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 3, 2004

                                       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.)

PO Box 6126
100 Augusta Street
Greenville, South Carolina                                          29606
--------------------------------------------                --------------------
(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




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<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 December 27, 2003 was:

           Common Stock, $.01 par value  - 0

The number of shares  outstanding of each of the registrant's  classes of Common
Stock, as of October 1, 2004 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.











                                       2
<PAGE>

<TABLE>
<CAPTION>

                     FOR THE FISCAL YEAR ENDED JULY 3, 2004
                             FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

PART I                                                                                                          PAGE

<S>            <C>                                                                                               <C>
Item 1.        Business                                                                                           5
Item 2.        Properties                                                                                        10
Item 3.        Legal Proceedings                                                                                 11
Item 4.        Submission of Matters to a Vote of Security Holders                                               11

PART II

Item 5.        Market for Registrant's Common equity and Related Stockholder Matters and Issuer Purchases        11
               of Equity Securities
Item 6.        Selected Financial Data                                                                           12
Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations             13
Item 7A.       Quantitative and Qualitative Disclosures about Market Risk                                        24
Item 8.        Financial Statements and Supplementary Data                                                       25
Item 9.        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure              42
Item 9A.       Controls and Procedures                                                                           42
Item 9B.       Other Information                                                                                 42

PART III

Item 10.       Directors and Executive Officers of the Registrant                                                42
Item 11.       Executive Compensation                                                                            42
Item 12.       Security Ownership of Certain Beneficial Owners and Management                                    42
Item 13.       Certain Relationships and Related Transactions                                                    42
Item 14.       Principal Accountant Fees and Services                                                            43

PART IV

Item 15.       Exhibits and Financial Statement Schedules                                                        44


</TABLE>




                                       3
<PAGE>

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

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

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

     o    changes in the retail demand for apparel products
     o    the cost of raw materials
     o    competitive conditions in the apparel and textile industries
     o    the relative  strength of the United  States  dollar as against  other
          currencies
     o    changes  in  United  States  and  international   trade   regulations,
          including without limitation the expected end of quotas on textile and
          apparel products amongst WTO member states in 2005
     o    the discovery of unknown conditions, such as environmental matters and
          similar items

Accordingly,  any forward-looking statements do not purport to be predictions of
future events or circumstances  and may not be realized.  You should also review
the other  cautionary  statements  we make in this  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 I.  BUSINESS

GENERAL

Delta Mills,  Inc.  ("Delta Mills" or the  "Company") is a Delaware  corporation
with its principal executive offices located at 100 Augusta Street, PO Box 6126,
Greenville, South Carolina 29606 (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.


PRODUCTS, RAW MATERIALS, AND MANUFACTURING

The Company  manufactures  woven  textile  fabrics  from cotton,  wool,  flax or
synthetic  fibers from cotton yarn or from synthetic  filament yarns.  Cotton is
purchased from numerous  suppliers.  Wool, flax,  synthetic fibers and synthetic
filament yarns are purchased from a smaller number of competitive suppliers. The
Company spins the major portion of the spun yarns used in its weaving operations
and the  balance is  purchased  from a small  number of domestic  spinners.  The
Company  expects the portion of its yarn  purchases  from  outside  suppliers to
increase  in fiscal year 2005.  In  manufacturing  these  yarns,  the cotton and
synthetic  fibers,   either   separately  or  in  blends,   are  carded  (fibers
straightened  and oriented) and then spun into yarn. The Company combs (removing
short fibers) some cotton fiber to make high quality  yarns.  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.

The  Company's  principal  raw  material  is  cotton,  although  it  also  spins
polyester,  wool,  linen  fiber,  acrylic,  lyocell,  nylon and rayon fibers and
weaves textured  polyester  filament.  Polyester is obtained  primarily from two
major suppliers,  both of whom provide competitive prices.  Polyester prices for
fiscal year 2004 were  unchanged  from fiscal year 2003.  The Company's  average
price per pound of cotton purchased and consumed, including freight and carrying
costs, was $0.590 in fiscal year 2004 as compared to $0.463 in fiscal year 2003,
and $0.594 in fiscal year 2002. As of July 3, 2004,  the Company had  contracted
to purchase 74%, and had fixed the price for approximately  47%, of its expected
cotton requirements for fiscal year 2005. The percentage of the Company's cotton
requirements  that  the  Company  fixes  each  year  varies  depending  upon the
Company's  forecast of future cotton  prices.  The Company  believes that recent
cotton  prices have enabled it to contract for cotton at prices that will permit
it to be competitive  with other companies in the United States textile industry
when the cotton purchased for future use is put into  production.  To the extent
that cotton prices decrease before the Company uses these future 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  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.

