
our  well-established  relationships with our customers,  our ability to respond
quickly to  customer  needs and the  logistical  advantage  associated  with our
manufacturing being located in North America. However, there can be no assurance
that these advantages will allow us to successfully compete with foreign textile
producers.

In August  2005,  the  Dominican  Republic - Central  American  U.S.  Free Trade
Agreement  (DR-CAFTA) was signed into law. DR-CAFTA provides that apparel can be
imported  into the U. S.  duty-free  from any DR-CAFTA  country if the yarns and
fabric are made in one or more of the  participating  countries  (Guatemala,  EL
Salvador, Honduras, Costa Rica, The Dominican Republic, Nicaragua and the United
States).  Effective  dates  for the  implementation  of this  agreement  will be

                                       8
<PAGE>

negotiated  by the  U.  S.  President  and  his  counterparts  in  the  DR-CAFTA
participants  on a country by country basis.  For the  participating  countries,
when  effective,   DR-CAFTA  will  replace  CBTPA.  We  do  not  anticipate  any
significant  impact on our  business in the  foreseeable  future from  DR-CAFTA;
however  it is too  early to  evaluate  fully  the  effects  of this  new  trade
agreement.


EMPLOYEES

The Company has  approximately  1,000 employees.  Unions do not represent any of
the Company's  employees and the Company is not aware of any efforts to organize
any of its employees. The Company believes that its relations with its employees
are good.


ENVIRONMENTAL

The Company is subject to various federal,  state and local  environmental  laws
and regulations  concerning,  among other things,  wastewater discharges,  storm
water flows,  air  emissions,  ozone  depletion  and solid waste  disposal.  The
Company's plants generate very small  quantities of hazardous  waste,  which are
either  recycled  or disposed of  off-site.  Most of its plants are  required to
possess one or more discharge permits.

Two of the Company's  South Carolina  plants,  the Delta 2 and Delta 3 finishing
plants,  have  experienced  and are  experiencing  high  nitrate  levels  in the
groundwater at the two adjacent  sludge spray sites for these plants.  The South
Carolina Department of Health and Environmental Control ("DHEC") and the Company
have entered into a consent  agreement which requires the Company to monitor the
groundwater until drinking water standards are attained.

In addition,  the National  Pollutant  Discharge  Elimination  System  ("NPDES")
permit  issued  to the Delta 2 and Delta 3  finishing  plants on April 1,  2004,
contained a new parameter for zinc in discharges that the Company is supposed to
meet by April 1, 2006.  On March 1, 2005,  DHEC  allowed  the Company to convert
groundwater  recovery wells with  discharges that exceeded the zinc parameter to
monitoring  wells,  which  brought the Company  into  compliance  with the NPDES
permit's zinc discharge limits.

The Company  believes that it can satisfy its permit and DHEC's  requirements at
the Delta 2 and Delta 3  finishing  plants  without  material  additional  cost.
Although there is no assurance that the Company will be successful, and it could
face  administrative  penalties  if it is not, no accrual has been made for such
contingency,  and the Company does not currently believe that liability has been
incurred. Even if the Company does incur administrative  penalties or additional
costs,  it does not believe this matter will have a material  adverse  impact on
the Company's financial position.

On June 30, 2000, the Company sold its  Greensboro,  North Carolina plant to the
City of Greensboro.  The Company had been working with environmental consultants
in assessing  groundwater  contamination at this site. Because of these studies,
one-half of the proceeds from the sale of the plant, consisting of approximately
$400,000,  were placed in an interest  bearing  escrow account to cover expenses
related  to this  contamination.  As of the date of this  filing,  approximately
$305,000  remains in this escrow account.  The Company  recorded the sale net of
estimated  costs to remediate the  property.  The North  Carolina  Department of
Environment  and  Natural  Resources  is  requiring  the  Company  to  install a
monitoring  well on an adjacent  property  owner's land.  The adjacent  owner is
requesting that the Company  provide it with the sampling  results and indemnify
it from any contamination on its property.  If contamination is discovered,  the
Company  would likely face a claim for  damages.  Management  believes  that the
escrow is sufficient to cover any likely expenses  related to the remediation of
this  property,   and  consequently  has  not  recognized  a  liability  in  the
consolidated financial statements.

Delta  Woodside's  previously  owned  Nautilus  business  has  been  named  as a
"potentially  responsible  party" ("PRP") under the Comprehensive  Environmental
Response,  Compensation,  and  Liability  Act  ("CERCLA")  with respect to three
hazardous  waste sites in North  Carolina,  South Carolina and  Mississippi.  To
Delta  Woodside's  knowledge,  all of the  transactions  with  these  sites were
conducted by a corporation (the "Selling Corporation") whose assets were sold in
1990 pursuant to the terms of an order of the United States  Bankruptcy Court to
another  corporation,  the stock of which  was  subsequently  acquired  by Delta
Woodside in January 1993.

                                       9
<PAGE>

At the North Carolina site, the Selling  Corporation is listed as a "de Minimis"
party,  and at the South Carolina site, the Selling  Corporation has been listed
as an  "insolvent"  party and would appear to qualify as a "de  Minimis"  party.
Delta  Woodside's   believes  that  the  Selling   Corporation's  share  of  the
liabilities at either of these sites will be immaterial.

At the  Mississippi  ("ERS") site, the PRP group  completed the surface  removal
action and investigated soil and groundwater contamination, both at the site and
in the surrounding area. Delta Woodside's latest information is that the Selling
Corporation is ranked eleventh out of a total of over 300 PRPs in  contributions
of  material  to the  site,  and,  based  on  volume,  the  Selling  Corporation
contributed  approximately  3% of  the  site's  material.  To  Delta  Woodside's
knowledge, estimates of costs to clean-up the site were $4 million, and could be
higher.  Trichloromethane,  one  of the  substances  delivered  by  the  Selling
Corporation  to the site,  was  found in the  site's  groundwater  and at nearby
drinking water wells. The EPA referred the site to the Mississippi Department of
Environmental  Quality  ("MDEQ") in 1996. In August of 2001, MDEQ indicated to a
third party that it was still considering  action at the site. On June 16, 2004,
MDEQ  conducted a site  investigation  to determine if any homes around the site
still used  private  water  wells and located  three such homes.  On October 13,
2004, a contractor wrote to EPA that "residents downgradient of the ERS property
are currently being exposed to unacceptable  concentrations of contaminants ....
Therefore,  it is  recommended  that  EPA  take  immediate  action  to  mitigate
exposures to contaminated  groundwater by residents at [two addresses]....  [I]t
appears  that  groundwater  contamination  has  expanded  beyond  the  extent of
contamination previously identified in 1993.... Therefore, ... a complete survey
of domestic  wells in the vicinity of the ERS property  should be  conducted....
Finally,  if it is determined  that  additional  residents  are currently  being
exposed to unacceptable  concentrations of contaminants,  it is recommended that
EPA also take immediate  action to mitigate  exposure at these  residences."  On
October 18, 2004,  MDEQ notified the homeowners  that their drinking water wells
were contaminated.

Although no  assurance  can be  provided,  Delta  Woodside  believes  that it is
shielded  from  liability at these three sites by the order of the United States
Bankruptcy  Court pursuant to which the Selling  Corporation  sold its assets to
the  corporation  subsequently  acquired by Delta  Woodside.  Delta Woodside has
denied any responsibility at these three sites, has declined to participate as a
member of the respective  PRP groups,  and has not provided for any reserves for
costs or liabilities  attributable  to the Selling  Corporation.  No accrual has
been made for these Nautilus contingencies,  as we do not believe it is probable
that a liability has been incurred.

On January 10, 2000,  the North Carolina  Department of Environment  and Natural
Resources requested that the Company accept responsibility for investigating the
discharge of hazardous  substances  at a hazardous  waste site known as the Glen
Raven Mills Site, Kings Mountain,  North Carolina (the "Site"). A predecessor by
merger of the Company,  Park Yarn Mills Company,  Inc. ("Park Yarn"),  owned the
Site for approximately six (6) years, from 1977 to 1983. the Company is aware of
no evidence that Park Yarn  discharged  or deposited any hazardous  substance at
the Site or is otherwise a "responsible party" for the Site. Further,  Park Yarn
filed  bankruptcy  and was  discharged  in 1983.  Although no  assurance  can be
provided,  any  liability of Park Yarn for the Site may have been  discharged by
the bankruptcy order. Accordingly,  the Company has denied any responsibility at
the Site, declined to undertake any activities  concerning the Site, and has not
provided for any reserves for costs or liabilities attributable to Park Yarn. We
believe that any liability of Park Yarn for the Site may have been discharged by
the bankruptcy  order. No accrual has been made for this  contingency,  as we do
not believe that it is probable that a liability has been incurred.

Generally,  the  environmental  rules  applicable  to the Company  are  becoming
increasingly  stringent.  The Company incurs capital and other  expenditures  in
each  year  that are aimed at  achieving  compliance  with  current  and  future
environmental standards.

The Company does not expect that the amount of such  expenditures  in the future
will have a material  adverse effect on its  operations or financial  condition.
There can be no assurance,  however,  that future  changes in federal,  state or
local regulations,  interpretations of existing  regulations or the discovery of
currently unknown problems or conditions will not require substantial additional
expenditures. Similarly, the extent of the Company's liability, if any, for past
failures  to  comply  with  laws,  regulations  and  permits  applicable  to its
operations cannot be determined.

                                       10
<PAGE>

ITEM 2  PROPERTIES

    The  following  table  provides  a  description  of Delta  Mills'  principal
facilities.
<TABLE>
<CAPTION>

                                                                               Approximate
                                                                                 Square
LOCATION                                            Utilization                  Footage      Owned/Leased
                                                    -----------                  -------      ------------

<S>                                                 <C>                          <C>          <C>
Greenville, SC                                      Vacant                        17,400      Leased (1)
New York, NY                                        Sales Offices                  9,100      Leased (2)
Beattie Plant, Fountain Inn, SC                     Weaving and Corporate        390,000      FILOT
                                                    and Administrative
                                                    Offices
Delta 3 Plant, Wallace, SC                          Dyeing and Finishing         555,000      FILOT
Pamplico (3) and Cypress Plants, Pamplico, SC       Spinning and Weaving         419,000      FILOT
Delta 2 Plant, Wallace, SC (3)                      Dyeing and Finishing         347,000      FILOT
</TABLE>

(1) Lease expires in December 2008.
(2) Lease expires in December 2009.
(3) The Company expects to close these plants  in the second  quarter of  fiscal
    year 2006 as described below in this Item 2.

All of the Company's plants are the subject of a "Fee in Lieu of Tax" or "FILOT"
agreement  with  three  Counties  within  the  State  of South  Carolina.  These
agreements  are intended to permit  counties to attract  business  investment by
offering  property tax  incentives.  In accordance  with South Carolina law, the
Company entered into a sale-leaseback agreement with these Counties and acquired
an Industrial  Development  Revenue Bond. The  arrangement is structured so that
the Company's lease payments to the Counties equal and offset the Counties' bond
payments to the Company. The Bond is non-recourse to the Counties, the Company's
lease  payments are pledged to secure  repayment of the Bond,  and the lease and
Bond provide for the legal right of offset. Consequently,  the FILOT arrangement
is not reflected in the Company's  financial  statements.  The agreements have a
maximum expiration date of 2017. Under the terms of the agreements,  the Company
must  annually  submit  information  regarding  the value of the  machinery  and
equipment in service in each county. The respective  Counties will then accept a
fee in lieu of property tax based upon predetermined  millage rates. These costs
are  included  in  cost  of  sales  in  the  Company's   consolidated  financial
statements.  If the Company had not entered into this transaction,  property tax
payments  would have been higher.  The Company can  reacquire  such property and
terminate the agreement at a nominal price of $1 and,  accordingly,  the subject
property is included in  property,  plant,  and  equipment  in the  consolidated
balance sheet. If the Company elects to reacquire the subject  property prior to
the  expiration  of the  arrangement,  it may also be required  to make  certain
adjusting property tax payments.

Delta Mills  leases  offices in  Greenville,  South  Carolina.  The lease on the
corporate  offices  expires on December 31, 2008. In January  2005,  the Company
relocated its corporate and  administrative  offices to the Beattie Plant and is
attempting  to sub-lease  this space to a new tenant,  although  there can be no
assurance  the Company  will be  successful  in its efforts.  Sales  offices are
leased in New York City under a lease  expiring in December 2009. At the date of
execution of this Form 10-K,  the  Company's  plants are  operating at less than
full production capacity. The Company believes that its equipment and facilities
are  generally  adequate to allow it to remain  competitive  with its  principal
competitors.

During or after fiscal year 2005,  the Company  completed  the disposal of three
manufacturing facilities.

     o    During the year ended June 29, 2002, the Company announced the closing
          of its Furman Plant, a weaving facility located in Fountain Inn, South
          Carolina.  The  equipment  run-out  schedule was  completed in October
          2001.  The Company  completed  the process of  liquidating  the assets
          associated with this facility subsequent to July 2, 2005.
     o    During the year ended June 28, 2003, the Company announced the closing
          of its Catawba Plant, a yarn manufacturing facility located in Maiden,

                                       11
<PAGE>

          North Carolina.  The equipment run-out schedule was completed in April
          2003, and the Company  completed the process of liquidating the assets
          associated with this facility during fiscal year 2005. The Company has
          replaced the  production  from this facility with  purchased yarn from
          outside sources.
     o    During the second quarter of fiscal year 2005,  the Company  announced
          the closing of the Estes weaving facility,  capacity reductions in the
          Company's  commercial  synthetics business and the elimination of yarn
          manufacturing at the Beattie plant. The equipment  run-out schedule at
          the Estes  plant was  completed  in  December  2004,  and the  Company
          completed the process of liquidating  the assets  associated with this
          facility during fiscal year 2005.

On August 11, 2005,  the Company  announced  implementation  of a  comprehensive
fiscal  year 2006  Business  Plan  (the  "2006  Plan").  The plan  includes  the
Company's exit from the synthetics business, including closure of the two plants
dedicated to the synthetics  product  lines:  the Pamplico  weaving  facility in
Pamplico,  SC and the Delta #2 finishing  facility  located in Wallace,  SC. The
Company  expects  to  complete  the  closing of these  facilities  in the second
quarter of fiscal year 2006 as production requirements dictate.


The Company's  accounts  receivable and inventory,  and certain other intangible
property, including the capital stock of Delta Mills Marketing, Inc., secure the
Company's credit facility.

ITEM 3. LEGAL PROCEEDINGS

All  litigation  to which the  Company is a party is  ordinary  routine  product
liability  litigation,  contract  breach  litigation,  or employment  litigation
incident  to its  business  that does not depart  from the  normal  kind of such
actions.  The Company believes that none of these actions should have a material
adverse  effect on its results of operations or financial  condition  taken as a
whole.

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

Omitted pursuant to Instruction I (2)(c) to Form 10-K.


PART II.

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

The Company is a  wholly-owned  subsidiary of Delta  Woodside  Industries,  Inc.
Accordingly,  there is no  established  public  trading market for the Company's
common stock.

The Company  declared no dividends  for fiscal year 2003,  fiscal year 2004,  or
fiscal year 2005. The information  concerning  limitations on cash distributions
contained  under the subheading  "Liquidity and Sources of Capital" under Item 7
is incorporated herein by reference.
























                                       12
<PAGE>
<TABLE>
<CAPTION>

ITEM 6.  SELECTED FINANCIAL DATA
In Thousands, Except Ratios
                                                                                   Fiscal Year
                                                --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:(1)
                                                          2005             2004             2003             2002          2001
                                                ---------------  ---------------  ---------------  --------------- -------------
<S>                                                   <C>              <C>              <C>              <C>           <C>
Net Sales                                             $157,863         $174,358         $177,193         $174,673      $212,960
Cost of Goods Sold                                     159,320          166,314          160,243          165,266       196,692
                                                ---------------  ---------------  ---------------  --------------- -------------
Gross Profit (Loss)                                    (1,457)            8,044           16,950            9,407        16,268

Selling, general and administrative expenses             9,467           11,810           11,370           11,634        14,609
Impairment and restructuring expenses                   12,077              847              398            8,683
Other income                                               428              766              582              476           302
                                                ---------------  ---------------  ---------------  --------------- -------------
Operating Profit (Loss)                               (22,573)          (3,847)            5,764         (10,434)         1,961
Interest expense                                         5,246            4,783            5,275            9,090        11,064
Interest (income)                                                                                           (192)         (547)
Gain on Extinguishment of Debt                             500                             3,643           16,072         2,458
                                                ---------------  ---------------  ---------------  --------------- -------------
Income (Loss) Before Income Taxes                     (27,319)          (8,630)            4,132          (3,260)       (6,098)
Income Tax Expense (Benefit)                           (3,743)          (3,164)            1,541          (1,198)       (2,192)
                                                ---------------  ---------------  ---------------  --------------- -------------
Net Income (Loss)                                    $(23,576)         $(5,466)           $2,591         $(2,062)      $(3,906)
                                                ===============  ===============  ===============  =============== =============
OTHER DATA:(1)
Depreciation and amortization                           $7,831           $8,942           $9,114           $9,544       $11,310

Capital expenditures                                       391            5,146            6,442            6,496         5,151

BALANCE SHEET DATA:
Working Capital                                         $9,970          $17,599          $26,657          $37,338       $64,270

Total assets                                           118,042          138,939          162,328          158,437       181,747

Total long-term debt                                    30,941           31,941           31,941           47,819        83,815

Shareholder's equity                                    20,868           44,444           49,910           47,319        49,381
</TABLE>


NOTE TO SELECTED FINANCIAL DATA

(1)  Certain amounts prior to fiscal year 2003 have been reclassified to reflect
     the  Company's  adoption in fiscal year 2003 of SFAS 145  pertaining to the
     treatment of gain on retirement of debt.  These  reclassifications  did not
     effect net income (loss) or shareholders' equity.

The  foregoing  information  is  qualified by reference to and should be read in
conjunction with our audited consolidated financial statements and related notes
and other financial  information  included  elsewhere in this report.  The audit
report of KPMG LLP includes an  explanatory  paragraph and Note C of our audited
consolidated   financial  statements  includes  information   regarding  certain
circumstances  that  raise  substantial  doubt  about the  Company's  ability to
continue as a going concern.


                                       13
<PAGE>

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

The following  discussion and analysis of our financial condition and results of
operations should be read in conjunction with "Selected  Financial Data" and our
audited consolidated  financial statements and related notes appearing elsewhere
in this report, including Note C, in which we discuss certain circumstances that
raise  substantial  doubt  about the  Company's  ability to  continue as a going
concern.

THE  CURRENT  ENVIRONMENT.  The current  environment  for the  domestic  textile
industry  is very  fragile due to  overcapacity  in the U. S.  coupled  with the
continued threat of imports. The WTO phased out textile and apparel quotas as of
the end of  calendar  year 2004 and  imports of textile  and  apparel  products,
primarily  from China,  has surged in many  categories in calendar year 2005. In
August 2005, the Dominican Republic - Central American U.S. Free Trade Agreement
(DR-CAFTA) was signed into law.  DR-CAFTA  provides that apparel can be imported
into the U. S. duty-free  from any DR-CAFTA  country if the yarns and fabric are
made in one or more of the  participating  countries  (Guatemala,  EL  Salvador,
Honduras, Costa Rica, The Dominican Republic,  Nicaragua and the United States).
We do not  anticipate  that  DR-CAFTA  will have any  significant  impact on our
business in the  foreseeable  future;  however it is too early to evaluate fully
the effects of this new trade agreement.

During  fiscal  year 2005 and into  fiscal year 2006,  our  synthetics  business
continued  to suffer from foreign  imports,  rising  costs and  declining  sales
prices. Because of these negative factors, we were unable to continue to justify
the losses and corresponding  working capital requirements  associated with this
business.  Therefore,  in August 2005,  we  announced  our decision to exit this
business in fiscal year 2006. We expect to complete all current  customer  order
requirements  and complete the closing of the two  facilities  dedicated to this
business by the end of the second quarter of fiscal year 2006  (December  2005).
We will discuss this decision later in this overview. We are now positioning the
company to focus on our two largest and  strongest  businesses:  government  and
cotton twill (khaki).

The products for our khaki business and the products for our government business
are both finished in the Delta #3 finishing  facility  using fabric woven in the
Beattie  weaving  facility  or  acquired  from  outside  sources.  We  sell  our
commercial  fabrics to apparel  manufacturers and resellers,  which in turn sell
primarily  to  department  stores  and  other  retailers.  We  sell  most of our
government fabrics to apparel manufacturers that contract with the US Government
to fulfill its requirements for military uniforms. Generally, our margins in the
government business are greater than those in the khaki business.  Because these
two lines of product share common manufacturing equipment, manufacturing support
services  and  administrative  support  services,  we view  our  government  and
commercial  cotton  businesses as one business  segment.  The aggregate level of
production for the two product lines combined  influences the  profitability  of
each line.

Our commercial  cotton (khaki)  business showed  improvement in the last half of
fiscal year 2005 but declined in fiscal year 2005  approximately 13% from fiscal
year 2004.  Current  activity  levels  indicate  that this  business will likely
stabilize in fiscal year 2006 at the fiscal year 2005 level.  This  business has
been negatively affected by domestic  overcapacity  coupled with the increase in
foreign imports  especially  from Asia. We recognize that our Asian  competitors
have a cost advantage as quotas are  eliminated  and tariffs on  textile/apparel
products  are reduced  (but not  eliminated);  however,  we believe that we have
competitive  advantages  compared to Asian competitors and we must fully utilize
those advantages.  Among our advantages are our  well-established  relationships
with our  customers,  our ability to respond  quickly to customer  needs and the
logistical  advantage  associated with our manufacturing  being located in North
America.  We believe  that these  advantages  are  particularly  relevant to our
customers with respect to their replenishment programs. However, there can be no
assurance  that these  advantages  will allow us to  successfully  compete  with
foreign textile producers.

Our  government  business was near  historic high levels in fiscal year 2005 and
the current outlook  continues to be favorable for this business;  however,  the
transition  to the new uniform has created  disruption in the order flow and the
timing of our government  sales.  We discuss this in our Outlook for Fiscal Year
2006. This business is not import sensitive since the current federal government
policy  requires  U.S.  sourcing of military  fabrics and  prohibits  the use of
fabric imports in the manufacture of military apparel.

THE  2005  REALIGNMENT   PLAN.   During  fiscal  year  2005,  we  completed  the
implementation  of the Realignment Plan that we announced in October of 2004. We
successfully  completed  a number  of the cost  savings  initiatives  that  were
started during the second quarter of fiscal year 2005.  However,  we experienced

                                       14
<PAGE>

some  disappointments  during  the  initial  implementation  phase  of the  plan
associated  with product  flow,  operating  schedules,  the  escalating  cost of
energy,  and raw materials and certain chemical costs increases.  The net result
was  that,  while  we were  able to  achieve  most of the cost  savings  that we
anticipated  (approximately $12.0 million on an annualized basis), other factors
caused us to fall short of the  operating  improvements  we  anticipated.  These
other  factors were  principally  higher energy and chemical  costs,  unabsorbed
fixed costs due to lower than  expected  operating  schedules  and lower selling
prices in our  synthetics  business  and  disruption  in the flow of  government
fabric  deliveries  due to  delays  associated  with  federal  funding  and  the
transition  to the new  uniform for some of our  garment  manufacturers.  During
August of 2005, we closed on the sale of the Furman plant and collected proceeds
of $1.9  million.  This  completed  all  asset  sales  associated  with the 2005
Realignment Plan for total asset sale proceeds of $9.1 million. As of the end of
fiscal year 2005  approximately  $2.5 million of the estimated $3.5 million cash
restructuring  costs  have  been  paid  leaving  approximately  $1.0  milion  in
estimated costs to be paid during fiscal year 2006.

FOURTH  QUARTER AND FISCAL YEAR 2005.  Sales  volume for the fourth  quarter was
$43.0 million, approximately $3.0 million or 7.5% more than the third quarter of
fiscal year 2005. Both commercial  cotton and synthetics  products  increased in
sales volume.  Government  sales also increased  over the third  quarter.  These
increases  resulted in improved  margins for  commercial  cottons and government
sales but  resulted  in  increased  losses  in the  synthetics  business  due to
continued downward pressure on sales prices. As a result of the continued losses
associated  with our synthetics  business with no improvement in the foreseeable
future, we announced in August of 2005 that we will exit the synthetics business
and close the two manufacturing facilities associated with the production of the
synthetics  products.  This was a difficult decision that affects  approximately
365  employees.  The $4.7 million  impairment  costs  associated  with these two
facilities were recorded in the fourth quarter of fiscal year 2005, and the cash
restructuring  costs will be recorded in the first fiscal quarter of fiscal year
2006.  Excluding these impairment  costs, we reported a fourth quarter operating
loss of $1.2  million  compared to a $2.2  million  operating  loss in the third
quarter of fiscal year 2005. This  approximately  45% improvement was the result
of sales volume increases in government and commercial  cottons,  and additional
savings  associated  with the 2005  Realignment  Plan. Our operating loss in the
fourth  quarter of fiscal year 2005  including  the  impairment  charge was $6.6
million.

Sales for the fiscal year 2005 were $157.9 million compared to $174.4 million in
fiscal year 2004. The decline was primarily in the commercial  cotton  business.
Reflecting  the sales volume  decline,  we incurred an operating  loss in fiscal
year 2005, which included an approximately  $1.5 million charge to cost of goods
sold  associated  with the  closing  of the  Estes  plant and the  Beattie  yarn
manufacturing  operation and an  approximately  $717,000 charge to cost of goods
sold associated  with the decision to close the Pamplico and Delta 2 plants.  In
fiscal year 2005, we also incurred losses of approximately  $750,000  associated
with  the  Company's  inability  to  meet  customer's  specifications  for a new
product.

We discuss the  results of fiscal year 2005 in more detail  under the Results of
Operations section.

OUR OUTLOOK FOR FISCAL YEAR 2006.
Our synthetics  business has continued to suffer volume  declines due to foreign
imports. This has resulted in substantial sales price declines and less than 60%
capacity utilization in the associated  manufacturing  facilities.  The negative
impact of these  circumstances  and the  significant  amount of working  capital
required  for this  business  led to the  decision to exit this  business in the
first half of fiscal  year 2006.  This is  discussed  in more detail in the next
section of this overview.

Our commercial cotton business volume continues to be impacted by the lackluster
sales of khaki products,  the overcapacity of the U. S. textile industry and the
increased volume of foreign imports,  coming mostly from the Far East.  However,
we believe this business will stabilize in fiscal year 2006 at approximately the
fiscal year 2005 level.  We estimate  that our  customer  base will  continue to
source some of their fabric  requirements from the U.S.,  particularly for their
replenishment  programs,  and we  expect  to  continue  to  benefit  as a  major
supplier.  Our  ability to provide  quick  response  to  customer  needs and the
logistical  advantage  associated  with our  manufacturing  and marketing  being
located in North  America are  advantages  that we will focus on to maintain our
domestic  market  share.  Quality and timely  delivery are critical  elements to
these success factors.

Our  government  business  was  successful  in fiscal  year 2005,  remaining  at
approximately  the same high  levels of fiscal  year 2004.  We expect the fiscal
year 2006 levels to be approximately the same; however,  during fiscal year 2005
we  experienced  a disruption  in the  government  order flow that resulted in a
short  fall from our  projected  government  sales for fiscal  year  2005.  This
situation still exists. The major causes of this disruption are:

                                       15
<PAGE>

     1.   The transition to the new uniform has been  problematic for all of our
          garment manufacturing customers,  causing some volatility in the order
          flow.   This  problem  is  being   addressed  by  the  major   garment
          manufacturers  but the supply  chain  continues to produce at a slower
          than expected rate.
     2.   Our government business is significantly affected by the amount of the
          Federal  budget  that is  allocated  to the  procurement  of  military
          uniforms and the timing of that allocation.  For the U.S. Government's
          fiscal year ending  September  30,  2005,  government  funding for the
          military was obtained but the budget  allocation to uniform fabric was
          less than expected due to other  priorities  set by the military.  The
          amount and timing of funding by the U.S.  Government  for its military
          uniform  needs  for its  fiscal  year  beginning  October  1,  2005 is
          currently uncertain.
     3.   In fiscal year 2005, the government  procurement  agency  forecasted a
          strategic path for a logical and smooth transition from the old battle
          dress  uniform  to the new  uniform.  The  funding  shortages  and the
          problems  encountered  by  the  garment  manufacturers  disrupted  the
          government's planned transition. Consequently, the government placed a
          Stop Work Order on the old battle  dress  uniform in order to maintain
          manageable  inventory levels.  The government has indicated that it is
          committed  to  negotiating  a  reasonable   settlement  and  accepting
          responsibility for reasonable losses resulting from this mandate.  The
          garment  makers,  which make  claims to the  government  that  include
          claims of their  suppliers such as us, are currently  assessing  their
          exposure  with respect to their  inventory  and the inventory of their
          fabric  suppliers.   The  timing  for  the  settlement  of  claims  is
          uncertain.  As a fabric  supplier,  we do not  anticipate any material
          losses due to inventory  write-downs  associated with this stop order;
          however, there can be no assurances of the outcome of the problem, and
          we cannot  speculate on any future  decision the  government  may make
          with respect to this situation.

The  level of both our  government  and our  khaki  businesses  with many of our
customers is dependent in part on their ability to obtain  credit  approval from
our factor,  GMAC. This requirement  from time to time causes  disruption in our
order flow.

With  respect  to costs,  we  believe  that our 2005  Realignment  Plan and 2006
Business Plan should generate  significant cost savings from overall fiscal year
2005 cost levels,  primarily in the areas of salaries,  wages and benefit costs.
Uncertainties  exist  with  respect to  anticipated  cost  reductions,  however,
primarily related to the Company's manufacturing  performance,  effects from the
timing of funding of military  fabric  purchases,  rising energy prices,  rising
chemical prices and increased raw material costs.

THE EXIT OF THE SYNTHETICS BUSINESS.

Because of continued losses and negative cash flows in our synthetics  business,
we could no longer justify the working  capital  required to fund this business.
Consequently,  in August  2005 we  announced  that we would exit the  synthetics
business and close our Pamplico weaving facility in Pamplico, SC and the Delta#2
finishing facility located in Wallace,  SC.  Approximately 365 employees will be
affected.  In the fourth quarter of fiscal year 2005, we recorded a $4.7 million
asset  impairment  charge and inventory  write-downs  of $717,000.  In the first
quarter of fiscal year 2006, we expect to record a restructuring  charge ranging
from $3.0 to $4.0 million in cash charges.  These pre-tax charges in fiscal year
2005 and 2006 are net of  estimated  proceeds of $3.0 to $4.0 million from land,
building  and  equipment  sales that are  expected  to occur in the last half of
fiscal year 2006. We are working with our synthetics  customers to facilitate an
orderly  transition  to  other  suppliers  and  estimate  the  run  out  of  the
manufacturing  facilities  will be  complete  in the  latter  part of the second
quarter of fiscal  year 2006.  Once the exit plan is  completed,  we  estimate a
reduction in our working capital  requirements of  approximately  $10.0 to $13.0
million by the end of fiscal year 2006.

THE TERMINATION OF THE DEFERRED COMPENSATION PLAN.

In August 2005,  Delta Woodside  announced that it was  terminating its deferred
compensation plan and paying out all plan account  balances.  The termination of
the deferred  compensation  plan by the Delta  Woodside and the Company's  Board
(with  Messrs.   W.F.   Garrett  and  J.P.  Danahy   abstaining)   followed  the
recommendation  of  the  Delta  Woodside  Board's  Compensation   Committee.  By
terminating  the deferred  compensation  plan and paying the respective  account
balances  to each  participant  (a total of  approximately  $3.4  million),  the
Company  expects to retain  certain of its key managers who are essential to the
future  of the  Company.  Under the  deferred  compensation  plan the  Company's
executive officers and certain senior and middle level management  employees had
been permitted to defer a portion of their compensation.  Deferred  compensation

                                       16
<PAGE>

accounts were credited with  interest and were  distributable  upon  retirement,
disability or employment termination.  The Delta Woodside Compensation Committee
and the Boards decided to terminate the deferred  compensation plan as a measure
to retain key employees who, in light of the general difficulties in the textile
industry,  have expressed a desire to diversify their retirement  assets.  Since
fiscal year 2004, certain employees who voluntarily  terminated their employment
with the Company  expressed that a primary  reason for their  departure was that
the deferred  compensation  plan had not been  terminated  earlier,  which early
termination  would have  allowed  them to receive  their  deferred  compensation
accounts  without  leaving  the  Company's  employ.   The  Company   conditioned
termination  of the  deferred  compensation  plan with  respect to any  employee
participant  on the  agreement of that  participant  to remain an employee for a
specified period. As of August 29, 2005, all employee participants had committed
to their  respective  employment  agreement  (eighteen months in the case of the
executive  officers and certain  other  employees).  Consequently,  the plan was
terminated and account balances totaling approximately $3.4 million were paid to
all participants.  We also had earlier distributed approximately $700,000 to one
employee in connection  with his voluntary  termination of his employment  after
the end of fiscal  year 2005 but  before the Boards  decided  to  terminate  the
deferred compensation plan.

GMAC AMENDMENTS.

On August 9,  2005,  the  Company  entered  into a waiver and  amendment  to its
revolving credit agreement with GMAC Commercial Finance LLC. The credit facility
amendment includes a waiver with respect to the Company's noncompliance with the
minimum   Earnings  before  interest,   taxes,   depreciation  and  amortization
("EBITDA")  covenant for the fourth  quarter ended July 2, 2005,  allows for the
payment of the deferred compensation participant account balances, sets required
minimum  EBITDA levels for each quarter of fiscal year 2006 and provides that it
will be an event of default if the  Company and GMAC do not enter into a written
amendment  setting  EBITDA  requirements  for the  remainder  of the term of the
credit facility.  The GMAC amendment also provides for a $3.0 million supplement
to the allowed  asset-based  availability.  The supplement is available  through
February of 2006,  and The Company will owe a $30,000 fee for any calendar month
in  which  The  Company  uses,  on more  than  three  days,  all or part of this
supplemental  amount.  The amendment  also  increased the  applicable  margin on
Eurodollar loans from 3% to 4%.

On September  30,  2005,  the Company  entered  into a further  amendment to its
revolving credit agreement with GMAC. The credit facility  amendment  includes a
waiver with respect to the Company's requirement to provide financial statements
for the fiscal year ended July 2, 2005 reported on without  qualification by the
Company's independent pubic accounting firm and sets new required minimum EBITDA
levels for each quarter of fiscal year 2006 and increases the applicable  margin
on Eurodollar loans from 4% to 5% and the applicable  margin on prime rate loans
from 0.75% to 2.75%.  GMAC will require an appraisal of the Company's  inventory
within 45 days. The Company  believes that GMAC will use this  appraisal,  among
other matters, to determine whether to extend the $3.0 million supplemental line
beyond February 2006.

IN CONCLUSION.

Our  industry is operating  in a fragile  environment  and there is no assurance
that all of our  problems  are  behind  us;  however,  with  our  exit  from the
synthetics  business and  anticipated  continued  demand in the  government  and
commercial  cotton  (khaki)  business  we believe  that we have  positioned  the
Company for an improved future.  Fiscal year 2006 will be a transition year that
will set the stage for the future of the Company.

We expect overcapacity of the domestic textile manufacturing base to continue to
affect pricing,  and we expect Asia to continue to disrupt the sourcing patterns
of U. S.  retailers  and  brands.  It is too early to  determine  the  impact of
DR-CAFTA.  We will keep a close eye on the impact that this trade  agreement may
have on our  business  in the  future.  We remain  diligent  in our  efforts  to
understand the globally  competitive market place and to look within our Company
in order to lower our costs and improve performance.

We believe that our best  opportunity is to exit the synthetics  business and to
focus on our two  largest  businesses:  government  and  cotton  twill  (khaki).
However,  we  recognize  the risks that  continue to threaten the success of our
future plans, which include, but are not limited to, the following:

     o    As  discussed  in  Note  C  to  our  audited  consolidated   financial
          statements, the Company has suffered recurring losses from  operations
          and has uncertainties with regard to its ability to operate within the
          availability established by its revolving credit facility.
     o    Delays or reductions in federal government funding for the purchase of
          military  fabrics  could reduce the running  schedules,  and hence the
          profitability, of our government business.
     o    If the federal  government  were to change its policy  respecting U.S.
          sourcing  requirements  for military  fabrics and permit sourcing from
          foreign  competitors  with  lower  production  costs,  our  government
          business would be materially adversely affected.
     o    Changes  in the  retail  demand for khaki  products  could  reduce our
          apparel  manufacturer  customers'  demand  for our  commercial  cotton
          products.
     o    The  continuation  --  or  exacerbation  --  of  adverse   competitive
          conditions in the apparel and textile  industries,  particularly,  but

                                       17
<PAGE>

          not limited to,  continued  pressure from foreign  imports,  primarily
          from China, and the high level of overcapacity in the domestic textile
          industry, could prevent us from returning to profitability.
     o    Continued  high  energy  costs and the  associated  effect on the U.S.
          economy  reduce the  profitability  of our business by increasing  our
          production  costs and reducing retail demand for the apparel  products
          of  our  commercial   customers  and  therefore  the  demand  for  our
          commercial cotton products.
     o    Material  increases  in the  costs of yarn  and  greige  fabric  could
          adversely affect our business.
     o    Because we compete with foreign  textile  companies,  increases in the
          strength  of the U.S.  dollar  against the  currencies  of our foreign
          competitors  (which reduce the price for their goods compared to ours)
          would generally impair our competitive position.
     o    Changes in U.S. and international trade regulations, including without
          limitation the end of quotas on textile and apparel products among WTO
          member states in January 2005 have had a significant adverse impact on
          our competitive position. The effect on us of the Dominican Republic -
          Central  American U.S.  Free Trade  Agreement  (DR-CAFTA),  which will
          eliminate  duties on  apparel  coming  from  DR-CAFTA  member  states,
          remains  to be  seen.  Further  changes  in  trade  regulations  could
          adversely impact our competitive position and profitability.
     o    The success of our 2006  Business  Plan is  dependent  on  predictable
          plant operating  schedules supported by timely customer orders in both
          commercial and government product lines.
     o    We have  relied on waivers and  amendments  from Delta  Mills'  credit
          facility  lender,  GMAC, in order to be in compliance  with the credit
          facility covenants.  Were GMAC to refuse to waive or cure by amendment
          any future default and accelerate the credit facility,  our ability to
          refinance the debt would be doubtful.  If GMAC were to accelerate  the
          credit facility in an event of default,  holders of Delta Mills Senior
          Notes or the indenture trustee could also accelerate the Senior Notes.
     o    The outstanding  $30,941,000  principal balance of Delta Mills' 9.625%
          Senior  Notes is due in August 2007.  Our  revolving  credit  facility
          matures  in  March  2007.  We will  need to  refinance  both of  these
          obligations  prior  to  March  2007 in  order  to be able to  continue
          operations.  We believe that any such refinancing will require,  among
          other things,  successful implementation of our 2006 Business Plan and
          an   improvement   in  demand  for  our  products  and  a  significant
          improvement  in our operating  results.  Particularly  in light of our
          results  over the  last  several  fiscal  quarters  and the  continued
          challenges in our industry, there is no assurance that these necessary
          conditions will occur in a timely fashion or at all.
     o    Our ability to borrow  under our  revolving  credit  facility is based
          primarily on a formula  under which we may borrow up to  approximately
          90% of outstanding accounts receivable balances plus approximately 50%
          of certain  inventory  balances.  If, due to the timing of billings to
          customers,  inventories increase and accounts receivable decrease,  we
          may be unable  to borrow  the funds  needed  to  respond  to  customer
          demands or to meet other needs for cash.
     o    We rely on the  willingness of our principal  vendors and suppliers to
          supply us product in accordance  with  reasonable  payment terms.  Any
          significant  tightening  of these  terms  could  materially  adversely
          affect our operations.
     o    We believe that the success of our business  depends on our ability to
          retain  employees in the face of continued  ressures in the  industry,
          and there can be no assurance that we will be able to do so.
     o    The impact of natural disasters such as hurricanes,  acts of terrorism
          and other instances of "Force  Majeure" could have unforeseen  adverse
          impacts on our business and financial condition.
     o    Projecting the costs related to the closing of our synthetics business
          is inherently uncertain.  If the actual costs substantially exceed our
          projections,  we may  not be  able to meet  the  targets  in our  2006
          Business  Plan or comply  with the  financial  covenants  under  Delta
          Mills' credit facility.
     o    The  future  discovery  of  currently  unknown  conditions,   such  as
          environmental  matters and similar items,  could result in significant
          unforeseen  liability  or  costs  to us and  disrupt  our  ability  to
          successfully execute our business plan.



                                       18
<PAGE>

<TABLE>
<CAPTION>

RESULTS OF OPERATIONS
FISCAL YEAR 2005 VERSUS FISCAL YEAR 2004

The following table summarizes the Company's results for Fiscal Year 2005 versus
Fiscal Year 2004:

                                                                                           Increase/ (Decrease)
In thousands, except percentages                                                            From 2004 to 2005
                                                                                          -----------------------
                                                                2005             2004               $
                                                       ----------------------------------------------------------
<S>                                                         <C>              <C>                  <C>
Net Sales                                                   $157,863         $174,358             $ (16,495)
% of Net Sales                                                100.00 %         100.00 %

Gross Profit (Loss)                                           (1,457)           8,044                (9,501)
% of Net Sales                                                 (0.92)%           4.61 %

Selling, General and Administrative Expenses                   9,467           11,810                (2,343)
% of Net Sales                                                  6.00 %           6.77 %

Impairment and Restructuring Expenses                         12,077              847                11,230

Other Income                                                     428              766                  (338)

Operating Loss                                               (22,573)          (3,847)              (18,726)
% of Net Sales                                                (14.30)%          (2.21)%

Interest Expense (Net)                                         5,246            4,783                   463
% of Net Sales                                                  3.32 %           2.74 %

Gain on Extinguishment of Debt                                   500                                    500

Loss Before Income Taxes                                     (27,319)          (8,630)              (18,689)
% of Net Sales                                                (17.31)%          (4.95)%

Income Tax Expense (Benefit)                                  (3,743)          (3,164)                 (579)
% of Net Sales                                                 (2.37)%          (1.81)%

Net Loss                                                     (23,576)          (5,466)              (18,110)
% of Net Sales                                                (14.93)%          (3.13)%

Order Backlog                                               $ 56,809         $ 41,567              $ 15,242
</TABLE>


NET SALES:
The 9.5%  decline  in net sales was the  result of a 9.7%  decline in unit sales
partially offset by a 0.3% increase in average sales price.  Unit sales declined
principally  due to  weaker  retail  sales in the  Company's  commercial  cotton
products combined with somewhat reduced demand for military fabrics. The reduced
unit sales of commercial  cotton  products,  the Company's  lowest price product
category, accounted for the majority of the average sales price increase.