                                       5
<PAGE>


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. This supplier recently emerged from  reorganization  under Chapter
11 of the federal  bankruptcy laws.  While the Company does not anticipate,  and
has not suffered, any adverse effects from this reorganization,  there can be no
assurances that this supplier will remain viable in the future. The Company does
not currently have an alternate domestic source for rayon staple.  However,  the
Company is currently  investigating  foreign sources of rayon staple or possibly
the use of other types of  rayon-like  fibers.  If an alternate  source of rayon
staple must be used, the Company believes that a cost increase is likely.

During  fiscal  years  2004,  2003 and  2002,  approximately  84%,  77% and 83%,
respectively,  of the Company's finished woven fabric sales were of fabrics made
from cotton or cotton/synthetic  blends,  while approximately 16%, 23%, and 17%,
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
is largely  vertically  integrated,  with the Company performing most of its own
spinning,  weaving and  finishing.  The Company's  finished  fabrics  plants are
currently operating at less than full capacity.


SALES AND MARKETING

The Company has focused its marketing  efforts 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
sells its  fabrics  primarily  to  numerous  apparel  manufacturers  and apparel
resellers and their  subcontractors.  These  manufacturers and resellers include
Levi-Strauss,  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,  women's
blazers, and career apparel (uniforms). The Company also sells camouflage fabric
and other fabrics used in apparel for the United  States  Department of Defense.
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
United States,  Canadian and Mexican markets),  with sales agents also operating
in Atlanta, Dallas, San Francisco and Mexico.

For fiscal year 2004,  the  Company had two  customers,  V.F.  Corporation,  and
Levi-Strauss  and its  subcontractors,  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  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.  For fiscal year 2002, the Company had two customers,
Levi-Strauss and V.F. Corporation,  net sales to each of which each exceeded 10%
of consolidated net sales. The Company's  aggregate net sales to these customers
were $63 million, or approximately 36%, of net sales for fiscal year 2002. There
is a trend towards selling directly to subcontractors of major apparel companies
either in additional to in lieu of sales directly to the major apparel companies
themselves.  The foregoing  amounts include sales directly to  subcontractors or
the apparel  companies  named. In addition,  during fiscal years 2004, 2003, and
2002,  net  sales  of  military  fabrics  to  apparel  customers  accounted  for
approximately 44%, 33%, and 31%, 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.


                                       6
<PAGE>


ORDER BACKLOG

The  Company's  order backlog at July 3, 2004 was $41.6  million,  a decrease of
$13.9  million  from the $55.5  million  order  backlog  at June 28,  2003.  The
majority  of this  decrease  was in men's  apparel  fabrics.  This  decline  was
partially  offset by an increase in the order  backlog for both  government  and
synthetic  fabrics.  In recent years,  customers in the industry have  shortened
lead times for  delivery  requirements.  In  response  to this,  the Company has
implemented a quick response  delivery  system.  The Company expects to ship the
majority  of the orders  that make up its order  backlog  during the next twelve
months.  However,  because the apparel market  continues to be soft,  management
believes  that the order backlog at any given point in time is not an indication
of future sales.


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.

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
of only two 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  spinning,
weaving and fabric  finishing  equipment at most of its facilities;  substantial
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.

                                       7
<PAGE>

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.  Quotas
among WTO members are to be  eliminated  by the end of calendar year 2004. As it
implements the WTO  mechanisms,  the U.S.  government is  negotiating  bilateral
trade  agreements with developing  countries  (which are generally  exporters of
textile and apparel  products) that are members of the WTO to get them to reduce
their  tariffs on imports of textiles and apparel in exchange for  reductions by
the United States in tariffs on imports of textiles and apparel. The elimination
of quotas and the  reduction  of tariffs  under the WTO is expected to result in
increased  imports of certain  textile and apparel  products into North America.
These  factors could make the Company's  products less  competitive  against low
cost imports from developing countries.