GROSS PROFIT (LOSS):
The decline in gross profit was primarily due to a decline in profit  margins in
the commercial cotton and synthetic product  categories.  The high level of over
capacity in the textile industry, pressure from foreign imports and inconsistent
demand at retail were the primary factors contributing to the declines in profit
margin in the commercial  product  categories.  Additionally,  run-out costs and
inventory  write-downs  associated  with the  closing of the Estes plant and the
Beattie plant yarn manufacturing  operation totaling  approximately $1.5 million
are included in the 2005 gross loss. Also included in the fiscal year 2005 gross
loss are inventory  write-downs of  approximately  $717,000  associated with the
Company's  plan to close  its  Pamplico  and Delta 2 plants.  In  addition,  the
Company incurred a loss in fiscal year 2005 of approximately $750,000 associated
with an inability to meet the customer's  specifications for a new product to be
produced for Levi Strauss. Also contributing to the decline in gross profit were
increased raw material  costs,  including  certain  chemicals used in dyeing and
finishing,  and energy costs.  These  factors were  somewhat  offset by the cost
reductions associated with the Company's 2005 Realignment Plan.

                                       19
<PAGE>

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The decline in selling, general and administrative expenses was primarily due to
lower  salary  and  benefit  costs  due  to  staff  reductions  related  to  the
Realignment  Plan and lower  distribution  costs  associated  with  reduced unit
sales.  Approximately  $0.25  million of the  decline in  selling,  general  and
administrative  expenses  was due to the  extra  week of fixed  expenses  in the
53-week 2004 fiscal year.

IMPAIRMENT AND RESTRUCTURING EXPENSES:
Impairment and restructuring  expenses related to the Company's 2005 Realignment
Plan include  asset  impairment  charges of $3.8 million and cash  restructuring
expenses,  primarily  related to employee  termination  costs,  of $3.5 million.
Additionally,  the Company  recorded asset  impairment  charges of approximately
$4.7 million  associated with the Company's plan to close its Pamplico and Delta
2 plants.

The  $847,000  impairment  charge  recorded  in fiscal year 2004  reflected  the
Company's  change in the  estimated  fair value of the  Company's  Furman Plant,
which was accounted for as an asset held for sale.  The remaining net book value
for the Furman  facility at July 2, 2005 is shown as assets held for sale on the
Company's consolidated balance sheet.

OTHER INCOME:
Other income for fiscal year 2005 was primarily  associated with the disposal of
assets at the  Company's  Pamplico  facility for cash  proceeds in excess of the
carrying  value of the assets.  Other income for fiscal year 2004 was  primarily
associated  with  asset  disposals  associated  with the  Company's  two  closed
facilities, the Furman Plant and the Catawba Plant, and included the involuntary
conversion of insured equipment at the Beattie facility.

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

INTEREST EXPENSE, NET:
The average  interest rate on the Company's credit facility is based on a spread
over either LIBOR or a base rate. The increase in interest expense was primarily
due to  increases  in interest  rates in  connection  with the  amendment of the
Company's  revolving  credit  facility and  increases in LIBOR due to changes in
market rates.  The average  interest rate on the revolving  credit  facility was
4.362% as of July 3, 2004  compared to an average  interest  rate of 6.24% as of
July 2, 2005.

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

INCOME TAX EXPENSE (BENEFIT):
The  Company's  net deferred tax assets at July 2, 2005 are reduced by valuation
allowances  of  $7,717,000.  As a result of the Company  having  provided  these
valuation allowances for any income tax expense (benefit) that would result from
the  application of a statutory tax rate to the Company's net operating  losses,
income tax expense (benefit) has been recognized in fiscal year 2005 only to the
extent that there were net  deferred  tax  liabilities  at the  beginning of the
fiscal year.

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

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

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

                                       20
<PAGE>

RESULTS OF OPERATIONS FISCAL YEAR 2004 VERSUS FISCAL YEAR 2003

The following table summarizes the Company's results for Fiscal Year 2004 versus
Fiscal Year 2003.
<TABLE>
<CAPTION>

                                                                                   Increase/ (Decrease)
In thousands, except percentages                                                    From 2003 to 2004
                                                                                  -----------------------
                                                          2004           2003               $
                                                   ------------------------------------------------------
<S>                                                  <C>            <C>                   <C>
Net Sales                                            $ 174,358      $ 177,193             $ (2,835)
% of Net Sales                                          100.00 %       100.00 %

Gross Profit                                             8,044         16,950               (8,906)
% of Net Sales                                           4.61%          9.57%

Selling, General and Administrative Expenses            11,810         11,370                  440
% of Net Sales                                            6.77 %         6.42 %

Impairment and Restructuring Expenses                      847            398                  449

Other Income                                               766            582                  184

Operating Profit (Loss)                                 (3,847)         5,764               (9,611)
% of Net Sales                                           (2.21)%         3.25 %

Interest Expense (Net)                                   4,783          5,275                 (492)
% of Net Sales                                            2.74 %         2.98 %

Gain on Extinguishment of Debt                                          3,643               (3,643)

Income (Loss) Before Income Taxes                       (8,630)         4,132              (12,762)
% of Net Sales                                           (4.95)%         2.33 %

Income Tax Expense (Benefit)                            (3,164)         1,541               (4,705)
% of Net Sales                                           (1.81)%         0.87 %

Net Loss                                                (5,466)         2,591               (8,057)
% of Net Sales                                           (3.13)%         1.46 %

Order Backlog                                         $ 41,567       $ 55,527            $ (13,960)
</TABLE>


NET SALES:
The 1.6%  decline  in net sales was the  result of a 5.0%  decline in unit sales
partially  offset by a 3.6%  increase  in average  sales  price.  The unit sales
decline was principally  due to weaker retail sales in the Company's  commercial
cotton  products  and was  partially  offset by  improved  demand  for  military
fabrics. The increased unit sales of military fabrics accounted for the majority
of the average sales price increase.

GROSS PROFIT:
The $8.9  million  decline  in gross  profit  was  primarily  due to  unabsorbed
manufacturing cost increases  associated with reduced plant operating  schedules
resulting  primarily from reduced  customer demand for the Company's  commercial
cotton  products.  This created  approximately  $9.0 million of unabsorbed fixed
overhead  costs.   Also   contributing  to  the  decline  in  gross  profit  was
approximately  $2.3 million associated with increased cotton raw material costs.
These factors were  partially  offset by higher profit margins  associated  with
increased military fabric sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Approximately  half  of the  $0.4  million  increase  in  selling,  general  and
administrative  expenses  was due to the  extra  week of fixed  expenses  in the
53-week  2004 fiscal  year.  The balance of the  increase  was due to  increased
credit insurance costs associated with increased sales to customers based in the
Caribbean.

IMPAIRMENT AND RESTRUCTURING EXPENSES:
The  $847,000  impairment  charge  recorded  in fiscal  year 2004  reflects  the
Company's  change in the  estimated  fair value of the  Company's  Furman Plant,
which is accounted for as an asset held for sale. In fiscal year 2003,  expenses
in this category, totaling $398,000,  represented exit costs associated with the
closing of the Company's Catawba Plant.

                                       21
<PAGE>

OTHER INCOME:
Other  income for both the 2004 and 2003 fiscal years was  primarily  associated
with asset disposals  associated with the Company's two closed  facilities,  the
Furman  Plant and the  Catawba  Plant,  and in fiscal  year 2004,  included  the
involuntary  conversion  of  insured  equipment  at the  Beattie  facility.  The
remaining net book value for both the Catawba and Furman  facilities is shown as
assets  held for sale on the  Company's  consolidated  balance  sheet at July 3,
2004.

OPERATING PROFIT (LOSS):
The majority of the $9.6 million  decline in operating  profit was the result of
unabsorbed manufacturing cost increases of approximately $9.0 million associated
with reduced plant operating schedules. Other contributing factors are discussed
above.

INTEREST EXPENSE, NET, AND GAIN ON EXTINGUISHMENT OF DEBT:
The $0.5 million  decrease in net interest  expense was due to the  reduction in
the outstanding  principal amount of the Company's 9.625% Senior Notes resulting
from repurchases in fiscal year 2003 which was somewhat offset by an increase in
the  borrowings  outstanding  under the revolving  credit  facility as described
below. The $3.6 million gain on  extinguishment  of debt in fiscal year 2003 was
the result of  repurchases of Senior Notes during fiscal year 2003, the majority
of which were the result of the "Modified  Dutch  Auction" in the fourth quarter
of fiscal year 2003.

INCOME TAX EXPENSE (BENEFIT):
The effective tax rate of 36.7% for the year ended July 3, 2004 is approximately
the same as the 37.3% effective tax rate for the year ended June 28, 2003.

NET INCOME (LOSS):
The $8.1 million  decrease in net income for fiscal year 2004 was  primarily due
to the deterioration of gross margins,  and was somewhat offset by a decrease in
net interest expense. Each of these items is discussed above.

LIQUIDITY AND SOURCES OF CAPITAL

SOURCES AND USES OF CASH.  The Company's  primary  sources of liquidity are cash
flows from operations and the Company's  revolving credit facility with GMAC. In
fiscal  year  2005,  the  Company  used  $13.7  million  in cash from  operating
activities  principally  as the result of the $27.4  million net loss  discussed
above,  net of the  non-cash  asset  impairment  charge of $8.5 million and $7.8
million in depreciation and amortization expense. Additionally,  $2.5 million of
the $3.5 million restructuring charges were actually paid during the period. The
changes in  operating  assets and  liabilities  were  principally  the result of
increases of $2.9 million in  inventories  due  primarily to customer  delays in
assortments and shipments of Government fabrics and increases of $1.1 million in
other assets due to prepayments for purchases required by some of our suppliers,
somewhat  offset by a  decrease  of $1.7  million  in  accounts  receivable  due
primarily to the decline in sales volume.

Availability on the revolving  credit facility was $7.3 million at July 2, 2005.
The Company was not in compliance with the revolving credit facility's financial
covenant at July 2, 2005. On August 8, 2005,  Delta Woodside's and the Company's
boards  approved  termination of the Company's  deferred  compensation  plan and
payout of participant plan balances (approximately $3.4 million in the aggregate
was paid out in August 2005) and an amendment to the Company's  revolving credit
agreement,  which was  entered  into on  August 9,  2005.  The  credit  facility
amendment includes a waiver with respect to the Company's noncompliance with the
minimum EBITDA  covenant for the fourth  quarter ended July 2, 2005,  allows for
the payment of the deferred  compensation  participant  account  balances,  sets
required  minimum  EBITDA  levels  for each  quarter of fiscal  year  2006,  and
provides  that it will  constitute  an event of default if the  Company  and its
lender fail to agree to minimum  EBITDA  levels for the remainder of the term of
the  revolving  credit  facility.  The GMAC  amendment  also provides for a $3.0
million supplement to the allowed  asset-based  availability.  The supplement is
available  through  February of 2006, and the Company will owe a $30,000 fee for
any calendar  month in which the Company uses,  on more than three days,  all or
part of this  supplemental  amount.  The amendment also increased the applicable
margin on Eurodollar loans from 3% to 4%.

On September  30,  2005,  the Company  entered  into a further  amendment to its
revolving credit agreement with GMAC. The credit facility  amendment  includes a
waiver with respect to the Company's requirement to provide financial statements
for the fiscal year ended July 2, 2005 reported on without  qualification by the
Company's  independent  public  accounting  firm and sets new  required  minimum
EBITDA levels for each quarter of fiscal year 2006 and increases the  applicable
margin on Eurodollar loans from 4% to 5% and the applicable margin on prime rate
loans  from 0.75% to 2.75%.  GMAC will  require an  appraisal  of the  Company's
inventory  within  45  days.  The  Company  believes  that  GMAC  will  use this
appraisal,  among other matters, to determine whether to extend the $3.0 million
supplemental line beyond February 2006.

                                       22
<PAGE>

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

LIQUIDITY.  Our  consolidated  financial  statements  have been  prepared on the
assumption  that  the  Company  will  continue  as a going  concern.  Management
believes that,  with the Company's entry into the August 2005 and September 2005
amendments to the GMAC  revolving  credit  agreement and based on projections of
what  management   considers  to  be  the  most  probable   outcomes  of  future
uncertainties,  the cash flows  generated by the Company's  operations and funds
available  under the Company's  credit  facility should be sufficient to service
its debt,  to  satisfy  its  day-to-day  working  capital  needs and to fund its
planned  capital  expenditures  for the  next  twelve  months.  This  belief  by
management is dependent on the validity of several assumptions that underpin the
Company's internal forecasts. These assumptions include:

     1.   Government business:
          o    revenues  remaining at the fiscal year 2005 level for fiscal year
               2006 and beyond
          o    minimum   disruption  from  the  problems   associated  with  the
               transition to the new uniform as discussed in "-- Our Outlook for
               Fiscal Year 2006"
          o    U.S.  government  funding for military uniforms is not materially
               delayed  or  decreased  as a result of  delays  in the  budgeting
               process or the costs of  recovering  from recent  hurricanes  and
               other demands on government resources
          o    a moderation in the rate of increase in energy and chemical costs
          o    continued  credit  approval of the government business's customer
               base by our factor GMAC
     2.   Commercial cotton business:
          o    maintaining  fiscal year 2005 revenue  levels in fiscal year 2006
               and beyond
          o    improved  margins based on the  continuation of current trends in
               sales prices and raw material costs
          o    a moderation in the rate of increase in energy and chemical costs
          o    continued  credit  approval of the commercial  cotton  business's
               customer base by our factor GMAC
     3.   Exit of the synthetics business:
          o    an orderly  production  flow to complete all  commitments  to our
               synthetics customers
          o    minimum negative run-out costs
          o    minimum inventory write-downs
          o    the collection of  substantially  all of the associated  accounts
               receivable
     4.   Payment terms  required by our principal  vendors and suppliers do not
          become materially more stringent.

The Company has suffered  recurring  losses from  operations and there can be no
assurance that the Company's actual results will match its internal forecasts of
the most probable outcomes. Adverse effects from the risks described above under
"--In  Conclusion"  or other  unforeseen  events  or risks  could  cause  future
circumstances  to differ  significantly  from  these  forecasts.  These  adverse
changes in circumstances  could cause the Company's needs for cash to exceed the
availability  of  credit  under  the  Company's   revolving  credit   agreement,
particularly  following  the  February 28, 2006  expiration  of the $3.0 million
supplemental credit line provided by GMAC. In addition,  because the fiscal year
2006  quarterly  trailing  twelve month EBITDA  covenants in our GMAC  revolving
credit  agreement  provide  minimal  tolerance  for any  shortfall  in operating
results, we may be required to seek additional waivers or amendments to our GMAC
revolving  credit  agreement  if our  operating  results  do not  improve  as we
anticipate.  GMAC has consistently  granted waivers or amendments in the past to

                                       23
<PAGE>

address our financial  difficulties,  and the bulk of its collateral is accounts
receivable,  so we  believe  that  GMAC is  well-collateralized.  Therefore,  we
believe that there is a likelihood that GMAC would grant  additional  waivers or
amendments;  however,  we cannot  guarantee  that we would be able to obtain any
necessary  waivers or  amendments  in the future.  If we become unable to borrow
under our revolving credit facility  because of insufficient  availability or an
unwaived  default,  our  ability  to  continue  operations  would  likely  be in
substantial doubt.

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

THE GMAC REVOLVING CREDIT FACILITY.  Delta Mills has a revolving credit facility
with GMAC with a term  lasting  until March 2007.  Borrowings  under this credit
facility  are  limited to the  lesser of (i) $38.0  million  less the  aggregate
amount of undrawn  outstanding letter of credit or (ii) a "formula amount" equal
to (A) 90% of eligible accounts  receivable plus 50% of eligible  inventories of
Delta  Mills  minus (B) the sum of $7.0  million  plus the  aggregate  amount of
undrawn  outstanding  letters of credit plus certain reserves.  Through February
2006, the formula amount is increased by a $3.0 million "supplemental amount" as
described more fully in the fifth bullet point below. The facility is secured by
the accounts  receivable,  inventories  and capital  stock of the  Company.  The
average  interest  rate on the credit  facility was 6.24% at July 2, 2005 and is
based on a spread  over  either  LIBOR or a base  rate.  Borrowings  under  this
facility  were $28.4  million  and $21.4  million as of July 2, 2005 and July 3,
2004,  respectively.   As  of  July  2,  2005,  the  revolver  availability  was
approximately  $7.3  million,  net  of  the $7  million  availability  reduction
established by the credit facility,  and the aggregate amount of undrawn letters
of credit was approximately $1.3 million.

At the  beginning  of fiscal year 2005,  the GMAC credit  facility had a maximum
loan amount of $50 million and had financial covenants that required the Company
to comply with a maximum  leverage  ratio and a minimum  fixed  charge  coverage
ratio.  Since the  beginning of fiscal year 2005,  the credit  facility has been
amended, or the Company has received waivers, as described below.

     o    On August 18,  2004,  the credit  facility  was  amended to reduce the
          maximum  availability to $38 million,  and the maximum  leverage ratio
          and fixed charge coverage ratio covenants were replaced with a minimum
          Earnings  Before  Interest,   Taxes,   Depreciation  and  Amortization
          (EBITDA) covenant. The new covenant set required minimum EBITDA levels
          for each  quarter  of  fiscal  year  2005 and  provided  that it would
          constitute an event of default if Delta Mills and its lender failed to
          agree by the end of fiscal year 2005 to minimum  EBITDA levels for the
          remainder of the term of the revolving credit facility.

     o    On October 18,  2004,  GMAC agreed to an  amendment  to the  financial
          covenants in the credit facility to reduce the required minimum EBITDA
          levels  for each  quarter  of fiscal  year 2005.  This  amendment  was
          intended  to allow the  Company  to remain in  compliance  with  these
          covenants while executing its 2005 Realignment Plan.

     o    On May 12, 2005,  GMAC granted a waiver with respect to a violation of
          the EBITDA  covenant as of the end of the third quarter of fiscal year
          2005.

     o    On May 17,  2005,  GMAC  granted a  prospective  waiver of the  EBITDA
          covenant for the end of fiscal year 2005  conditioned upon the Company
          (i)  achieving  trailing  twelve  months EBITDA as of fiscal year 2005
          year-end of negative $700,000,  (ii) maintaining undrawn  availability
          of at least $2.5 million for thirty consecutive days immediately prior
          to and  immediately  subsequent  to the  date  on  which  the  Company
          delivered to GMAC its draft financial  statements for fiscal year 2005
          and (iii) not otherwise being in default under the credit facility.

     o    On August 9, 2005,  the Company  entered  into a waiver and  amendment
          that (i) waived the Company's  noncompliance  with the minimum  EBITDA
          covenant for the fourth  quarter  ended July 2, 2005,  (ii) allows for
          the payout of the deferred compensation  participant account balances,
          (iii) sets required  minimum  EBITDA levels for each quarter of fiscal
          year 2006,  (iv)  provides  that it will be an event of default if the
          Company  and GMAC do not enter into a written  amendment  establishing
          required  EBITDA  levels for the  remainder  of the term of the credit
          facility,  (v) provides for a $3.0 million  supplement  to the allowed
          asset-based  availability  that is available  through February of 2006
          (the Company  will owe a $30,000 fee for any  calendar  month in which
          the  Company  uses,  on  more  than  three  days,  all or part of this
          supplemental  amount)  and (vi)  increased  the  applicable  margin on
          Eurodollar loans from 3% to 4%.

                                       24
<PAGE>

o         On September 30, 2005, the Company entered into a further amendment to
          its  revolving   credit  agreement  with  GMAC.  The  credit  facility
          amendment includes a waiver with respect to the Company's  requirement
          to provide financial statements for the fiscal year ended July 2, 2005
          reported on without  qualification by the Company's independent public
          accounting  firm and sets new required  minimum EBITDA levels for each
          quarter of fiscal year 2006 and  increases  the  applicable  margin on
          Eurodollar loans from 4% to 5% and the applicable margin on prime rate
          loans  from 0.75% to 2.75%.  GMAC will  conduct  an  appraisal  of the
          Company's  inventory  within 45 days.  The Company  believes that GMAC
          will use this appraisal,  among other matters, to determine whether to
          extend the $3.0 million supplemental line beyond February 2006.