The Company expects to face a significant  change in global  competition in 2005
as a result of the impact of the WTO's  phase-out of textile and apparel quotas.
Tariffs on textile/apparel products are also being reduced (but not eliminated).
In  addition,  China's  admission to the WTO will have a  significant  impact on
global textile and apparel trade. By gaining admission to the WTO, China is able
to take advantage of the elimination of quota  limitations on access to the U.S.
market,  and there could be a significant  negative impact on the North American
textile industry. With the arrival of 2005 and the elimination of quotas for WTO
members,  competitors in certain countries,  most particularly,  but not limited
to, China, may have cost advantages  compared to the Company.  Accordingly,  the
Company believes it must fully utilize other competitive  advantages it believes
it has compared to Asian  competitors.  Among the  advantages of the Company are
its  well-established  relationships with its customers,  its ability to respond
quickly to its  customers  needs as well as the logistic  advantages  associated
with its manufacturing being located in North America.  However, there can be no
assurance that these  advantages will allow the Company to successfully  compete
with foreign textile producers.

The U.S.,  the  Dominican  Republic and the five Central  American  countries of
Costa Rica,  El  Salvador,  Guatemala,  Honduras and  Nicaragua  have signed the
U.S./Dominican  Republic-Central  America Free Trade Agreement (DR-CAFTA).  This
merged trade agreement is awaiting Congressional consideration. DR-CAFTA will be
a NAFTA-like agreement among the signature  countries.  The rules of origin will
allow apparel to be imported into the United States without tariff  provided the
yarns and fabrics are formed in any participating  country. This agreement would
create an  incentive  for apparel  manufacturers  to use fabric from this region
rather than from other  parts of the world,  which  could be  beneficial  to the
Company and other domestic textile manufacturers. Conversely, this agreement may
result in an  increase in the  production  and use of  regional  fabrics  formed
outside the U.S., which would be a disadvantage to the Company.



EMPLOYEES

The Company has  approximately  1,500 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  high  nitrate  levels at the  spray  field for these
plants. The Company is working with the South Carolina  Department of Health and
Environmental  Control  ("DHEC") to address this issue.  On August 5, 2004, DHEC
proposed a consent  agreement,  which establishes a groundwater mixing zone with
nitrate parameters that the Company believes it can satisfy without  additional,
material  cost or future  violations.  Although  there is no assurance  that the
Company will be successful and it could face  administrative  penalties if it is
not,  the  Company  does not  currently  believe  that this  matter  will have a
material adverse impact on the Company's financial position.


                                       8
<PAGE>


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 that the Company is supposed to meet by April
1, 2006.  Discharges  from nitrate  recovery wells have exceeded this parameter.
The Company has proposed to convert the recovery wells into monitoring  wells to
eliminate  the zinc  discharge  and  understands  that DHEC is  amenable to this
approach. Although there is no assurance that the Company will be successful and
it could be required to construct a zinc  wastewater  treatment  feature  and/or
face  administrative  penalties  if it is not,  the Company  does not  currently
believe that 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
$306,000  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.  At the time of this  filing,
management  believes that the escrow is sufficient to cover any expenses related
to the remediation of this property.

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 the
Company'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 the Company
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. The
Company  believes that the Selling  Corporation's  share of the  liabilities  at
either of these sites will be immaterial.

At the Mississippi  site, the PRP group completed the surface removal action and
investigated  soil and  groundwater  contamination,  both at the site and in the
surrounding  area.  The  Company'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 the Company'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  for an EPA RCRA  contractor to determine if any
homes  around the site still used  private  water wells and  located  three such
homes.

Although no assurance can be provided,  the Company 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 the  Company.  The Company 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.


                                       9
<PAGE>


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 Delta Mills, Inc., Park Yarn Mills Company,  Inc. ("Park Yarn"), owned
the Site for  approximately  six (6) years, from 1977 to 1983 (prior to the time
Delta Mills, Inc. became a subsidiary of Delta Woodside Industries,  Inc.) Delta
Mills,  Inc. 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.