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

CROSS-DEFAULT  CLAUSE IN THE INDENTURE.  The indenture for the Company's  Senior
Notes provides that it is an event of default under the indenture if the Company
defaults in the payment of principal  or interest at final  stated  maturity (as
defined in the indenture),  or otherwise defaults resulting in acceleration,  of
other  indebtedness  aggregating  $5.0  million or more.  Either  the  indenture
trustee or holders of 25% or more in  principal  amount of the Senior  Notes may
accelerate  the Senior Notes in an event of default under the  indenture.  There
have been  several  defaults  under the  Company's  revolving  credit  facility;
however,  in each case to date,  the  lender has  either  waived the  default or
entered  into an amendment  to cure the  default.  If there is a future  default
under the Company's revolving credit facility,  which the Company cannot cure or
which the lender  declines to waive or cure by amendment,  holders of the Senior
Notes or the indenture trustee could,  under the circumstances  described in the
indenture, accelerate the Senior Notes.

NEED FOR REFINANCING BY 2007. Our revolving credit facility with GMAC matures in
March  2007,  and the  Senior  Notes  mature  in  August  2007.  We will need to
refinance  both of these  obligations  before  March 2007 in order to be able to
continue  operations.  We believe that any such refinancing will require,  among
other  things,   successful   implementation  of  our  2006  Business  Plan,  an
improvement  in demand for our products  and a  significant  improvement  in our
operating  results.  Particularly  in light of our results over the last several
fiscal  quarters  and the  continued  challenges  in our  industry,  there is no
assurance that these  necessary  conditions will occur in a timely fashion or at
all. If they do not occur, we will likely be required to explore alternatives to
a full refinancing of our Senior Notes, such as seeking  amendments to the terms
of our Senior  Notes,  offering  the Senior  Note  holders  the  opportunity  to
exchange  their  Senior  Notes  for  other  debt  and/or  equity  securities,  a
restructuring of our debt, selling or otherwise  disposing of our assets or some
other transaction or combination of these transactions.

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

Due to the closing of the yarn  manufacturing  operations at our Beattie  plant,
the Company no longer purchases cotton.  Instead,  it now enters into agreements
to purchase  all of its cotton yarn from third party  vendors.  At July 2, 2005,
minimum  payments  under  these  agreements  with   non-cancelable   terms  were
approximately $18 million.  These contracts are expected to satisfy a portion of
the Company's fiscal year 2006 cotton yarn requirements.

During 1998,  Delta Woodside  received  notices from the State of North Carolina
asserting  deficiencies  in state  corporate  income and franchise taxes for the
Company's  1994 - 1997 tax years.  The total  assessment  proposed  by the State
amounted to $1.5 million,  which  included  interest and penalties at that time.
The assessment was delayed pending an  administrative  review of the case by the

                                       25
<PAGE>

State.  In October 2002, the State proposed a settlement in which Delta Woodside
would  have paid  approximately  90% of the  assessed  amount  plus a portion of
certain  penalties for the Delta  Woodside's  tax years 1994 - 2000. In January,
2005, the North Carolina  Department of Revenue (the Department)  notified Delta
Woodside  that the  North  Carolina  Court of  Appeals  unanimously  upheld  the
Department's  assessment  of  corporate  income and  franchise  tax  against A&F
Trademark and eight other holding  company  subsidiaries  of the Limited Stores,
Inc. (the "Limited Stores Case"),  ruling that the trademark  holding  companies
were doing  business in the state of North  Carolina  for  corporate  income tax
purposes. As a result of the Limited Stores Case ruling, the Department proposed
a Voluntary  Compliance  Program (the Program)  whereby Delta Woodside could pay
the assessment  amount for the Company's 1994 - 1997 tax years plus interest for
a total of approximately $1.4 million.  Under the Program,  the Department would
waive all penalties  provided that Delta  Woodside paid the tax and interest and
waived all rights to a refund.  Delta Woodside rejected the Department's  offer.
The North  Carolina  Supreme Court has upheld the  Department's  position in the
Limited Stores Case, and in June 2005, the taxpayers in that case asked the U.S.
Supreme Court to review the decision.  The Department has indicated that, if the
U.S.  Supreme Court declines to review the Limited  Stores Case decision,  Delta
Woodside  must  either  pay  the   assessment  or  continue  its  appeal  in  an
administrative tax hearing before the North Carolina Secretary of Revenue. Delta
Woodside has determined to continue with its appeal due to  management's  belief
that the State's legal  position is in conflict with  established  principles of
federal   constitutional   law.  Delta  Woodside   considers  all  exposures  in
determining  probable  amounts of  payment  and has  determined  that any likely
settlement  will not exceed  established  reserves;  therefore,  any  payment in
settlement  of this  matter is not  expected  to result in a material  impact on
Delta Woodside's financial position or results of operations. Any payment would,
however, negatively impact Delta Woodside's liquidity.

OFF-BALANCE  SHEET  OBLIGATIONS.  The Company has no material  off-balance sheet
obligations.

CONTRACTUAL  OBLIGATIONS.  As of July  2,  2005,  the  Company  had  contractual
obligations  in  the  form  of  leases,  yarn  purchase  commitments,   deferred
compensation, debt, and related interest as follows (in thousands):
<TABLE>
<CAPTION>

                           PAYMENTS DUE BY FISCAL YEAR

            Contractual Obligations                2006       2007      2008      2009     2010      Thereafter       Total
                                                ------------------------------------------------------------------ -------------

<S>                                                <C>         <C>       <C>        <C>       <C>            <C>        <C>
 Yarn Purchase Commitments                         $17,900                                                              $17,900
 Deferred Compensation (1)                           4,178                                                                4,178
 Non-Cancelable Operating Leases                       279       $283      $290     $257      $147                        1,256
 Revolving Credit Facility                                     28,444                                                    28,444
 Interest Payments on Credit Facility (2)            1,772      1,329                                                     3,101
 Long-Term Debt                                                          30,941                                          30,941
 Interest Payments on Long-Term Debt                 2,978      2,978     1,489                                           7,445
                                                ----------- ---------- --------- -------- ------------- ---------- -------------
 Total                                             $27,107    $33,034   $32,720     $257      $147             $0       $93,265
                                                =========== ========== =========          ============= ========== =============
</TABLE>


(1)  Deferred  compensation is included in accrued  employee  compensation as of
     July 2, 2005.
(2)  Assumes  for the sake of  illustration  that the  outstanding  balance  and
     interest rate as of July 2, 2005 remain  constant to maturity of the credit
     facility.  Actual balances and interest rates fluctuate, so actual interest
     payments could be higher or lower.




                                       26
<PAGE>

CRITICAL ACCOUNTING POLICIES

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

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

In estimating  the future  undiscounted  cash flows  expected to be generated by
long-lived  assets to be held and used, major  assumptions and estimates include
expected  period of operation,  projected  future  product  pricing,  future raw
material costs and market supply and demand.  Changes in any of these  estimates
and assumptions  could have a material effect on the estimated future cash flows
to be  generated  by  the  Company's  assets.  With  the  deterioration  of  the
competitive  conditions  in the textile  industry,  we have had changes in these
estimates and assumptions  based on strategic  changes in  management's  plan of
operations,  including the planned closure and sale of five facilities:  Furman,
Catawba,  Estes, Pamplico and Delta 2. As management planned for closure of each
of these facilities,  it was necessary to first analyze held-for-use or held-for
sale  status of the assets and  project  future  cash flows  accordingly.  These
changes in assumptions have resulted in asset impairment  charges in each of the
last three fiscal years. These assumptions could change in the future. Estimates
of  future  cash  flows and  asset  selling  prices  are  inherently  uncertain.
Different estimates could result in materially different carrying amounts.

For example,  when  management  decided to close the Furman plant in fiscal year
2002, an $8.2 million  impairment  charge was  recognized  reducing the carrying
amount of this asset  from  $12.1  million  to $3.9  million.  When the  Company
entered into a contract to sell the Furman  Plant real  property in August 2004,
the sales price, net of selling costs, was approximately  $847,000 less than the
then carrying amount resulting in an additional  impairment  charge of $847,000.
As another  example,  when the Company  announced its 2005  Realignment  Plan in
November 2004, it estimated that its non-cash impairment charge would range from
$5.0 to $8.0 million.  The Company  revised this estimate upward in its 10-Q for
the first  quarter  of fiscal  year  2005;  however,  the  Company  subsequently
contracted to sell its facilities at more favorable  sales prices for certain of
its property, plant and equipment than it had initially expected, and the actual
impairment charge was $3.8 million.

In the fourth  quarter of fiscal year 2005,  the Company  recorded an impairment
charge of $4,727,000  to reduce the carrying  amount of the Pamplico and Delta 2
plants.  The valuation of these assets was derived from  management's  estimates
based on recent  experience  selling similar  assets.  There can be no assurance
that these numbers will  represent the final charges until the  consummation  of
the sales of these assets, which is expected to occur during fiscal year 2006.

Income  Taxes:  The  Company  accounts  for  income  taxes  under  the asset and
liability method in accordance with Statement of Financial  Accounting Standards
No. 109,  Accounting  for Income  Taxes  ("SFAS  109").  The Company  recognizes
deferred income taxes, net of any valuation allowances, for the estimated future
tax effects of temporary  differences  between the financial  statement carrying
amounts of existing assets and liabilities and their tax bases and net operating
loss and tax credit  carryforwards.  Deferred  tax assets  and  liabilities  are
measured  using  enacted tax rates  expected  to apply to taxable  income in the
years in which those  temporary  differences  are  expected to be  recovered  or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax
rates is recognized  in income in the period that  includes the enactment  date.
Changes in deferred tax assets and liabilities are recorded in the provision for
income taxes. As of July 3, 2004, the Company had approximately  $3.7 million in
net deferred tax  liabilities.  As of July 2, 2005, the Company did not have any
deferred tax assets, net of valuation allowances and deferred tax liabilities.

The Company  evaluates on a regular basis the  realizability of its deferred tax
assets for each  taxable  jurisdiction.  In making this  assessment,  management
considers  whether it is more  likely  than not that some  portion or all of its
deferred tax assets will be realized.  The ultimate  realization of deferred tax
assets is  dependent  on the  generation  of future  taxable  income  during the

                                       27
<PAGE>

periods in which  those  temporary  differences  become  deductible.  Management
considers all  available  evidence,  both positive and negative,  in making this
assessment.  The Company's  pre-tax  operating  losses in each of 2005, 2004 and
2003 represent negative evidence, which is difficult to overcome under SFAS 109,
with respect to the realizability of the Company's deferred tax assets.

To fully realize the deferred tax assets for net operating  losses,  the Company
will need to generate future taxable income of approximately  $22,000,000 in the
United States. The Company's federal net operating loss carryforwards  generally
expire in varying  intervals from 2013 to 2024,  while state loss  carryforwards
expire at various intervals  beginning in fiscal year 2006. At July 2, 2005, the
Company's  gross  deferred tax assets were  reduced by a valuation  allowance of
$7,717,000.   In  preparing  the  Company's  financial  statements,   management
determined  that it was more likely than not that the Company would be unable to
fully  utilize its net deferred tax assets before they expire.  Therefore,  SFAS
109  required  the  Company  to record a full  valuation  allowance  for its net
deferred tax assets.  The Company first recorded a full  valuation  allowance of
$7,717,000  in fiscal year 2005.  Primarily as a result of losses in fiscal year
2005  that  increased  the  Company's  net  operating  loss  carryforwards,  the
Company's net deferred tax assets  increased  during fiscal year 2005.  Prior to
Fiscal 2005, the Company had net deferred tax  liabilities and did not require a
valuation allowance.

If the body of evidence  considered by management in  determining  the valuation
allowance,  including the  generation of pre-tax  income,  were to improve,  the
Company  would  consider  reversal of the  valuation  allowance and record a net
deferred  tax  asset on its  balance  sheet,  resulting  in tax  benefit  on its
statement of operations for the period in which the reversal occurs.

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

Inventories:  Inventories  are  valued  at the  lower  of FIFO  cost or  market.
Management  regularly  reviews  inventory  quantities  on  hand  and  records  a
provision  for  off  quality,  excess  or  otherwise  obsolete  inventory  based
primarily on our historical selling prices for these products.  If actual market
conditions  are less favorable  than those  projected,  or if liquidation of the
inventory is more difficult than anticipated,  additional inventory  write-downs
may be required.


RECENT ACCOUNTING PRONOUNCEMENTS

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

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


In March 2005, the FASB issued FASB  Interpretation  No. 47, which clarifies the
term "asset retirement obligation" as used in SFAS No. 143 "Accounting for Asset
Retirement  Obligations." This guidance requires an entity to record a liability
for the fair value of a  conditional  asset  retirement  obligation  if the fair
value  of  the  liability  can  be  reasonably  estimated.   Since  this  is  an
interpretation,  the effective date is immediate.  This  interpretation does not
have an impact on the consolidated financial statements of the Company.


                                       28
<PAGE>

ENVIRONMENTAL MATTERS

The Company is subject to various federal,  state and local  environmental  laws
and regulations  concerning,  among other things,  wastewater discharges,  storm
water flows,  air  emissions,  ozone  depletion  and solid waste  disposal.  The
Company's plants generate very small  quantities of hazardous  waste,  which are
either  recycled  or disposed of  off-site.  Most of its plants are  required to
possess one or more discharge permits.

Two of the Company's  South Carolina  plants,  the Delta 2 and Delta 3 finishing
plants,  have  experienced  and are  experiencing  high  nitrate  levels  in the
groundwater at the two adjacent  sludge spray sites for these plants.  The South
Carolina Department of Health and Environmental Control ("DHEC") and the Company
have entered into a consent  agreement which requires the Company to monitor the
groundwater until drinking water standards are attained.

In addition,  the National  Pollutant  Discharge  Elimination  System  ("NPDES")
permit  issued  to the Delta 2 and Delta 3  finishing  plants on April 1,  2004,
contained a new parameter for zinc in discharges that the Company is supposed to
meet by April 1, 2006.  On March 1, 2005,  DHEC  allowed  the Company to convert
groundwater  recovery wells with  discharges that exceeded the zinc parameter to
monitoring  wells,  which  brought the Company  into  compliance  with the NPDES
permit's zinc discharge limits.

The Company  believes that it can satisfy its permit and DHEC's  requirements at
the Delta 2 and Delta 3  finishing  plants  without  material  additional  cost.
Although there is no assurance that the Company will be successful, and it could
face  administrative  penalties  if it is not, no accrual has been made for such
contingency,  and the Company does not currently believe that liability has been
incurred. Even if the Company does incur administrative  penalties or additional
costs,  it does not believe this matter will have a material  adverse  impact on
the Company's financial position.

On June 30, 2000, the Company sold its  Greensboro,  North Carolina plant to the
City of Greensboro.  The Company had been working with environmental consultants
in assessing  groundwater  contamination at this site. Because of these studies,
one-half of the proceeds from the sale of the plant, consisting of approximately
$400,000,  were placed in an interest  bearing  escrow account to cover expenses
related  to this  contamination.  As of the date of this  filing,  approximately
$305,000  remains in this escrow account.  The Company  recorded the sale net of
estimated  costs to remediate the  property.  The North  Carolina  Department of
Environment  and  Natural  Resources  is  requiring  the  Company  to  install a
monitoring  well on an adjacent  property  owner's land.  The adjacent  owner is
requesting that the Company  provide it with the sampling  results and indemnify
it from any contamination on its property.  If contamination is discovered,  the
Company  would likely face a claim for  damages.  Management  believes  that the
escrow is sufficient to cover any likely expenses  related to the remediation of
this  property,   and  consequently  has  not  recognized  a  liability  in  the
consolidated financial statements.

Delta  Woodside's  previously  owned  Nautilus  business  has  been  named  as a
"potentially  responsible  party" ("PRP") under the Comprehensive  Environmental
Response,  Compensation,  and  Liability  Act  ("CERCLA")  with respect to three
hazardous  waste sites in North  Carolina,  South Carolina and  Mississippi.  To
Delta  Woodside's  knowledge,  all of the  transactions  with  these  sites were
conducted by a corporation (the "Selling Corporation") whose assets were sold in
1990 pursuant to the terms of an order of the United States  Bankruptcy Court to
another  corporation,  the stock of which  was  subsequently  acquired  by Delta
Woodside in January 1993.

At the North Carolina site, the Selling  Corporation is listed as a "de Minimis"
party,  and at the South Carolina site, the Selling  Corporation has been listed
as an  "insolvent"  party and would appear to qualify as a "de  Minimis"  party.
Delta  Woodside's   believes  that  the  Selling   Corporation's  share  of  the
liabilities at either of these sites will be immaterial.

At the  Mississippi  ("ERS") site, the PRP group  completed the surface  removal
action and investigated soil and groundwater contamination, both at the site and
in the surrounding area. Delta Woodside's latest information is that the Selling
Corporation is ranked eleventh out of a total of over 300 PRPs in  contributions
of  material  to the  site,  and,  based  on  volume,  the  Selling  Corporation
contributed  approximately  3% of  the  site's  material.  To  Delta  Woodside's

                                       29
<PAGE>

knowledge, estimates of costs to clean-up the site were $4 million, and could be
higher.  Trichloromethane,  one  of the  substances  delivered  by  the  Selling
Corporation  to the site,  was  found in the  site's  groundwater  and at nearby
drinking water wells. The EPA referred the site to the Mississippi Department of
Environmental  Quality  ("MDEQ") in 1996. In August of 2001, MDEQ indicated to a
third party that it was still considering  action at the site. On June 16, 2004,
MDEQ  conducted a site  investigation  to determine if any homes around the site
still used  private  water  wells and located  three such homes.  On October 13,
2004, a contractor wrote to EPA that "residents downgradient of the ERS property
are currently being exposed to unacceptable  concentrations of contaminants ....
Therefore,  it is  recommended  that  EPA  take  immediate  action  to  mitigate
exposures to contaminated  groundwater by residents at [two addresses]....  [I]t
appears  that  groundwater  contamination  has  expanded  beyond  the  extent of
contamination previously identified in 1993.... Therefore, ... a complete survey
of domestic  wells in the vicinity of the ERS property  should be  conducted....
Finally,  if it is determined  that  additional  residents  are currently  being
exposed to unacceptable  concentrations of contaminants,  it is recommended that
EPA also take immediate  action to mitigate  exposure at these  residences."  On
October 18, 2004,  MDEQ notified the homeowners  that their drinking water wells
were contaminated.

Although no  assurance  can be  provided,  Delta  Woodside  believes  that it is
shielded  from  liability at these three sites by the order of the United States
Bankruptcy  Court pursuant to which the Selling  Corporation  sold its assets to
the  corporation  subsequently  acquired by Delta  Woodside.  Delta Woodside has
denied any responsibility at these three sites, has declined to participate as a
member of the respective  PRP groups,  and has not provided for any reserves for
costs or liabilities  attributable  to the Selling  Corporation.  No accrual has
been made for these Nautilus contingencies,  as we do not believe it is probable
that a liability has been incurred.

On January 10, 2000,  the North Carolina  Department of Environment  and Natural
Resources requested that the Company accept responsibility for investigating the
discharge of hazardous  substances  at a hazardous  waste site known as the Glen
Raven Mills Site, Kings Mountain,  North Carolina (the "Site"). A predecessor by
merger of the Company,  Park Yarn Mills Company,  Inc. ("Park Yarn"),  owned the
Site for approximately six (6) years, from 1977 to 1983. the Company is aware of
no evidence that Park Yarn  discharged  or deposited any hazardous  substance at
the Site or is otherwise a "responsible party" for the Site. Further,  Park Yarn
filed  bankruptcy  and was  discharged  in 1983.  Although no  assurance  can be
provided,  any  liability of Park Yarn for the Site may have been  discharged by
the bankruptcy order. Accordingly,  the Company has denied any responsibility at
the Site, declined to undertake any activities  concerning the Site, and has not
provided for any reserves for costs or liabilities attributable to Park Yarn. We
believe that any liability of Park Yarn for the Site may have been discharged by
the bankruptcy  order. No accrual has been made for this  contingency,  as we do
not believe that it is probable that a liability has been incurred.

Generally,  the  environmental  rules  applicable  to the Company  are  becoming
increasingly  stringent.  The Company incurs capital and other  expenditures  in
each  year  that are aimed at  achieving  compliance  with  current  and  future
environmental standards.

The Company does not expect that the amount of such  expenditures  in the future
will have a material  adverse effect on its  operations or financial  condition.
There can be no assurance,  however,  that future  changes in federal,  state or
local regulations,  interpretations of existing  regulations or the discovery of
currently unknown problems or conditions will not require substantial additional
expenditures. Similarly, the extent of the Company's liability, if any, for past
failures  to  comply  with  laws,  regulations  and  permits  applicable  to its
operations cannot be determined.