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 the  Company's  principal
facilities.
<TABLE>
<CAPTION>

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


<S>                                                    <C>                   <C>         <C>
Greenville, SC                                         Admin Offices          17,400     Leased (1)
New York, NY                                           Sales Offices          10,245     Leased (2)
Beattie Plant, Fountain Inn, SC                        spin/weave            390,000        (3)
Estes Plant, Piedmont, SC                              spin/weave            332,000        (3)
Delta 3 Plant, Wallace, SC                             dye/finish            555,000        (3)
Pamplico and Cypress Plants, Pamplico, SC              spin/weave            419,000        (3)
Delta 2 Plant, Wallace, SC                             dye/finish            347,000        (3)

</TABLE>

(1)  Delta Woodside leases corporate offices in Greenville,  SC that are used by
     the Company. The lease expires on December 31, 2008.
(2)  Delta  Woodside  leases a sales office in New York,  NY that is used by the
     Company. The lease expires in December of 2004.
(3)  The  title to  these  facilities  and  substantially  all of the  equipment
     located in these facilities is held by three South Carolina  counties under
     a fee-in-lieu-of-taxes  arrangement,  which has the effect of substantially
     reducing  the  Company's  property  taxes in South  Carolina.  Although the
     Company  can  reacquire  such  property  at a  nominal  price,  this  would
     currently cause a significant increase in the amount of property taxes paid
     by the Company.

Except as noted  above,  all of the above  facilities  are owned by the  Company
subject in certain cases to various  outstanding  liens.  Delta Woodside  leases
corporate  offices in  Greenville,  South  Carolina.  The lease on the corporate
offices expires on December 31, 2008.  Sales offices are leased in New York City
under leases  expiring in December  2004.  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 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 has since
liquidated or transferred  substantially  all of the assets associated with this
facility  except for the  facility's  real  property.  On August 24,  2004,  the
Company  contracted  to sell the 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  has  since
terminated  the  proposed  sale as permitted  by the  contract.  The Company has
lowered  its  offering  price  for the  property  to  reflect  the  price in the
terminated contract.

During the year ended June 28, 2003,  the Company  announced  the closing of its
Catawba Plant, a yarn manufacturing  facility located in Maiden, North Carolina.
The equipment  run-out  schedule was completed in April 2003, and the Company is
in the process of liquidating  the assets  associated  with this  facility.  The
Company has replaced the production  from this facility with purchased yarn from
outside  sources.  At the date of execution  of this Form 10-K,  the Company has
closed and plans to dispose of its Catawba facility in Maiden, NC.

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.


                                       11
<PAGE>

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.

During 2001, the Company declared dividends of $2,900,000.  The Company declared
no dividends for fiscal year 2002,  fiscal year 2003,  or fiscal year 2004.  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) (2)
                                                          2004             2003             2002             2001          2000
                                                ---------------  ---------------  ---------------  --------------- -------------
<S>                                                   <C>              <C>              <C>              <C>           <C>
Net Sales                                             $174,358         $177,193         $174,673         $212,960      $276,511
Cost of Goods Sold                                     166,314          160,243          165,266          196,692       243,254
                                                ---------------  ---------------  ---------------  --------------- -------------
Gross Profit                                             8,044           16,950            9,407           16,268        33,257

Selling, general and administrative expenses            11,810           11,370           11,634           14,609        15,345
Impairment and restructuring expenses                      847              398            8,683
Other income                                               766              582              476              302           446
                                                ---------------  ---------------  ---------------  --------------- -------------
Operating Profit (Loss)                                 (3,847)           5,764          (10,434)           1,961        18,358
Interest expense                                         4,783            5,275            9,090           11,064        16,095
Interest (income)                                                                           (192)            (547)         (958)
Gain on Extinguishment of Debt                                            3,643           16,072            2,458         7,414
                                                ---------------  ---------------  ---------------  --------------- -------------
Income (Loss) from Continuing Operations
 Before Income Taxes                                   (8,630)            4,132           (3,260)          (6,098)       10,635
Income Tax Expense (Benefit)                           (3,164)            1,541           (1,198)          (2,192)        4,035
                                                ---------------  ---------------  ---------------  --------------- -------------
Income (Loss) from Continuing Operations               (5,466)            2,591           (2,062)          (3,906)        6,600
Loss from Discontinued Operations                                                                                          (174)
                                                ---------------  ---------------  ---------------  --------------- -------------
Net Income (Loss)                                     $(5,466)           $2,591          $(2,062)          $(3,906)      $6,426
                                                ===============  ===============  ===============  =============== =============
OTHER DATA:(1)
Depreciation and amortization                           $8,942           $9,114           $9,544          $11,310       $14,015

Capital expenditures                                     5,146            6,442            6,496            5,151         4,340

BALANCE SHEET DATA:
Working Capital                                        $17,599          $26,657          $37,338          $64,270       $95,158

Total assets                                           138,939          162,328          158,437          181,747       229,612

Total long-term debt                                    31,941           31,941           47,819           83,815       115,078

Shareholder's equity                                    44,444           49,910           47,319           49,381        56,187

</TABLE>

NOTES TO SELECTED FINANCIAL DATA
(1)  The  Stevcoknit   knitted   fabrics   business  is  presented  as  part  of
     discontinued operations.

(2)  Certain  amounts  prior to  fiscal  year 2003  have  been  reclassified  to
     reflects 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.

                                       13
<PAGE>


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

THE CURRENT ENVIRONMENT. In fiscal year 2004, we continued our efforts to become
globally  competitive  in 2005 and  beyond.  Some  items are  largely  under our
control.  We will continue to focus on inventory  control,  product  innovation,
cost-containment,  improved  product  mix and the  modernization  of our Delta 3
finishing facility located in Wallace,  SC. We have engaged a consulting company
to assist us in developing a long-term financial strategy.  We have continued to
develop  programs  for  improved  quality  and  yield at our  Delta 3  finishing
facility.  Outside of our control, however, are what we believe are unfair trade
practices of foreign competitors,  particularly, the Chinese government's policy
of maintaining an artificially low valuation for its currency and of subsidizing
China's textile industries to keep their  manufacturing  costs artificially low.
We will, therefore,  continue to monitor foreign trade legislation and appeal to
our government  officials to enforce current legislation and install a new trade
policy that creates a level playing field.  Our long-term  success will hinge on
government policy.  There can be no assurances that the United States government
will adopt policies favorable to us.

The Company expects to face a significant  change in global  competition in 2005
as a result of the WTO's  phase-out of textile and apparel  quotas by the end of
calendar year 2004. Tariffs on  textile/apparel  products are also being reduced
(but not  eliminated).  In  addition,  China's  admission to the WTO will have a
significant  impact on global textile and apparel trade. By gaining admission to
the WTO, China is able to take advantage of the elimination of quota limitations
on access to the U.S. market,  and there could be a significant  negative impact
on the  North  American  textile  industry.  With  the  arrival  of 2005 and the
elimination of quotas for WTO members, certain countries, most particularly, but
not  limited  to,  China,  may have cost  advantages  compared  to the  Company.
Accordingly,  the  Company  believes  it must fully  utilize  other  competitive
advantages  it  believes  it  has  compared  to  Asian  competitors.  Among  the
advantages  of the  Company  are its  well-established  relationships  with  its
customers, its ability to respond quickly to its customers' needs as well as the
logistical  advantages  associated with its manufacturing being located in North
America. However, there can be no assurance that these advantages will allow the
Company to successfully compete with foreign textile producers.

During the year ended June 28, 2003,  the Company  announced  the closing of its
Catawba Plant, a yarn manufacturing  facility located in Maiden, North Carolina.
The equipment run-out schedule was completed in April 2003 and the Company is in
the process of liquidating the assets associated with this facility. The Company
has replaced the production  from this facility with purchased yarn from outside
sources.

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 has since
liquidated or transferred  substantially  all of the assets associated with this
facility except for the facility's real property.

In August of 2004,  the Company  entered into a contract to sell the Furman Plan
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  2004.  The sale was  subject to closing  conditions,  and the
prospective  purchaser  has since  terminated  the proposed sale as permitted by
this  contract.  The Company has lowered its offering  price for the property to
reflect the price in the terminated contract.

FISCAL  YEAR 2004.  Our  fiscal  year 2004  sales  volume was down $2.8  million
(1.6%). This was the result of a 17% decline in our commercial business somewhat
offset by a 28% improvement in our sales of military fabric to apparel customers
for ultimate use by the U.S. armed forces (which we refer to as our  "Government
Business,"  though  we do not sell  directly  to the U.S.  government).  Reduced
production  volume  associated  with the downturn in commercial  cottons created
unabsorbed fixed overhead costs of  approximately  $9.0 million.  This,  coupled
with  increased  cotton  costs of  approximately  $2.3 million and an erosion of
commercial product margins of approximately $1.8 million (due primarily to price
deterioration)  accounted for the losses suffered in fiscal year 2004.  Somewhat
offsetting  these losses was an  improvement  in gross profit margin  associated
with the increased sales of our Government Business. We have continued to reduce
costs and have  managed  our working  capital  well.  Even with an $8.6  million
pretax loss in fiscal year 2004, we were able to meet all financial  obligations
and reduce our  revolving  credit  facility by $3.5 million.  We also  completed
phase two and started work on the final phase  (three) of our Delta #3 finishing
plant  modernization  project.  We are  excited  about  the  completion  of this
three-year  modernization  effort  and the  positive  impact it will have on the
quality and the service we will provide our customers in the future.