                                       30
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY RISK SENSITIVITY

In prior  years,  as a part of the  Company's  business of  converting  fiber to
finished fabric, the Company made raw cotton purchase commitments and then fixed
prices  with  cotton  merchants  who buy  from  producers  and  sell to  textile
manufacturers. As part of the 2005 Realignment Plan, the Company ceased internal
production  of cotton yarns and no longer  purchases  raw cotton In fiscal 2005,
the Company  began to enter into cotton yarn purchase  commitments  and then fix
prices with the yarn vendors. The Company may seek to fix prices up to 18 months
in advance of delivery.  Daily price  fluctuations  are minimal,  yet  long-term
trends in raw cotton price movement can result in unfavorable  pricing of cotton
yarn for the Company.  Before  fixing  prices,  the Company  looks at supply and
demand  fundamentals,  recent  price  trends and other  factors  that affect raw
cotton and cotton yarn  prices.  The Company  also reviews the backlog of orders
from  customers as well as the level of fixed price cotton yarn  commitments  in
the industry in general.  The Company  believes  that  currently its market risk
sensitivity with respect to cotton yarn is  qualitatively  similar to its market
risk  sensitivity  with respect to raw cotton before it discontinued  its cotton
yarn  manufacturing  operations  and that the  market  effects of changes in raw
cotton prices  generally "pass through" cotton yarn  manufacturers  to similarly
affect cotton yarn prices. At July 2, 2005, a 10% decline in the market price of
the cotton  component of yarn  covered by the  Company's  fixed price  contracts
would have a negative impact of  approximately  $0.9 million on the value of the
contracts.  At July 3, 2004, a 10% decline in the market price of the  Company's
fixed  price  contracts  for raw  cotton  would  have had a  negative  impact of
approximately  $0.7 million on the value of the  contracts.  The increase in the
potential  negative  impact  from  2004  to 2005 is due  principally  to  larger
commitment quantities in 2005.

INTEREST RATE SENSITIVITY

The  Company's  revolving  credit  facility with GMAC is sensitive to changes in
interest  rates.  Interest  is based on a spread  over LIBOR or a base rate.  An
interest  rate increase  would have a negative  impact to the extent the Company
borrows against the revolving credit facility.  The impact would be dependent on
the  level of  borrowings  incurred.  As of July 2,  2005,  an  increase  in the
interest rate of 1% would have a negative  impact of  approximately  $284,000 on
annual interest expense  (assuming for illustrative  purposes only that interest
rates and the  amount  outstanding  remain  constant  over  fiscal  year  2006).
Similarly, as of July 3, 2004, an increase in the interest rate of 1% would have
had a negative impact of approximately  $214,000 on annual interest expense. The
increase in the negative  impact is due to the higher level of borrowings  under
the revolving  credit  facility at the 2005 fiscal year end compared to the 2004
fiscal year end.

An interest rate change would not impact the  Company's  cash flows on the fixed
rate ten-year Senior Notes.





                                       31
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                                                 Page
                                                                                                -------
<S>                                                                                               <C>
Report of KPMG  LLP                                                                               22
Consolidated Balance Sheets as of July 2, 2005 and July 3, 2004                                   23
Consolidated Statements of Operations for the fiscal years ended July 2, 2005,
                      July 3, 2004 and June 28, 2003                                              25
Consolidated Statements of Shareholder's Equity for the fiscal years ended July 2, 2005,
                      July 3, 2004 and June 28, 2003                                              26
Consolidated Statements of Cash Flows for the fiscal years ended July 2, 2005,
                      July 3, 2004 and June 28, 2003                                              27
Notes to Consolidated Financial Statements                                                        28


</TABLE>























                                       32
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



THE BOARD OF DIRECTORS
DELTA MILLS, INC.:

We have audited the  accompanying  consolidated  balance  sheets of Delta Mills,
Inc.  and  subsidiaries  as of July 2,  2005 and July 3  2004 and the  related
consolidated statements of operations,  shareholders' equity, and cash flows for
each  of  the  years  in  the  three-year  period  ended  July  2,  2005.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audits 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 financial  position of Delta Mills, Inc.
and  subsidiaries  at July 2, 2005 and July 3,  2004,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  July 2, 2005,  in  conformity  with U.S.  generally  accepted  accounting
principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note C to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from  operations  and has  uncertainties  with  regard to its ability to operate
within the  covenants  and  availability  established  by its  revolving  credit
facility that raise  substantial  doubt about its ability to continue as a going
concern.  Management's  plans in regard to these  matters are also  described in
Note C. The  financial  statements  do not  include any  adjustments  that might
results from the outcome of this uncertainty.


                                    /s/ KPMG  LLP
                                    KPMG LLP



Greenville, South Carolina
August 10, 2005, except as to Note C, which is as of September 30, 2005


                                       33
<PAGE>

<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
Delta Mills, Inc.
(In Thousands)

                                                               July 2, 2005              July 3, 2004
                                                       ---------------------    ----------------------
ASSETS
CURRENT ASSETS
<S>                                                                    <C>                       <C>
  Cash and cash equivalents                                            $282                      $585
  Accounts receivable:
     Factor and other                                                37,039                    38,613
    Less allowances for returns                                         101                        20
                                                       ---------------------    ----------------------
                                                                     36,938                    38,593
  Inventories
     Finished goods                                                  10,004                     6,613
     Work in process                                                 19,507                    18,877
     Raw materials and supplies                                       5,797                     6,889
                                                       ---------------------    ----------------------
                                                                     35,308                    32,379

  Deferred income taxes                                               1,159                     1,113
  Other assets                                                        1,357                       302
                                                       ---------------------    ----------------------
                                TOTAL CURRENT                        75,044                    72,972
ASSETS
                                                       ---------------------    ----------------------

ASSETS HELD FOR SALE                                                  1,900                     2,495

PROPERTY, PLANT AND EQUIPMENT, at cost
     Land and land improvements                                       1,588                     1,587
     Buildings                                                       30,771                    31,006
     Machinery and equipment                                         85,304                   116,696
     Furniture, fixtures and office equipment                        11,141                    11,948
     Lease improvements                                                                         1,030
     Construction in progress                                            26                       765
                                                       ---------------------    ----------------------
                                                                    128,830                   163,032
     Less accumulated depreciation and amortization                  87,969                    99,907
                                                       ---------------------    ----------------------
                                                                     40,861                    63,125

DEFERRED LOAN COSTS
             less accumulated amortization of $5,856
             and $5,746 in 2005 and 2004 respectively                   237                       347

                                                       ---------------------    ----------------------
                                                                   $118,042                  $138,939
                                                       =====================    ======================
</TABLE>












                                       34
<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS
Delta Mills, Inc.
(In Thousands, except share amounts)


                                                               July 2, 2005            July 3, 2004
                                                          ------------------      ------------------

LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
<S>                                                                  <C>                     <C>
  Trade accounts payable                                             $8,349                  $7,879
  Revolving credit facility                                          28,444                  21,388
  Payable to Affiliates                                               3,780                   3,686
  Accrued employee compensation                                       4,937                   3,179
  Income taxes payable                                               13,695                  13,698
  Accrued restructuring expenses                                      1,054
  Accrued and sundry liabilities                                      4,815                   5,543
                                                          ------------------      ------------------
                    TOTAL CURRENT LIABILITIES                        65,074                  55,373

LONG-TERM DEBT                                                       30,941                  31,941
DEFERRED INCOME TAXES                                                 1,159                   4,853
DEFERRED COMPENSATION                                                                         2,334
SHAREHOLDER'S EQUITY
  Common Stock - par value $.01 a share -
    authorized  3,000  shares,  issued and
    outstanding 100 shares
    Additional paid-in capital                                       51,792                  51,792
    Accumulated deficit                                            (30,924)                 (7,348)
                                                          ------------------      ------------------
                                                                     20,868                  44,444
COMMITMENTS AND CONTINGENCIES
                                                          ------------------      ------------------
                                                                   $118,042                $138,939
                                                          ==================      ==================


</TABLE>



See notes to consolidated financial statements.


                                       35
<PAGE>

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills, Inc.
(In Thousands)

                                                                     Year Ended        Year Ended       Year Ended
                                                                    July 2, 2005      July 3, 2004     June 28, 2003
                                                                 ----------------  ---------------- -----------------

<S>                                                                     <C>               <C>               <C>
Net sales                                                               $157,863          $174,358          $177,193
Cost of goods sold                                                       159,320           166,314           160,243
                                                                 ----------------  ---------------- -----------------
GROSS PROFIT (LOSS)                                                      (1,457)             8,044            16,950
Selling, general and administrative expenses                               9,467            11,810            11,370
Impairment and restructuring expenses                                     12,077               847               398
Other income                                                                 428               766               582
                                                                 ----------------  ---------------- -----------------
  OPERATING PROFIT (LOSS)                                               (22,573)           (3,847)             5,764
Other (expense) income:
  Interest expense                                                       (5,246)           (4,783)           (5,275)
  Gain on extinguishment of debt                                             500                               3,643
                                                                 ----------------  ---------------- -----------------
                                                                         (4,746)           (4,783)           (1,632)
                                                                 ----------------  ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES                                       (27,319)           (8,630)             4,132
Income tax expense (benefit)                                             (3,743)           (3,164)             1,541
                                                                 ----------------  ---------------- -----------------

NET INCOME (LOSS)                                                      $(23,576)          $(5,466)            $2,591
                                                                 ================  ================ =================


</TABLE>



See notes to consolidated financial statements.










                                       36
<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
Delta Mills, Inc.
(In Thousands)


                                                              Additional                                   Total
                                      Common Stock             Paid-In                                   Shareholder's
                                Shares          Amount         Capital        Accumulated Deficit          Equity
                             --------------  -------------  ---------------  -----------------------  -----------------
<S>                                    <C>             <C>         <C>                     <C>                 <C>
Balance at June 29, 2002               100             $0          $51,792                 $(4,473)            $47,319
  Net Income                                                                                  2,591              2,591
                             --------------  -------------  ---------------  -----------------------  -----------------
Balance at June 28, 2003               100             $0          $51,792                 $(1,882)            $49,910
  Net Loss                                                                                  (5,466)            (5,466)
                             --------------  -------------  ---------------  -----------------------  -----------------
Balance at July 3, 2004                100             $0          $51,792                 $(7,348)            $44,444
  Net Loss                                                                                 (23,576)           (23,576)
                             --------------  -------------  ---------------  -----------------------  -----------------
Balance at July 2, 2005                100             $0          $51,792                $(30,924)            $20,868
                             ==============  =============  ===============  =======================  =================


</TABLE>









See notes to consolidated financial statements.






                                       37
<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Mills, Inc.
(In Thousands)
                                                                                  Year Ended      Year Ended       Year Ended
                                                                                 July 2, 2005    July 3, 2004    June 28, 2003
                                                                                 --------------  --------------  ---------------
OPERATING ACTIVITIES
<S>                                                                                  <C>              <C>                <C>
  Net income (loss)                                                                  $(23,576)        $(5,466)           $2,591
  Adjustments to reconcile net income (loss) to net
     cash provided by (used in) operating activities:
     Depreciation                                                                        7,721           8,830            8,979
     Amortization                                                                          110             112              135
     Decrease in deferred loan costs                                                                                        175
     Discount to face value on repurchase of bonds                                       (500)                          (3,818)
     Impairment and restructuring expenses                                              12,077             847              398
     Change in deferred income taxes                                                   (3,740)         (3,164)          (1,089)
     Gains on disposition of property
        and equipment                                                                    (245)           (253)            (433)
     Changes in operating assets and liabilities:
        Accounts receivable                                                              1,655           5,855            5,407
        Inventories                                                                    (2,929)          11,756         (11,388)
        Other current assets                                                           (1,056)             218            (495)
        Deferred compensation                                                            (488)         (2,920)              306
        Accounts payable and accrued expenses                                          (2,698)         (7,997)            3,732
                                                                                 --------------  --------------  ---------------
          NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                         (13,669)           7,818            4,500
                                                                                 --------------  --------------  ---------------

INVESTING ACTIVITIES Property, plant and equipment:
     Purchases                                                                           (391)         (5,146)          (6,442)
     Proceeds of dispositions                                                            7,202             861              807
                                                                                 --------------  --------------  ---------------
           NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                           6,811         (4,285)          (5,635)
                                                                                 --------------  --------------  ---------------

FINANCING ACTIVITIES
  Proceeds from revolving lines of credit                                              173,364         176,501          195,461
  Repayments on revolving lines of credit                                            (166,309)       (179,969)        (181,970)
  Repurchase and retirement of long-term debt                                            (500)                         (11,888)
                                                                                 --------------  --------------  ---------------
          NET CASH PROVIDED BY (USED IN) FINANCING                                       6,555         (3,468)            1,603
ACTIVITIES
                                                                                 --------------  --------------  ---------------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                         (303)              65              468

Cash and cash equivalents at beginning of year                                             585             520               52
                                                                                 --------------  --------------  ---------------
         CASH AND CASH EQUIVALENTS AT END OF YEAR                                         $282            $585             $520
                                                                                 ==============  ==============  ===============


</TABLE>





See notes to consolidated financial statements.



                                       38
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS:  The Company manufactures woven fabrics for sale to its
customers.

BASIS  OF  PRESENTATION:  The  consolidated  financial  statements  include  the
accounts of Delta Mills, Inc. and Delta Mills Marketing, Inc. (collectively, the
"Company").  All significant  intercompany  balances and transactions  have been
eliminated in consolidation.  Delta Mills, Inc. and Delta Mills Marketing,  Inc.
are  wholly-owned  subsidiaries  of  Delta  Woodside  Industries,  Inc.  ("Delta
Woodside" or "DWI").

CASH  EQUIVALENTS:  The Company  considers  all highly liquid  investments  with
initial   maturities  of  three  months  or  less  when  purchased  to  be  cash
equivalents.

INVENTORIES:  Inventories  are stated at the lower of cost or market  determined
using the first-in, first-out (FIFO) method.

PROPERTY,  PLANT AND EQUIPMENT:  Property,  plant and equipment is stated on the
basis of cost.  Depreciation  is  computed  using the  straight-line  method for
financial  reporting based on estimated  useful lives of three to 32 years,  but
predominantly over seven to 14 years.

DEFERRED LOAN COSTS:  Deferred  loan costs are being  amortized over the life of
the related debt, which is primarily 10 years.

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

REVENUE RECOGNITION: Sales are recorded upon shipment or designation of specific
goods for later  shipment  at the  customers'  request,  due to  changes  in the
customers'  manufacturing  schedules.  The  Company  records  a  portion  of its
revenues  on a bill and hold  basis,  invoicing  goods that have been  produced,
packaged and made ready for shipment.  The goods are effectively segregated from
inventory  which is available  for sale.  The risk of ownership of the goods has
passed to the customer, and remittance terms are consistent with all other sales
by the Company.

The Company's  sales  agreements  do not give the buyer a right of return.  When
returns and allowances are authorized by the Company, returns and allowances are
accounted for as a reduction to sales, and sales are reported net of returns and
allowances.  Allowances  are charged  against sales at the full dollar amount of
the allowance.

INCOME TAXES: Deferred income taxes, net of the established valuation allowance,
are recognized  for the tax  consequences  of temporary  differences by applying
enacted  statutory tax rates  applicable to future years to differences  between
the financial  statement  carrying  amounts and the tax bases of existing assets
and  liabilities  and net  operating  losses and tax credit  carryforwards.  The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.

ENVIRONMENTAL   COSTS:   Environmental   compliance  cost,   including   ongoing
maintenance,   monitoring   and  similar   costs,   are  expensed  as  incurred.
Environmental  remediation costs are accrued,  except to the extent costs can be
capitalized,  when remedial efforts are probable, and the cost can be reasonably
estimated.


                                       39
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

COTTON  PROCUREMENT:  In prior  years,  as a part of the  Company's  business of
converting  fiber to  finished  fabric,  the  Company  made raw cotton  purchase
commitments  and then fixed prices with cotton  merchants who buy from producers
and sell to textile  manufacturers.  As part of the 2005  Realignment  Plan, the
Company ceased internal  production of cotton yarns and no longer  purchases raw
cotton.  The Company now makes cotton yarn purchase  commitments  and then fixes
prices with the yarn  vendors.  These  contracts are settled by delivery and are
not used for  trading  purposes.  The  Company  commits  to  fixed  prices  on a
percentage of its cotton yarn  requirements up to eighteen months in the future.
If market prices for yarn fall below the Company's  committed fixed costs and it
is  estimated  that the costs of yarn are not  recoverable  in  future  sales of
finished goods, the differential is charged to income at that time.


STOCK OPTIONS:  The Company  participates in the Delta Woodside  Industries Inc.
Stock  Option Plan,  the 2004 Stock Award Plan,  and the  Incentive  Stock Award
Plan. The Company applies the intrinsic value-based method of accounting for its
stock option plans, in accordance  with the provisions of Accounting  Principles
Board (APB) Opinion No. 25,  "Accounting  for Stock Issued to  Employees,"  (APB
25), and related  interpretations.  Under this method,  compensation expense for
stock  options is recorded  on the date of the grant only if the current  market
price of the underlying stock exceeded the exercise price.  Compensation expense
for the Company's incentive stock award programs is approximately the same under
APB 25 as it would under SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS No. 123). If the Company had determined compensation expense at fair value
for stock options, as under SFAS No. 123, the Company's net loss would have been
as follows:
<TABLE>
<CAPTION>

(In thousands)                                              Year Ended               Year Ended              Year Ended
                                                            July 2, 2005             July 3, 2004            June 28, 2003
                                                            -----------------        ------------------      -----------------

<S>                                                      <C>                      <C>                     <C>
Net income (loss), as reported                           $          (23,576)      $            (5,466)    $             2,591

Add stock based employee compensation expense
included in reported net income (loss), net of tax                        43                        25                    174

Less total stock based compensation expense
   determined under fair value based method, net
   of related tax effects                                               (43)                      (25)                  (496)
                                                            -----------------        ------------------      -----------------

Pro forma net income (loss)                              $                        $                       $             2,269
                                                                    (23,576)                   (5,466)
                                                            =================        ==================      =================

</TABLE>


ESTIMATES:  The  preparation  of financial  statements in  conformity  with U.S.
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.


                                       40
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

FAIR  VALUE OF  FINANCIAL  INSTRUMENTS:  The  carrying  values of the  Company's
financial  instruments,  except for those disclosed in Note C, approximate their
estimated  fair  values  due  to  either  the  short-term   maturities  of  such
instruments or minor interest rate differentials.

FISCAL YEAR:  The Company's  operations  are based on a fifty-two or fifty-three
week fiscal year ending on the  Saturday  closest to June 30.  Fiscal years 2005
and 2003 each consisted of 52 weeks. Fiscal year 2004 consisted of 53 weeks.


NOTE B--ACCOUNTS RECEIVABLE AND MAJOR CUSTOMERS

The Company  assigns a substantial  portion of its trade accounts  receivable to
GMAC Commercial Credit LLC (the Factor) under a factor agreement. The assignment
of these  receivables  is primarily  without  recourse,  provided  that customer
orders are  approved by the Factor  prior to shipment of goods,  up to a maximum
for each  individual  account.  The factor  agreement  contains two programs for
assignment of receivables:  a collection program and a purchased program.  Under
the  collection  program,  accounts are assigned to the factor for ledgering and
collection.  Under the purchased program, accounts are assigned to the factor as
the sole owner thereof.  The majority of the factored receivables fall under the
purchased  program.  Under both the  collection and the purchased  program,  the
amounts due from the factor are the same as the  amounts  due from the  customer
trade  accounts.  There are no advances  from the Factor  against  the  assigned
receivables.  All factoring fees are recorded on the Company's books as incurred
as a part of selling, general and administrative expenses.

The  Company's  accounts  receivable  are due from many  companies  that produce
apparel  products.  Credit risk for the receivables  generally  remains with the
Factor under the terms of the factoring agreement.

For fiscal year 2005, the Company had one customer,  Levi Strauss, that exceeded
10% of consolidated  net sales. The Company's net sales to this customer totaled
$22 million,  or approximately 14%, of net sales in fiscal year 2005. For fiscal
year 2004, the Company had two customers,  V.F.  Corporation,  and Levi Strauss,
that exceeded 10% of  consolidated  net sales.  The Company's net sales to these
customers totaled $45 million, or approximately 26%, of net sales in fiscal year
2004.  For fiscal  year 2003,  the Company had three  customers,  Levi  Strauss,
Haggar Apparel and V.F. Corporation,  net sales to each of which exceeded 10% of
consolidated net sales.  The Company's net sales to these customers  totaled $71
million,  or approximately  40%, of net sales in fiscal year 2003. The foregoing
amounts include sales directly to subcontractors of the named apparel companies.
In addition,  during fiscal years 2005,  2004,  and 2003,  net sales of military
fabrics to apparel  customers  accounted  for  approximately  47%, 44%, and 33%,
respectively,  of the  Company's  total  net  sales.  The  loss of any of  these
accounts could have a material adverse effect on the results of the Company.


NOTE C--LONG-TERM DEBT AND LEASES

LONG-TERM DEBT AND REVOLVING  CREDIT  FACILITY:  On August 25, 1997, the Company
issued $150 million of unsecured  ten-year  Senior Notes at an interest  rate of
9.625%. These notes will mature in August 2007. At July 2, 2005, the outstanding
balance of the notes was $30,941,000, a reduction of $1,000,000 from the balance
at July 3, 2004.  This  reduction  is the result of a purchase by the Company of
$1,000,000  face amount of its 9.625% Senior Notes for $500,000 during the third
quarter of fiscal year 2005.

The Company has a revolving  credit facility with GMAC with a term lasting until
March 2007.  Borrowings  under this credit facility are limited to the lesser of
(i) $38.0 million less the  aggregate  amount of undrawn  outstanding  letter of
credit  or  (ii) a  "formula  amount"  equal  to (A)  90% of  eligible  accounts
receivable plus 50% of eligible  inventories of Delta Mills minus (B) the sum of
$7.0 million plus the aggregate amount of undrawn  outstanding letters of credit
plus certain reserves. Through February 2006, the formula amount is increased by
a $3.0 million "supplemental amount" as described more fully in the fifth bullet
point below. The facility is secured by the accounts receivable, inventories and
capital stock of the Company.  The average  interest rate on the credit facility
was 6.24% at July 2, 2005 and is based on a spread over  either  LIBOR or a base
rate.  Borrowings under this facility were $28.4 million and $21.4 million as of
July 2, 2005 and July 3, 2004,  respectively.  As of July 2, 2005,  the revolver
availability was approximately $7.3 million,  net of the $7 million availability
reduction  established  by the  credit  facility,  and the  aggregate  amount of
undrawn  letters of credit was  approximately  $1.3  million.  The Company has a
revolving  credit  facility  with GMAC with a term  lasting  until  March  2007.
Borrowings  under this credit facility are based primarily on eligible  accounts
receivable  and  inventories  of the  Company.  The  facility  is secured by the
accounts  receivable,  inventories and capital stock of the Company. The average
interest rate on the credit facility was 6.24% at July 2, 2005 and is based on a
spread over either LIBOR or a base rate.  Borrowings  under this  facility  were
$28.4  million  and  $21.4  million  as of  July  2,  2005  and  July  3,  2004,
respectively. As of July 2,

                                       41
<PAGE>

2005, the revolver  availability was approximately  $7.3 million,  net of the $7
million  availability  reduction  established  by the credit  facility,  and the
aggregate amount of undrawn letters of credit was approximately $1.3 million.

At the  beginning  of fiscal year 2005,  the GMAC credit  facility had a maximum
loan amount of $50 million and had financial covenants that required the Company
to comply with a maximum  leverage  ratio and a minimum  fixed  charge  coverage
ratio.  Since the  beginning of fiscal year 2005,  the credit  facility has been
amended, or Delta Mills has received waivers, as described below.

     o    On August 18,  2004,  the credit  facility  was  amended to reduce the
          maximum  availability to $38 million,  and the maximum  leverage ratio
          and fixed charge coverage ratio covenants were replaced with a minimum
          Earnings  Before  Interest,   Taxes,   Depreciation  and  Amortization
          (EBITDA) covenant. The new covenant set required minimum EBITDA levels
          for each  quarter  of  fiscal  year  2005 and  provided  that it would
          constitute an event of default if Delta Mills and its lender failed to
          agree by the end of fiscal year 2005 to minimum  EBITDA levels for the
          remainder of the term of the revolving credit facility.

     o    On October 18,  2004,  GMAC agreed to an  amendment  to the  financial
          covenants in the credit facility to reduce the required minimum EBITDA
          levels  for each  quarter  of fiscal  year 2005.  This  amendment  was
          intended  to allow the  Company  to remain in  compliance  with  these
          covenants while executing its 2005 Realignment Plan.

     o    On May 12, 2005,  GMAC granted a waiver with respect to a violation of
          the EBITDA  covenant as of the end of the third quarter of fiscal year
          2005.

     o    On May 17,  2005,  GMAC  granted a  prospective  waiver of the  EBITDA
          covenant for the end of fiscal year 2005  conditioned upon the Company
          (i)  achieving  trailing  twelve  months EBITDA as of fiscal year 2005
          year-end of negative $700,000,  (ii) maintaining undrawn  availability
          of at least $2.5 million for thirty consecutive days immediately prior
          to and  immediately  subsequent  to the  date  on  which  the  Company
          delivered to GMAC its draft financial  statements for fiscal year 2005
          and (iii) not otherwise being in default under the credit facility.

     o    On August 9, 2005,  the Company  entered  into a waiver and  amendment
          that (i) waived the Company's  noncompliance  with the minimum  EBITDA
          covenant for the fourth  quarter  ended July 2, 2005,  (ii) allows for
          the payout of the deferred compensation  participant account balances,
          (iii) sets required  minimum  EBITDA levels for each quarter of fiscal
          year 2006,  (iv)  provides  that it will be an event of default if the
          Company  and GMAC do not enter into a written  amendment  establishing
          required  EBITDA  levels for the  remainder  of the term of the credit
          facility,  (v) provides for a $3.0 million  supplement  to the allowed
          asset-based  availability  that is available  through February of 2006
          (the Company  will owe a $30,000 fee for any  calendar  month in which
          the  Company  uses,  on  more  than  three  days,  all or part of this
          supplemental  amount)  and (vi)  increased  the  applicable  margin on
          Eurodollar loans from 3% to 4%.

     o    On September 30, 2005, the Company entered into a further amendment to
          its  revolving   credit  agreement  with  GMAC.  The  credit  facility
          amendment includes a waiver with respect to the Company's  requirement
          to provide financial statements for the fiscal year ended July 2, 2005
          reported on without  qualification by the Company's  independent pubic
          accounting  firm and sets new required  minimum EBITDA levels for each
          quarter of fiscal year 2006 and  increases  the  applicable  margin on
          Eurodollar loans from 4% to 5% and the applicable margin on prime rate
          loans  from 0.75% to 2.75%.  GMAC will  require  an  appraisal  of the
          Company's  inventory  within 45 days.  The Company  believes that GMAC
          will use this appraisal,  among other matters, to determine whether to
          extend the $3.0 million supplemental line beyond February 2006.

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

The  indenture for the  Company's  Senior Notes  provides that it is an event of
default under the indenture if the Company  defaults in the payment of principal
or interest at final stated maturity (as defined in the indenture), or otherwise
defaults  resulting in  acceleration,  of other  indebtedness  aggregating  $5.0
million  or more.  Either  the  indenture  trustee  or holders of 25% or more in
principal amount of the Senior Notes may accelerate the Senior Notes in an event
of default  under the  indenture.  There have been  several  defaults  under the
Company's  revolving credit facility;  however, in each case to date, the lender
has either  waived the default or entered into an amendment to cure the default.
If there is a future  default under the  Company's  revolving  credit  facility,

                                       42
<PAGE>

which the Company  cannot cure or which the lender  declines to waive or cure by
amendment, holders of the Senior Notes or the indenture trustee could, under the
circumstances described in the indenture, accelerate the Senior Notes.

LIQUIDITY:  Our  consolidated  financial  statements  have been  prepared on the
assumption  that  the  Company  will  continue  as a going  concern.  Management
believes that,  with the Company's entry into the August 2005 and September 2005
amendments to the GMAC revolving credit  agreement,  and based on projections of
what  management   considers  to  be  the  most  probable   outcomes  of  future
uncertainties,  the cash flows  generated by the Company's  operations and funds
available under Delta Mills' credit facility should be sufficient to service its
debt, to satisfy its  day-to-day  working  capital needs and to fund its planned
capital  expenditures  for the next twelve months.  This belief by management is
dependent on the validity of several  assumptions  that  underpin the  Company's
internal forecasts. These assumptions include:

     1.   Government business:
          o    revenues  remaining at the fiscal year 2005 level for fiscal year
               2006 and beyond
          o    minimum   disruption  from  the  problems   associated  with  the
               transition to the new uniform as discussed in "-- Our Outlook for
               Fiscal Year 2006"
          o    U.S.  government  funding for military uniforms is not materially
               delayed  or  decreased  as a result of  delays  in the  budgeting
               process or the costs of  recovering  from recent  hurricanes  and
               other demands on government resources
          o    a moderation in the rate of increase in energy and chemical costs
          o    continued credit approval of the government  business's  customer
               base by our factor GMAC
     2.   Commercial cotton business:
          o    maintaining  fiscal year 2005 revenue  levels in fiscal year 2006
               and beyond
          o    improved  margins based on the  continuation of current trends in
               sales prices and raw material costs
          o    a moderation in the rate of increase in energy and chemical costs
          o    continued  credit  approval of the commercial  cotton  business's
               customer base by our factor GMAC
     3.   Exit of the synthetics business:
          o    an orderly  production  flow to complete all  commitments  to our
               synthetics customers
          o    minimum negative run-out costs
          o    minimum inventory write-downs
          o    the collection of  substantially  all of the associated  accounts
               receivable
     4.   Payment terms  required by our principal  vendors and suppliers do not
          become materially more stringent.

The Company has suffered  recurring  losses from  operations and there can be no
assurance that the Company's actual results will match its internal forecasts of
the most  probable  outcomes.  Adverse  effects from the risks  described  under
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations  - In  Conclusion"  or other  unforeseen  events or risks could cause
future circumstances to differ significantly from these forecasts. These adverse
changes in circumstances  could cause the Company's needs for cash to exceed the
availability  of  credit  under  Delta  Mills'   revolving   credit   agreement,
particularly  following  the  February 28, 2006  expiration  of the $3.0 million
supplemental credit line provided by GMAC. In addition,  because the fiscal year
2006  quarterly  trailing  twelve month EBITDA  covenants in our GMAC  revolving
credit  agreement  provide  minimal  tolerance  for any  shortfall  in operating
results, we may be required to seek additional waivers or amendments to our GMAC
revolving  credit  agreement  if our  operating  results  do not  improve  as we
anticipate.  GMAC has consistently  granted waivers or amendments in the past to
address our financial  difficulties,  and the bulk of its collateral is accounts
receivable,  so we believe that GMAC is well-collateralized.  However, we cannot
guarantee that we would be able to obtain any necessary waivers or amendments in
the future.  If we become unable to borrow under our revolving  credit  facility
because of  insufficient  availability  or an unwaived  default,  our ability to
continue operations would likely be in substantial doubt.

LEASES:  The Company  leases  office space in New York City and  Greenville,  SC
under  non-cancelable  operating  leases with terms  expiring from 2008 to 2010.
Rent expense relating to all non-cancelable  operating leases of the Company was
approximately  $406,000,  $466,000 and $435,000 for fiscal years 2005,  2004 and
2003, respectively.

Total interest  expense  incurred by the Company was $5,246,000,  $4,784,000 and
$5,275,000 for fiscal years 2005, 2004, and 2003,  respectively,  net of $46,000
and $0.4  million  of  capitalized  interest  in  fiscal  years  2004 and  2003,
respectively.  No interest was  capitalized in fiscal year 2005.  Total interest
paid during fiscal years 2005,  2004,  and 2003 was  $5,136,000,  $4,781,000 and
$5,778,000, respectively.

                                       43
<PAGE>

At July 2, 2005,  the carrying  value of the Senior Notes was  $30,941,000.  The
last period of meaningful trading activity for these notes was the Dutch Auction
in 2003, when the Company  repurchased a principal amount of $12,798,000 at $790
per $1,000 principal amount.  Management  believes that the notes are not widely
held and there is very little if any trading  activity.  Recent  indications  of
interest  in the  marketplace  have ranged in value from $500 to $800 per $1,000
principal amount.

The fair value of the revolving credit facility  approximates its carrying value
as of July 2, 2005 due to the variable interest rate provision of the facility.

Aggregate principal  maturities of all long-term debt and minimum payments under
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>

                                               Long-Term Debt            Operating Leases
        Fiscal Year
        <S>                 <C>                  <C>                             <C>
                            2006                                                 $279,000
                            2007                                                  283,000
                            2008                  $30,941,000                     290,000
                            2009                                                  257,000
                            2010                                                  147,000
                                       -----------------------      ----------------------
        Total                                     $30,941,000                  $1,256,000
                                       =======================      ======================
</TABLE>


NOTE D--EMPLOYEE BENEFIT PLANS

The Company  participates  in the Delta Woodside  Industries,  Inc. 40l(k) Plan.
During  fiscal  years 2005,  2004 and 2003,  the Company  contributed  $234,000,
$556,000  and  $617,000,  respectively,  to the  401(k)  plan to match  employee
contributions.   Effective   January  1,  2005,   the  Company   suspended   its
contributions to the 401(k) plan.

The Company participated in a Deferred  Compensation Plan, managed by DWI, which
permitted certain management employees to defer a portion of their compensation.
Deferred   compensation   accounts   were   credited   with  interest  and  were
distributable after retirement, disability or employment termination. As of July
2, 2005 and July 3, 2004, the Company's liability was $4,178,000 and $4,665,000,
respectively.  The ability of  participants  to add to their accounts under this
plan was effectively discontinued pursuant to an amendment described below.

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

On August 8, 2005,  the Board  approved  termination  of the Company's  deferred
compensation  plan and payout of participant plan balances  (approximately  $3.4
million in the  aggregate at August 8, 2005).  The  termination  of the deferred
compensation  plan by the Board  (with  Messrs.  W.F.  Garrett  and J.P.  Danahy
abstaining) followed the recommendation of the Board's  Compensation  Committee.

                                       44
<PAGE>

By terminating the deferred  compensation plan and paying the respective account
balances to each  participant,  the Company expects to retain certain of its key
managers  who are  essential  to the  future of the  Company.  The  Compensation
Committee and the Board decided to terminate the deferred compensation plan as a
measure to retain key employees who, in light of the general difficulties in the
textile industry,  have expressed a desire to diversify their retirement assets.
Since fiscal year 2004,  certain  employees  who  voluntarily  terminated  their
employment with the Company stated that a primary reason for their departure was
that the deferred compensation plan had not been earlier terminated, which early
termination  would have  allowed  them to receive  their  deferred  compensation
accounts  without  leaving  the  Company's  employ.   The  Company   conditioned
termination  of the  deferred  compensation  plan with  respect to any  employee
participant  on the  agreement of that  participant  to remain an employee for a
specified  period  (eighteen  months in the case of the  executive  officers and
certain other employees).  By August 29, 2005, all employee participants entered
into such agreements and received distributions of their account balances, which
completed the  termination  of the plan. As a result of the  termination  of the
deferred  compensation  plan and a distribution  in connection  with  employment
termination  of  approximately   $700,000  to  one  employee  who  resigned  his
employment  after the end of fiscal  year 2005 but before  the board  decided to
terminate the plan,  approximately $4.2 million, which represented the aggregate
participant plan balances,  is classified on the  consolidated  balance sheet at
July 2, 2005 as accrued employee compensation in current liabilities.

The Company also participates in the Delta Woodside Industries,  Inc. 2004 Stock
Plan,  Incentive  Stock  Award Plan,  and 2000 Stock  Option  Plan.  The Company
recognized  expense  of  $43,000  and  $66,000  in fiscal  years  2005 and 2004,
respectively,  for  awards  granted  pursuant  to the  2004  Stock  Award  Plan.
Including  associated tax  assistance,  under the Incentive Stock Award Plan the
Company also  recognized  expense  (income) of ($26,000) and $280,000 for fiscal
years 2004 and 2003,  respectively.  The Company has adopted the disclosure only
provisions of Statement of Financial  Accounting  Standards No. 123, "Accounting
for Stock-Based Compensation." See Note A for further discussion.


NOTE E--AFFILIATED PARTY TRANSACTIONS

The Company is the only operating  subsidiary of DWI. Actual  corporate  service
costs for management,  treasury, auditing, and shareholder relations are charged
to the Company as  incurred.  As of July 2, 2005,  the balance of the payable to
affiliate was $3.8 million,  as compared to a balance of $3.7 million as of July
3, 2004.  The increase of $0.1 million in fiscal year 2005 was  attributable  to
corporate  service  costs  charged  to the  Company.  Receivable  or  payable to
affiliates  bears no interest and includes amounts payable to or receivable from
DWI for current activity as described.


























                                       45
<PAGE>

NOTE F--INCOME TAXES

The Company  reports  federal  income  taxes in the  consolidated  return of its
parent, DWI, and had a taxable loss of approximately $10.9 million which will be
reported in the fiscal year 2005 consolidated Federal income tax return with its
parent,  DWI.  The  consolidated  tax  group  had  a  regular  taxable  loss  of
approximately   $16.1   million  and   alternative   minimum   taxable  loss  of
approximately $19.3 million. The Federal income tax obligation or refund that is
allocated to the Company is  determined  as if the Company was filing a separate
Federal income tax return.  The Company's Federal tax liability or receivable is
paid to or is a receivable from the parent company.

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the  financial  statement  amounts and amounts  reported  for income tax
purposes.  The  Company's  gross  deferred  tax assets are reduced by  valuation
allowances of $7,717,000 at July 2, 2005.  The ultimate  realization of deferred
tax assets is dependent  upon  generation  of future  taxable  income during the
periods in which those temporary  differences become  deductible.  The Company's
management  believes  that it is more likely  than not that the Company  will be
unable to fully  utilize  its net  deferred  tax assets  before they expire and,
consequently,  has recognized a full valuation allowance on its net deferred tax
assets at July 2, 2005.

Significant  components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>

                                                           2005                     2004
Assets:
<S>                                                     <C>                      <C>
Deferred compensation                                   $  1,728,000             $  1,926,000
Accrued and sundry liabilities                              1,193,000                1,157,000
Net operating loss carryforwards                           9,077,000                 3,704,000
Accrued restructuring expenses                                 387,000
Inventories                                                 418,000
Other                                                         38,000                     8,000
                                                       ------------------       --------------------
Gross deferred tax assets                                  12,841,000                6,795,000
Valuation allowance                                        (7,717,000)
                                                       ------------------       --------------------
Net Deferred tax assets                                     5,124,000                6,795,000
                                                       ------------------       --------------------

Liabilities:
Depreciation                                                5,124,000              10,483,000
Inventories                                                                             52,000
                                                       ------------------       --------------------
Deferred tax liabilities                                    5,124,000              10,535,000
                                                       ------------------       --------------------
      Net deferred tax liabilities                      $           0             $(3,740,000)
                                                       ==================       ====================
</TABLE>


Significant  components of the provision for income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>

                                                             2005                     2004                     2003
                                               -------------------     --------------------     --------------------
Current:
<S>                                                 <C>                        <C>                       <C>
     Federal income taxes                                                                                $2,230,000
     State income taxes                                                                                     400,000
                                               -------------------     --------------------     --------------------
           Total current                                                                                  2,630,000
Deferred:
      Federal income taxes                           $(3,411,000)             $(2,939,000)                (804,000)
      State income taxes                                (332,000)                (225,000)                (285,000)
                                               -------------------     --------------------     --------------------
           Total deferred                             (3,743,000)              (3,164,000)              (1,089,000)

                                               -------------------     --------------------     --------------------
Total income tax expense (benefit)                   $(3,743,000)             $(3,164,000)               $1,541,000
                                               ===================     ====================     ====================
</TABLE>


                                       46
<PAGE>

NOTE F--INCOME TAXES - CONTINUED

The  reconciliation  of income tax  expense  (benefit)  computed  at the Federal
statutory tax rates is as follows:
<TABLE>
<CAPTION>

                                                                 2005                 2004                   2003
                                                      ------------------   --------------------   ------     -----


<S>                                                   <C>                  <C>                    <C>
Income tax expense (benefit) at statutory rates       $       (9,562,000)  $       (3,021,000)    $      1,446,000
State tax expense (benefit), net of federal benefit             (525,000)            (146,000)              75,000
Valuation allowance adjustments                                7,717,000
Other                                                         (1,373,000)               3,000               20,000
                                                      -------------------  -------------------    -----------------
                                                      $       (3,743,000)  $       (3,164,000)    $      1,541,000
                                                      ===================  ===================    =================
</TABLE>

The Company did not make any tax payments  during  fiscal  years 2004,  2003 and
2002, respectively.

NOTE G--SUMMARIZED FINANCIAL INFORMATION OF SUBSIDIARY

Delta Mills  Marketing,  Inc.  (the  "Guarantor")  does not  comprise a material
portion of the Company's  assets or operations.  The Guarantor is a wholly-owned
subsidiary  of the Company  and has fully and  unconditionally  guaranteed  (the
"Guarantee") the Company's payment of principal,  premium,  interest and certain
liquidated  damages,  if any, on the Company's  Senior Notes (the "Notes").  The
Guarantor's liability under the Guarantee is limited to such amount, the payment
of which would not have left the guarantor  insolvent or with unreasonably small
capital at the time its Guarantee  was entered into,  after giving effect to the
incurrence of existing indebtedness immediately prior to such time.

The Guarantor is the sole subsidiary of the Company.  All future subsidiaries of
the Company  will  provide  guarantees  identical  to the one  described  in the
preceding paragraph unless such future subsidiaries are Receivables Subsidiaries
(as defined in the indenture relating to the Notes). Such additional  guarantees
will be joint and several with the Guarantee of the Guarantor.

The Company has not presented separate financial statements or other disclosures
concerning the Guarantor  because  Company  management has determined  that such
information is not material to investors.

Summarized financial information for the Guarantor is as follows (in thousands):

                                       JULY 2, 2005            JULY 3, 2004
                                       ------------            ------------

Current assets                            $ 105                    $ 83
Noncurrent assets                                                     13
Current Liabilities                       2,128                    2,275
Noncurrent liabilities                     434                       697
Stockholder's deficit                    (2,457)                  (2,876)

Summarized   results  of  operations  for  the  Guarantor  are  as  follows  (in
thousands):

<TABLE>
<CAPTION>
                                                                        Year Ended
                                                    --------------------------------------------------
                                                    July 2, 2005       July 3, 2004     June 28, 2003
                                                    ------------       ------------     -------------
<S>                                                    <C>                <C>               <C>
Net sales -intercompany commissions                    $3,549             $3,909            $3,986
Cost and expenses                                       3,130              3,952             4,033
Net income (loss)                                         419                (43)              (47)
</TABLE>


                                       47
<PAGE>

NOTE H--COMMITMENTS AND CONTINGENCIES

Due to the closing of the yarn  manufacturing  operations at our Beattie  plant,
the Company no longer purchases cotton.  Instead,  it now enters into agreements
to purchase  all of its cotton yarn from third party  vendors.  At July 2, 2005,
minimum  payments  under  these  agreements  with   non-cancelable   terms  were
approximately $18 million.

Two of the Company's  South Carolina  plants,  the Delta 2 and Delta 3 finishing
plants,  have  experienced  and are  experiencing  high  nitrate  levels  in the
groundwater at the two adjacent  sludge spray sites for these plants.  The South
Carolina Department of Health and Environmental Control ("DHEC") and the Company
have  entered a consent  agreement  which  requires  the  Company to monitor the
groundwater until drinking water standards are attained.

In addition,  the National  Pollutant  Discharge  Elimination  System  ("NPDES")
permit  issued  to the Delta 2 and Delta 3  finishing  plants on April 1,  2004,
contained a new parameter for zinc in discharges that the Company is supposed to
meet by April 1, 2006.  On March 1, 2005,  DHEC  allowed  the Company to convert
groundwater  recovery wells with  discharges that exceeded the zinc parameter to
monitoring  wells,  which  brought the Company  into  compliance  with the NPDES
permit's zinc discharge limits.

The Company  believes that it can satisfy its permit and DHEC's  requirements at
the Delta 2 and Delta 3  finishing  plants  without  material  additional  cost.
Although there is no assurance that the Company will be successful, and it could
face  administrative  penalties  if it is not, no accrual has been made for such
contingency,  and the Company does not currently believe that liability has been
incurred. Even if the Company does incur administrative  penalties or additional
costs,  it does not believe this matter will have a material  adverse  impact on
the Company's financial position.

On June 30, 2000, the Company sold its  Greensboro,  North Carolina plant to the
City of Greensboro.  The Company had been working with environmental consultants
in assessing  groundwater  contamination at this site. Because of these studies,
one-half of the proceeds from the sale of the plant, consisting of approximately
$400,000,  were placed in an interest  bearing  escrow account to cover expenses
related  to this  contamination.  As of the date of this  filing,  approximately
$305,000  remains in this escrow account.  The Company  recorded the sale net of
estimated  costs to remediate the  property.  The North  Carolina  Department of
Environment  and  Natural  Resources  is  requiring  the  Company  to  install a
monitoring  well on an adjacent  property  owner's land.  The adjacent  owner is
requesting that the Company  provide it with the sampling  results and indemnify
it from any contamination on its property.  If contamination is discovered,  the
Company  would likely face a claim for  damages.  Management  believes  that the
escrow is sufficient to cover any expenses  related to the  remediation  of this
property,  and  consequently  has not recognized a liability in the consolidated
financial statements.

Delta  Woodside's  previously  owned  Nautilus  business  has  been  named  as a
"potentially  responsible  party" ("PRP") under the Comprehensive  Environmental
Response,  Compensation,  and  Liability  Act  ("CERCLA")  with respect to three
hazardous  waste sites in North  Carolina,  South Carolina and  Mississippi.  To
Delta  Woodside's  knowledge,  all of the  transactions  with  these  sites were
conducted by a corporation (the "Selling Corporation") whose assets were sold in
1990 pursuant to the terms of an order of the United States  Bankruptcy Court to
another  corporation,  the stock of which  was  subsequently  acquired  by Delta
Woodside in January 1993.

At the North Carolina site, the Selling  Corporation is listed as a "de Minimis"
party,  and at the South Carolina site, the Selling  Corporation has been listed
as an  "insolvent"  party and would appear to qualify as a "de  Minimis"  party.
Delta  Woodside's   believes  that  the  Selling   Corporation's  share  of  the
liabilities at either of these sites will be immaterial.

At the  Mississippi  ("ERS") site, the PRP group  completed the surface  removal
action and investigated soil and groundwater contamination, both at the site and
in the surrounding area. Delta Woodside's latest information is that the Selling
Corporation is ranked eleventh out of a total of over 300 PRPs in  contributions
of  material  to the  site,  and,  based  on  volume,  the  Selling  Corporation
contributed  approximately  3% of  the  site's  material.  To  Delta  Woodside's
knowledge, estimates of costs to clean-up the site were $4 million, and could be
higher.  Trichloromethane,  one  of the  substances  delivered  by  the  Selling
Corporation  to the site,  was  found in the  site's  groundwater  and at nearby
drinking water wells. The EPA referred the site to the Mississippi Department of
Environmental  Quality  ("MDEQ") in 1996. In August of 2001, MDEQ indicated to a
third party that it was still considering  action at the site. On June 16, 2004,
MDEQ  conducted a site  investigation  to determine if any homes around the site
still used  private  water  wells and located  three such homes.  On October 13,
2004, a contractor wrote to EPA that "residents downgradient of the ERS property
are currently being exposed to unacceptable  concentrations of contaminants ....
Therefore,  it is  recommended  that  EPA  take  immediate  action  to  mitigate
exposures to contaminated  groundwater by residents at [two addresses]....  [I]t
appears  that  groundwater  contamination  has  expanded  beyond  the  extent of
contamination previously identified in 1993.... Therefore, ... a complete survey

                                       48
<PAGE>

of domestic  wells in the vicinity of the ERS property  should be  conducted....
Finally,  if it is determined  that  additional  residents  are currently  being
exposed to unacceptable  concentrations of contaminants,  it is recommended that
EPA also take immediate  action to mitigate  exposure at these  residences."  On
October 18, 2004,  MDEQ notified the homeowners  that their drinking water wells
were contaminated.

Although no  assurance  can be  provided,  Delta  Woodside  believes  that it is
shielded  from  liability at these three sites by the order of the United States
Bankruptcy  Court pursuant to which the Selling  Corporation  sold its assets to
the  corporation  subsequently  acquired by Delta  Woodside.  Delta Woodside has
denied any responsibility at these three sites, has declined to participate as a
member of the respective  PRP groups,  and has not provided for any reserves for
costs or liabilities  attributable  to the Selling  Corporation.  No accrual has
been made for these Nautilus contingencies,  as we do not believe it is probable
that a liability has been incurred.

On January 10, 2000,  the North Carolina  Department of Environment  and Natural
Resources requested that the Company accept responsibility for investigating the
discharge of hazardous  substances  at a hazardous  waste site known as the Glen
Raven Mills Site, Kings Mountain,  North Carolina (the "Site"). A predecessor by
merger of the Company,  Park Yarn Mills Company,  Inc. ("Park Yarn"),  owned the
Site for approximately six (6) years, from 1977 to 1983. the Company is aware of
no evidence that Park Yarn  discharged  or deposited any hazardous  substance at
the Site or is otherwise a "responsible party" for the Site. Further,  Park Yarn
filed  bankruptcy  and was  discharged  in 1983.  Although no  assurance  can be
provided,  any  liability of Park Yarn for the Site may have been  discharged by
the bankruptcy order. Accordingly,  the Company has denied any responsibility at
the Site, declined to undertake any activities  concerning the Site, and has not
provided for any reserves for costs or liabilities attributable to Park Yarn. We
believe any liability of Park Yarn for the Site may have been  discharged by the
bankruptcy order. No accrual has been made for these contingencies, as we do not
believe it is probable that a liability has been incurred.

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

From time to time the Company and its subsidiaries are defendants in other legal
actions  involving  claims  arising in the normal course of business,  including
product  liability  claims.  The  Company  believes  that,  as a result of legal
defenses,  insurance  arrangements and  indemnification  provisions with parties
believed to be financially capable, none of these actions should have a material
effect on its results of operations or financial condition.

                                       49
<PAGE>

Substantial  portions of the Company's fixed assets are the subject of a "Fee in
Lieu of Tax" or "FILOT"  agreement with three Counties within the State of South
Carolina.  These  agreements are intended to permit counties to attract business
investment  by  offering  property  tax  incentives.  In  accordance  with South
Carolina law, the Company  entered into a  sale-leaseback  agreement  with these
Counties and acquired an Industrial Development Revenue Bond. The arrangement is
structured so that the Company's lease payments to the Counties equal and offset
the Counties'  bond  payments to the Company.  The Bond is  non-recourse  to the
Counties,  the Company's  lease payments are pledged to secure  repayment of the
Bond,   and  the  lease  and  Bond  provide  for  the  legal  right  of  offset.
Consequently,  the FILOT arrangement is not reflected in the Company's financial
statements.  The agreements have a maximum  expiration  date of 2017.  Under the
terms of the agreements,  the Company must annually submit information regarding
the  value of the  machinery  and  equipment  in  service  in each  county.  The
respective  Counties  will then accept a fee in lieu of property  tax based upon
predetermined  millage  rates.  These costs are included in cost of sales in the
Company's consolidated financial statements. If the Company had not entered into
this transaction,  property tax payments would have been higher. The Company can
reacquire  such  property and  terminate  the agreement at a nominal price of $1
and,  accordingly,  the subject  property is included in  property,  plant,  and
equipment in the consolidated  balance sheet. If the Company elects to reacquire
the subject property prior to the expiration of the arrangement,  it may also be
required to make certain adjusting property tax payments.


NOTE I--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited  quarterly results of operations for
the years ended July 2, 2005 and July 3, 2004:
<TABLE>
<CAPTION>

 2005 QUARTER ENDED
 (IN THOUSANDS)                                            OCTOBER 2          JANUARY 1           APRIL 2           JULY 2
                                                           ---------          ---------           -------           ------

<S>                                                          <C>                <C>              <C>               <C>
 Net sales                                                   $35,440            $39,310          $40,064           $43,049

 Gross profit (loss)                                             309            (1,425)            (128)             (213)

 Net income (loss)                                            (2,322)          (10,224)          (3,055)           (7,925)

 2004 QUARTER ENDED
 (IN THOUSANDS)                                           SEPTEMBER 27       DECEMBER 27         MARCH 27           JULY 3
                                                          ------------       -----------         --------           ------

 Net sales                                                    $42,581          $48,500          $37,919           $45,358

 Gross profit                                                     619            4,413            1,677             1,335

 Net loss                                                      (1,977)             287          (1,238)            (2,538)
</TABLE>

The Company recorded  restructuring and impairment  charges of $7,350,000 in the
quarter ended January 1, 2005 and $4,727,000 in the quarter ended July 2, 2005.

                                       50
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE J--GAIN ON EXTINGUISHMENT OF DEBT

During fiscal year 2005,  the Company  purchased  $1,000,000  face amount of its
9.625% Senior Notes for $500,000. The Company recognized a gain of $500,000 as a
result  of this  purchase.  During  fiscal  year  2003,  the  Company  purchased
$15,878,000  face amount of its 9.625%  Senior Notes for  $12,060,000  including
expenses of approximately  $172,000. The Company recognized a gain of $3,643,000
after the  write-off  of deferred  loan costs of  $175,000.  The Company did not
purchase any of its 9.625% Senior Notes during  fiscal year 2004,  and there was
no gain on extinguishment of debt in fiscal year 2004.

NOTE K-- RESTRUCTURING AND IMPAIRMENT CHARGES

2005 REALIGNMENT PLAN

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

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

         During the six months  ended July 2, 2005,  the  Company  closed  sales
         under  certain  of the  agreements  for  cash  proceeds  of  $7,202,000
         resulting in a decrease in assets held for sale to  $1,900,000  at July
         2, 2005 and a gain on the disposal of assets, primarily at the Pamplico
         facility,  of $245,000.  The remaining  assets held for sale at July 2,
         2005 include the Furman plant,  for which the Company had an asset sale
         agreement that subsequently  closed in the first quarter of fiscal year
         2006 yielding sale proceeds of $1.9 million.

         Restructuring
         The remainder of the charge recognized by the Company during the second
         quarter of fiscal year 2005 was for restructuring costs, which included
         employee  termination  costs principally for separation pay and benefit
         costs for the approximately 400 terminated employees,  as well as other
         expenses which included primarily estimated contract termination costs.
         These expenses are expected to be paid through March 2006.

A roll forward of the Company's liability for restructuring is as follows:
<TABLE>
<CAPTION>

                                                         Employee
                                                       Termination                 Other
                                                          Costs                  Expenses                  Total
                                                    -------------------      ------------------      -------------------
<S>                                                        <C>                       <C>                    <C>
Restructuring charge recognized during
   the quarter ended January 1, 2005                       $ 3,154,000               $ 350,000              $ 3,504,000

Less payments made during fiscal 2005                        2,161,000                 289,000                2,450,000

                                                    -------------------      ------------------      -------------------
Restructuring liability at July 2, 2005                      $ 993,000                $ 61,000              $ 1,054,000
                                                    ===================      ==================      ===================
</TABLE>


                                       51
<PAGE>

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

2006 BUSINESS PLAN

On August 8,  2005,  Delta  Woodside's  and the  Company's  Boards of  Directors
approved the  implementation  of a comprehensive  fiscal year 2006 Business Plan
(the "2006  Plan").  The plan was  announced on August 11, 2005 and includes the
Company's  exit from the  synthetics  business.  The Company  will close the two
plants dedicated to the synthetics  product lines: The Pamplico weaving facility
in Pamplico,  SC and the Delta #2 finishing facility located in Wallace, SC. The
Company  expects  to  complete  the  closing of these  facilities  in the second
quarter of fiscal year 2006 as  production  requirements  dictate.  The closings
will affect approximately 365 employees company-wide. The Company recorded asset
impairment  charges of $4,727,000,  on a pretax basis,  associated with its 2006
Plan in the  fourth  quarter of fiscal  year  2005.  In  addition,  the  Company
recorded  in cost of goods  sold in the  fourth  quarter  of fiscal  year 2005 a
charge of $717,000 for the write-down of certain supply  inventories  associated
with the impaired assets.

         Asset Impairment
         In the fourth  quarter  of fiscal  year 2005,  the  Company  recorded a
         $4,727,000  non-cash asset impairment charge to write down assets to be
         disposed of,  including real estate and machinery,  to their  estimated
         fair value, less selling costs, of $3,260,000.  The impaired assets did
         not meet the  criteria  under SFAS No. 144 to be  classified  as assets
         held for sale and are  classified  as held for use in the  consolidated
         financial  statements as of July 2, 2005. The valuation of these assets
         was derived  from  management's  estimates  based on recent  experience
         selling similar assets in association with the 2005 Realignment Plan.

         Restructuring
         In the  fiscal  year 2006 first  quarter  ending  October 1, 2005,  the
         Company  expects to record pre-tax cash  restructuring  charges ranging
         from  $3.0 to  $4.0  million,  which  are  primarily  wage  and  salary
         severance  benefit  costs.  No  restructuring  charges were recorded in
         fiscal year 2005 relating to the 2006 Plan.

OTHER RESTRUCTURING AND IMPAIRMENT
During the year ended June 28, 2003, the Company recorded a restructuring charge
of $0.4 million on a pre-tax  basis  associated  with the closing of its Catawba
facility  as  announced  on  March  5,  2003.  The  charge  reflected   employee
termination costs of approximately $354,000.  Production at the Catawba facility
ceased in April of 2003,  and the Company  completed the process of  liquidating
the assets associated with this facility during fiscal year 2005.

During the year ended June 29,  2002,  the Company  recorded an  impairment  and
restructuring  charge of $8.7 million,  on a pretax basis,  associated  with the
closing  of the  Furman  Plant as  announced  on August 22,  2001.  The  Company
recorded  an $8.2  million  non-cash  asset  impairment  charge to  reflect  the
property and  equipment at the Furman Plant at its  estimated  fair value,  less
selling costs.  The carrying amount of these assets was reduced to approximately
$3,923,000.  The balance of the charge was approximately $0.5 million of accrued
expenses for  involuntary  termination  costs  associated with the 122 employees
terminated as a result of the plant closing.  Production at the Furman  facility
ceased in October of 2001.  On August 24, 2004,  Delta Mills  contracted to sell
the Furman Plant real property for expected net proceeds of  approximately  $1.8
million.  The  sales  price,  net of  selling  costs,  under  the  contract  was
approximately  $847,000  less  than  the  carrying  amount  of the  asset on the
Company's  books.  Based on this  information  relative to the fair value of the
property  at  July 3,  2004,  the  Company  recorded  an  impairment  charge  of
approximately  $847,000 for the fourth quarter of fiscal year 2004. The sale was
subject to closing  conditions,  and the  prospective  purchaser  terminated the
proposed sale as permitted by the contract. The Company completed the process of
liquidating the assets associated with this facility subsequent to July 2, 2005.

During  fiscal year 2004 and fiscal year 2003,  the Company  paid  $342,000  and
$196,000,  respectively, in restructuring costs and had a remaining liability of
$0  and  $342,000  as  of  July  3,  2004  and  June  28,  2003,   respectively.
Restructuring  activity  for fiscal  year 2005 is  presented  in the table above
under "2005 Realignment Plan".

As of July 2,  2005  and July 3,  2004 the  Company  had $1.9  million  and $2.5
million, respectively, in assets held for sale.




                                       52
<PAGE>

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

Not applicable.


ITEM 9A.  CONTROLS AND PROCEDURES

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

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


ITEM 9B.  OTHER INFORMATION

Not applicable.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Company has  adopted a code of ethics  that  applies to its chief  executive
officer, its chief financial officer and its controller.  A copy of this code of
ethics is posted on the Delta  Woodside web site at  www.deltawoodside.com.  The
Company will  disclose any  amendment to, or any waiver of, any provision of its
code of  ethics  that is  required  to be  included  in the  code by Item 406 of
Regulation S-K promulgated under the Securities Exchange Act that applies to the
Company's chief  executive  officer,  chief  financial  officer or controller by
posting such information on this web site.

The other information  required by this item is omitted pursuant to instructions
I (2)(c) to Form 10-K.


ITEM 11.  EXECUTIVE COMPENSATION

Omitted pursuant to instructions I (2)(c) to Form 10-K.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Omitted pursuant to instructions I (2)(c) to Form 10-K.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Omitted pursuant to instructions I (2)(c) to Form 10-K.


                                       53
<PAGE>

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The table below and the  accompanying  footnotes  set forth the fees paid by the
Company to its independent  registered public accounting firm, KPMG LLP, for the
periods and in the categories indicated.

AUDIT FEES AND SERVICES             FISCAL 2005          FISCAL 2004

Audit Fees                             $172,000            $174,700
Audit Related Fees                        9,500  (1)          9,000 (1)
Tax Fees                                      0  (2)         36,800 (2)
All Other Fees                                0                   0
                                 ---------------      --------------
TOTAL FEES FOR ALL SERVICES            $181,500            $220,500
                                 ===============      ==============


1)   Audit  related fees for both fiscal  years 2005 and 2004  consisted of fees
     for employee  benefit plan audits and responses to inquiries  that arise in
     the  normal  course  of  business   related  to  accounting   and  auditing
     pronouncements and SEC rules and regulations.
2)   Tax  fees for  both  fiscal  years  2005  and  2004  consisted  of fees for
     preparation of returns and  estimates,  responding to  miscellaneous  state
     notices,  research of tax matters,  and  preparation  of prior year amended
     returns.

All audit related services, tax services and other services were pre-approved by
the Audit Committee, which concluded that the provision of such services by KPMG
LLP was  compatible  with the  maintenance  of that firm's  independence  in the
conduct of its auditing functions.  The Audit Committee's Audit Policies provide
for pre-approval of all audit,  audit-related and tax services and, in addition,
individual engagements must be separately approved. These policies authorize the
Audit Committee to delegate to one or more of its members pre-approval authority
with respect to permitted services.




















                                       54
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

         (a) (1) and (2)  Financial Statements and Financial Statement Schedules

The following  consolidated  financial statements of Delta Mills, Inc. as of the
Year ended July 3, 2004 are included in item 8.

         Consolidated balance sheets--July 2, 2005 and July 3, 2004.

         Consolidated  statements of operations--Years  ended July 2, 2005, July
3, 2004, and June 28, 2003.

         Consolidated  statements of shareholder's  equity-- Years ended July 2,
2005, July 3, 2004, and June 28, 2003.

         Consolidated  statements  of cash  flows--  Years  ended July 2,  2005,
July 3, 2004, and June 28, 2003.

         Notes to consolidated financial statements.

The following  consolidated  financial  statement schedules of Delta Mills, Inc.
are included in Item 15a (2):

         Schedule II -- Valuation and qualifying accounts

All other  schedules for which  provision is made in the  applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related  instructions  or are  inapplicable,  and  therefore  have been omitted.
Columns  omitted from schedules  filed have been omitted because the information
is not applicable.



         (3) Listing of Exhibits:


3.1       Restated  and Amended  Certificate  of  Incorporation  of Delta Mills,
          Inc.:  Incorporated  by reference  to Exhibit 3.1 to the  Registration
          Statement on Form S-4 of the Company and Delta Mills Marketing,  Inc.,
          File No. 333-37617 (the "S-4").
3.1.1     Certificate of Amendment of Restated  Certificate of  Incorporation of
          Delta Mills, Inc. dated June 27, 2005.
3.2       Bylaws of Delta Mills, Inc.:  Incorporated by reference to Exhibit 3.2
          to the S-4.
4.1       See Exhibits 3.1 and 3.2.
4.2       Indenture,  dated as of August  25,  1997,  by and among the  Company,
          Delta Mills Marketing, Inc. and The Bank of New York, as Trustee, with
          respect to the Company's Series A and Series B 9-5/8% Senior Notes due
          2007,  $150,000,000 in aggregate principal amount, together with forms
          of certain related instruments, agreements and documents: Incorporated
          by reference to Exhibit  4.2.6 to the Current  Report on Form 8-K/A of
          Delta  Woodside  Industries,  Inc. with the date of September 25, 1997
          (the "DWI 8-K/A").*
4.2.1     Amendment No. 1 dated as of December 30, 1997 to Indenture dated as of
          August 25, 1997 with respect to Delta Mills, Inc.$150,000,000 Series A
          and Series B 9 5/8% Senior Notes due 2007,  with The Bank of New York,
          as Trustee.
4.3.1     Revolving Credit and Security  Agreement,  dated as of March 31, 2000,
          between  GMAC  Commercial  Credit LLC as agent and  lender,  and Delta
          Mills, Inc. as borrower:  Incorporated by reference to Exhibit 99.1 to
          Delta Woodside Industries, Inc. Current Report on Form 8-K dated March
          31, 2000 and filed with the  Securities  and  Exchange  Commission  on
          April 13, 2000
4.3.1.1   Letter,  dated July 28, 2000,  amending  Revolving Credit and Security
          Agreement:  Incorporated  by reference to Exhibit 4.3.1.1 to Form 10-K
          of Delta Woodside Industries,  Inc. for the fiscal year ended June 30,
          2001*
4.3.1.2   Consent and Amendment to Credit Agreement and Other  Documents,  dated
          as of October 5, 2001: Incorporated by reference to Exhibit 4.3.1.2 to
          the  Company's  Quarterly  Report on Form 10-Q for the fiscal  quarter
          ended  September 29, 2001 and filed with the  Securities  and Exchange
          Commission on November 9, 2001.

                                       55
<PAGE>

4.3.1.3   Consent and Amendment to Credit Agreement and Other  Documents,  dated
          as of March 31,2002:  Incorporated  by reference to Exhibit 4.3.1.3 to
          the  Company's  Quarterly  Report on Form 10-Q for the fiscal  quarter
          ended  March  30,  2002 and filed  with the  Securities  and  Exchange
          Commission on May 14, 2002.
4.3.1.4   Consent and Amendment to Credit Agreement and Other  Documents,  dated
          as of March 20,2003:  Incorporated  by reference to Exhibit 4.3.1.4 to
          the  Company's  Quarterly  Report on Form 10-Q for the fiscal  quarter
          ended  March  29,  2003 and filed  with the  Securities  and  Exchange
          Commission on May 13, 2003.
4.3.1.5   Waiver dated  September 27, 2003 by GMAC Commercial  Credit,  LLC as a
          lender  and  agent:  Incorporated  by  reference  to  Exhibit 4 to the
          Company's  Quarterly  Report on Form 10-Q for the fiscal quarter ended
          September 30, 2003.
4.3.1.6   Consent under Credit  Agreement and Other  Documents dated February 4,
          2004:  Incorporated  by reference to Exhibit  4.3.1.5 to the Company's
          Quarterly  Report on Form 10-Q for the fiscal  quarter ended  December
          27, 2003.
4.3.1.7   Waiver and  Amendment to Credit  Agreement and Other  Documents  dated
          April 19, 2004:  Incorporated  by reference to Exhibit  4.3.1.6 to the
          Company's  Quarterly  Report on Form 10-Q for the fiscal quarter ended
          March 27, 2004.
4.3.1.8   Amendment  to Credit  Agreement  dated  August 18, 2004 by and between
          Delta Mills,  Inc. and GMAC Commercial  Finance,  LLC, as a lender and
          agent:  Incorporated  by reference to Exhibit  4.3.1.8 to Form 10-K of
          Delta Mills, Inc. for the fiscal year ended July 3, 2004.
4.3.1.9   Amendment to Credit  Agreement  dated  October 18, 2004 by and between
          Delta Mills,  Inc. and GMAC Commercial  Finance,  LLC, as a lender and
          agent:  Incorporated  by reference to Exhibit  4.3.1.9 to Form 10-K of
          Delta Mils, Inc. for the fiscal year ended July 3, 2004.
4.3.1.10  Waiver dated May 12, 2005 from GMAC  Commercial  Finance LLC as lender
          and agent to Delta Mills,  Inc.:  Incorporated by reference to Exhibit
          4.3.10 to the Company's  Quarterly  Report on Form 10-Q for the fiscal
          quarter ended April 2, 2005.
4.3.1.11  Waiver dated May 17, 2005 from GMAC  Commercial  Finance LLC as lender
          and agent to Delta Mills,  Inc. : Incorporated by reference to Exhibit
          4.3.11 to the Company's  Quarterly  Report on Form 10-Q for the fiscal
          quarter ended April 2, 2005.
4.3.1.12  Waiver and  Amendments  dated August 9, 2005 to  Revolving  Credit and
          Security Agreement dated March 31, 2000 by and between GMAC Commercial
          Finance LLC, as lender and agent, and Delta Mills, Inc.:  Incorporated
          by reference to Exhibit  4.3.1.12 to the Company's  Current  Report on
          Form 8-K dated August 8, 2005.
4.3.1.13  Waiver and Amendments dated September 30, 2005 to Revolving Credit and
          Security Agreement dated March 31, 2000 by and between GMAC Commercial
          Finance LLC, as lender and agent, and Delta Mills, Inc.
4.3.2     Guarantee,  dated as of March 31, 2000, of Delta Mills Marketing, Inc.
          in favor of GMAC  Commercial  Credit  LLC as  agent:  Incorporated  by
          reference to Exhibit 99.2 to the Company's  Current Report on Form 8-K
          dated  March  31,  2000 and filed  with the  Securities  and  Exchange
          Commission on April 13, 2000.
4.3.3     General Security Agreement,  dated as of March 31, 2000, between Delta
          Mills  Marketing,  Inc.  and  GMAC  Commercial  Credit  LLC as  agent:
          Incorporated  by reference  to Exhibit  99.3 to the Current  Report on
          Form 8-K of Delta Woodside  Industries,  Inc. dated March 31, 2000 and
          filed with the Securities and Exchange Commission on April 13, 2000.
4.3.4     Stock Pledge and Security  Agreement,  dated as of March 31, 2000,  by
          Alchem Capital  Corporation in favor of GMAC Commercial  Credit LLC as
          agent:  Incorporated  by reference  to Exhibit  99.4 to the  Company's
          Current  Report on Form 8-K dated  March 31,  2000 and filed  with the
          Securities and Exchange Commission on April 13, 2000.
4.3.5     Stock Pledge and Security  Agreement,  dated as of March 31, 2000,  by
          Delta  Mills,  Inc. in favor of GMAC  Commercial  Credit LLC as agent:
          Incorporated  by reference to Exhibit  99.5 to the  Company's  Current
          Report on Form 8-K dated March 31, 2000 and filed with the  Securities
          and Exchange Commission on April 13, 2000
4.3.6     Stock Pledge and  Security  Agreement,  dated as of May 11,  2000,  by
          Delta Woodside Industries, Inc. in favor of GMAC Commercial Credit LLC
          as agent:  Incorporated  by reference to Exhibit 4.3.6 to the DWI 2000
          10-K.*

                                       56
<PAGE>

4.4       The Company hereby agrees to furnish to the Commission upon request of
          the Commission a copy of any instrument with respect to long-term debt
          not being  registered in a principal amount less than 10% of the total
          assets of the Company and its subsidiaries on a consolidated basis.
10.1**    Delta Woodside Deferred  Compensation  Plan for Key Managers,  Amended
          and Restated  Effective  June 30, 2000:  Incorporated  by reference to
          Exhibit 10.2 to the Delta  Woodside  Industries,  Inc.  Report on Form
          10-K  dated July 1, 2000 and filed with the  Securities  and  Exchange
          Commission on September 29, 2000. *
10.1.1    First  Amendment  dated  December  23,  2003 to Delta  Woodside  Group
          Deferred  Compensation  Plan for Key  Managers  Amended  and  Restated
          Effective June 30, 2000:  Incorporated  by reference to Exhibit to the
          Company's  Quarterly  Report on Form 10-Q for the fiscal quarter ended
          December 27, 2003.
10.1.2    Second  Amendment  dated  January  16,  2004 to Delta  Woodside  Group
          Deferred  Compensation  Plan for Key  Managers  Amended  and  Restated
          Effective June 30, 2000:  Incorporated  by reference to Exhibit 10.1.2
          to the Company's  Quarterly Report on Form 10-Q for the fiscal quarter
          ended December 27, 2003.
10.1.3**  Form of Termination  of Deferred  Compensation  Arrangement  Agreement
          between Delta Woodside  Industries,  Inc.,  Delta Mills,  Inc.,  Delta
          Mills  Marketing,  Inc.  and  Employee  Participants  in the  Deferred
          Compensation Plan including  schedule of terms for executive  officers
          of the Company.
10.3.1**  Delta Woodside Industries, Inc. Stock Option Plan effective as of July
          1, 1990:  Incorporated  by reference to Exhibit 10.11 to the Form 10-K
          of Delta Woodside Industries,  Inc. for the fiscal year ended June 30,
          1990.*
10.3.2**  Amendment  No. 1 to Stock  Option Plan:  Incorporated  by reference to
          Exhibit 10.1 to the Form 10-Q of Delta Woodside  Industries,  Inc. for
          the quarterly period ended December 29, 1990 (the "DWI 12/90 10-Q").*
10.3.3**  Amendment to Stock Option Plan:  Incorporated  by reference to Exhibit
          10.9.2 to the Form 10-K of Delta  Woodside  Industries,  Inc.  for the
          fiscal year ended June 29, 1991 (the "DWI 1991 10-K").*
10.3.4**  1995  Amendment to Stock Option Plan effective as of November 9, 1995:
          Incorporated  by reference to Exhibit 10.4.4 to the Form 10-Q of Delta
          Woodside Industries,  Inc. for the quarterly period ended December 30,
          1995 (the "Delta Woodside Industries, Inc. 12/95 10-Q".)*
10.3.5**  1997  Amendment to Stock Option Plan effective as of November 6, 1997:
          Incorporated  by  reference  to  Exhibit  99.1  to  the   Registration
          Statement on Form S-8 of Delta  Woodside  Industries,  Inc.  (File No.
          333-45767).
10.3.6**  Amendment to Stock Option Plan adopted April 25, 2000: Incorporated by
          reference to Exhibit 10.4.6 to Form 10-Q of Delta Woodside Industries,
          Inc. for the fiscal quarter ended April 1, 2000.*
10.3.7**  Amendments to Stock Option Plan:  Incorporated by reference to Exhibit
          10.4.7 to the DWI 2000 10-K.*
10.4**    Form of  Amendment of Certain  Rights and  Benefits  Relating to Stock
          Options  and  Deferred  Compensation  by and  between  the Company and
          certain  pre-spin-off plan participants:  Incorporated by reference to
          Exhibit 10.7 to the DWI 2000 10-K.*
10.4.1    List of directors  and officers of the Company who signed the document
          described in Exhibit 10.4: Incorporated by reference to Exhibit 10.7.1
          to DWI 2000 10-K.*
10.4.2**  Form of  Amendment  of Stock  Options by and  between  Delta  Woodside
          Industries,   Inc.  and  certain   pre-spin-off   plan   participants.
          Incorporated by reference to Exhibit 10.7.2 to DWI 2000 10-K.*
10.5.1**  Directors Stock Acquisition Plan: Incorporated by reference to Exhibit
          10.14 to the DWI 1991 10-K.*
10.5.2**  Amendment to Directors Stock  Acquisition  Plan, dated April 30, 1992:
          Incorporated by reference to Exhibit 10.12.2 to the DWI 1992 10-K.*
10.6**    2000  Stock   Option  Plan  of  Delta   Woodside   Industries,   Inc.:
          Incorporated by reference to Exhibit 10.10 to the DWI 2000 10-K.*
10.6.1**  Amendment of 2000 stock option plan of Delta Woodside Industries, Inc:
          Incorporated   by  reference  to  Item  6(a)  of  the  Delta  Woodside
          Industries,  Inc.  report on Form 10-Q for the quarter ended September
          30, 2000 and filed with the  Securities  and  Exchange  Commission  on
          November 14, 2000.
10.7**    2000 Incentive  Stock Award Plan of Delta Woodside  Industries,  Inc.:
          Incorporated by reference to Exhibit 10.11 to the DWI 2000 10-K.*
10.8      Tax  Sharing  Agreement,  dated as of June 30, 2000 by and among Delta
          Woodside  Industries,  Inc. Duck Head Apparel Company,  Inc. and Delta
          Apparel, Inc.:  Incorporated by reference to Exhibit 2.2 to the Report
          on Form 8-K of Delta Woodside  Industries,  Inc. with the date of June
          30, 2000.
10.8.1    Amendment  to tax  sharing  agreement  dated  as of  August  6,  2001:
          Incorporated  by  reference  to Exhibit  10.17.2 to the Report on Form
          10-K for Delta Woodside Industres, Inc. for the fiscal year ended June
          30, 2001 and filed with the  Securities  and  Exchange  Commission  on
          September 24, 2001.


                                       57
<PAGE>
10.9**    Delta Woodside  Industries,  Inc. 2004 Stock Plan. Effective September
          25,  2003:  Incorporated  by  reference  to  Exhibit  99 to the  Delta
          Woodside Registration  Statement on Form S-8 filed with the Securities
          and  Exchange  Commission  on January  29, 2004  (Commission  File No.
          333-112308.)
10.10**   Letter  dated June 28,  2000 to William F.  Garrett:  Incorporated  by
          reference to Exhibit 10.l4 to the DWI 2000 10-K.*
10.10.1** Resolution  of the  Compensation  Committee  of the Board of Directors
          dated February 11, 2005  respecting  Fiscal Year 2005 Incentive  Bonus
          Plan:  Incorporated  by reference to Exhibit  10.1.1 to the  Company's
          Quarterly  Report on Form 10-Q for the fiscal  quarter  ended April 2,
          2005.
10.11**   Resolution  of the Board of Directors  dated January 27, 2005 adopting
          Fiscal Year 2005 Incentive  Bonus Plan:  Incorporated  by reference to
          Exhibit 10.1 to the  Company's  Quarterly  Report on Form 10-Q for the
          fiscal quarter ended January 1, 2005.
10.11.1** Resolution  of the  Compensation  Committee  of the Board of Directors
          dated February 11, 2005  respecting  Fiscal Year 2005 Incentive  Bonus
          Plan:  Incorporated  by reference to Exhibit  10.1.1 to the  Company's
          Quarterly  Report on Form 10-Q for the fiscal  quarter  ended April 2,
          2005.
10.12**   2005 Salary Recovery Plan.
10.13     Asset Purchase  Agreement  dated January 27, 2005 by and between Delta
          Mills Inc. and Gibbs International Inc.:  Incorporated by reference to
          Exhibit  10.2 to  Quarterly  Report  on Form  10-Q of  Delta  Woodside
          Industries, Inc. for the fiscal quarter ended January 1, 2005.
10.14     See Exhibits 4.2, 4.2.1, 4.3.1, 4.3.2, 4.3.3, 4.3.4, 4.3.5 and 4.3.6.
23        Report on Schedule by Independent Registered Public Accounting Firm
31.1      Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act
          of 2002.
31.2      Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act
          of 2002.
32.1      Certification of CEO Pursuant to Section 906 of the Sarbanes-Oxley Act
          of 2002.
32.2      Certification of CFO Pursuant to Section 906 of the Sarbanes-Oxley Act
          of 2002.


*         All reports  previously  filed with the  Commission by Delta  Woodside
          Industries,   Inc.   pursuant  to  the  Exchange  Act  and  rules  and
          regulations promulgated thereunder, exhibits of which are incorporated
          by reference into this Report,  were filed under  Commission  File No.
          1-10095.

**        This is a management contract or compensatory plan or arrangement.

         The registrant  agrees to furnish  supplementally to the Securities and
         Exchange Commission a copy of any omitted schedule or exhibit to any of
         the above filed exhibits upon request of the Commission.



         (b)      Exhibits
                  The  response to this  portion of Item 15 is  incorporated  by
                  reference from Item 15(a)(3) above.

         (c)      Financial Statement Schedules
                  Not applicable










                                       58
<PAGE>

SIGNATURES

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


                               DELTA MILLS, INC.
                               (Registrant)


  September 30, 2005           By:  /s/ William F. Garrett
----------------------------   ------------------------------------------------
         Date                  William F. Garrett
                               President, Chief Executive Officer and Director



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and as of the dates indicated.
<TABLE>
<CAPTION>


<S>                                   <C>              <C>                                                      <C>
/s/ E. Erwin Maddrey, II              9/30/2005        /s/ William F. Garrett                                   9/30/2005
------------------------------------- -------------    -------------------------------------------------------- -------------
E. Erwin  Maddrey,  II                Date             William F. Garrett Date
Director                                               President,  Chief Executive Officer and Director

/s/ Buck A. Mickel                    9/30/2005        /s/ William H. Hardman, Jr.                              9/30/2005
------------------------------------- -------------    -------------------------------------------------------- -------------
Buck A. Mickel                        Date             William H. Hardman, Jr.                                  Date
Director                                               Executive Vice President, Chief Financial Officer,
                                                       Secretary and Treasurer

                                                       /s/ David Palmer                                         9/30/2005
                                                       -------------------------------------------------------- -------------
                                                       David Palmer                                             Date
                                                       Controller




</TABLE>








                                       59
<PAGE>


                                  EXHIBIT INDEX

3.1.1     Certificate of Amendment of Restated  Certificate of  Incorporation of
          Delta Mills, Inc. dated June 27, 2005.

4.2.1     Amendment No. 1 dated as of December 30, 1997 to Indenture dated as of
          August 25, 1997 with respect to Delta Mills, Inc.$150,000,000 Series A
          and Series B 9 5/8% Senior Notes due 2007,  with The Bank of New York,
          as Trustee.

4.3.1.13  Waiver and Amendments dated September 30, 2005 to Revolving Credit and
          Security Agreement dated March 31, 2000 by and between GMAC Commercial
          Finance LLC, as lender and agent, and Delta Mills, Inc.

10.1.3**  Form of  Termination  of Defined  Compensation  Arrangement  Agreement
          between Delta Woodside  Industries,  Inc.,  Delta Mills,  Inc.,  Delta
          Mills  Marketing,  Inc.  and  Employee  Participants  in the  Deferred
          Compensation Plan including  schedule of terms for executive  officers
          of the Company.

10.12**   2005 Salary Recovery Plan of Delta Woodside Industries, Inc.

23        Report on Schedule by Independent Registered Public Accounting Firm

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

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

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

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














<PAGE>

<TABLE>
<CAPTION>

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                DELTA MILLS, INC.

------------------------------------------------------------------------------------------------------------------------------------
                 COL. A                 COL. B              COL. C                                     COL. D            COL. E
------------------------------------------------------------------------------------------------------------------------------------
                                                          ADDITIONS
                                                     -----------------------------------------
                                      Balance at                                                         (2)
               DESCRIPTION            Beginning              (1)                 (2)                 Deductions       Balance at End
                                      of Period        Charged to Costs   Charged to Other            Describe          of Period
                                                         and Expenses     Accounts-Describe
------------------------------------------------------------------------------------------------------------------------------------
Deducted from asset accounts
 Allowance for Returns:

<S>                                          <C>                                   <C>                 <C>                 <C>
Year ended July 2, 2005                      $20,000                               $2,057,000(1)     $(1,976,000)(2)       $101,000
                                  ===================                   ======================    ==================     ===========

Year ended July 3, 2004                     $180,000                               $1,714,000(1)     $(1,874,000)(2)        $20,000
                                  ===================                   ======================    ==================     ===========

Year ended June 28, 2003                    $ 32,000                               $1,751,000(1)     $(1,603,000)(2)       $180,000
                                  ==================                    ======================    ==================     ===========


</TABLE>




NOTES:
1) The change in the  allowance  for returns is charged to income as a reduction
   of net sales.
2) Deductions represent customer returns and allowances during the period.





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