                                       14
<PAGE>

OUR OUTLOOK FOR FISCAL YEAR 2005.  Looking  forward to fiscal year 2005,  on the
commercial  side of our  business,  we expect to  continue to suffer from a high
level of over capacity in the textile industry,  inconsistent  retail demand and
pressure from foreign  imports that we expect to intensify  beginning in January
2005  with the  removal  of  import  quotas.  While we  believe  the  volume  of
commercial  business will stabilize at approximately the fiscal year 2004 level,
we believe there is also little hope for any pricing  improvement,  so we do not
expect gross margin to improve in fiscal year 2005.

The outlook for our  Government  Business  is better  beginning  in the last two
quarters  of our 2005  fiscal  year.  The U.S.  Department  of  Defense  ("DOD")
recently  introduced a new uniform design,  the  implementation  of which should
begin during the second  quarter of our 2005 fiscal year. DOD has reduced fabric
orders for the old uniform design in the last two quarters of calendar year 2004
(the first two quarters of our 2005 fiscal year) in  anticipation  of a surge in
production of the new uniform  design in the first two quarters of calendar year
2005. Working with DOD to accomplish the change to the new uniform has created a
shortfall in our sales for the first  quarter of our 2005 fiscal year;  however,
we  believe we are well  positioned  to  participate  in  production  of the new
uniform and anticipate an increase in our Government Business in the second half
of our  2005  fiscal  year  and  improved  sales  of this  product  line for the
foreseeable future.

OUR 2005  REALIGNMENT  PLAN.  We are well  aware of the  negative  forces in our
industry that will adversely affect our operations in the future, and we realize
we must do more in  order to  compete  in 2005 and  beyond.  Therefore,  we have
developed a  comprehensive  realignment  plan that will streamline the Company's
operations  and provide for  significant  cost  reductions.  As a result of this
realignment  plan,  the Company  expects to record a second quarter pretax asset
impairment  and  restructuring  charge to  earnings  ranging  from $9.0 to $12.0
million  comprised  of  approximately  $3.0 to $4.0  million in cash charges and
approximately  $5.0 to $8.0 million of non-cash  charges.  We estimate that this
aggressive  cost reduction  initiative  will improve pretax earnings by $11.0 to
$16.0 million when compared to fiscal year 2004 results,  although  there can be
no assurance to this effect.  The uncertainty  associated with these anticipated
charges  relates to the timing and the amount of the charges  resulting from the
rollout of the detailed plan.

GMAC, our revolving
credit facility  lender,  has  demonstrated  its commitment to us by agreeing to
revise  the  financial  covenants  in our credit  facility  to  accommodate  our
realignment  plan.  We firmly  believe  that this plan will allow the Company to
continue to meet its financial obligations,  maintain GMAC's support, and define
a path to profitability in the future.














                                       15
<PAGE>

RESULTS OF OPERATIONS FISCAL 2004 VERSUS FISCAL 2003

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

                                                                                   Increase/ (Decrease)
In thousands, except percentages                                                     From 2003 to 2004
                                                                                  ------------------------
                                                          2004           2003          $           %
                                                   ----------------------------------------------------------
<S>                                                  <C>            <C>              <C>            <C>
Net Sales                                            $ 174,358      $ 177,193        $ (2,835)      (1.60)%
% of Net Sales                                          100.00%        100.00%

Gross Profit                                             8,044         16,950          (8,906)     (52.54)%
% of Net Sales                                           4.61%          9.57%

Selling, General and Administrative Expenses            11,810         11,370             440        3.87 %
% of Net Sales                                            6.77%          6.42%

Impairment and Restructuring Expenses                      847            398             449      112.81 %

Other Income                                               766            582             184       31.62 %

Operating Profit (Loss)                                 (3,847)         5,764          (9,611)    (166.74)%
% of Net Sales                                           (2.21)%         3.25%

Interest Expense (Net)                                   4,783          5,275            (492)      (9.33)%
% of Net Sales                                            2.74%          2.98%

Gain on Extinguishment of Debt                                          3,643          (3,643)    (100.00)%

Income (Loss) Before Income Taxes                       (8,630)         4,132         (12,762)    (308.86)%
% of Net Sales                                           (4.95)%         2.33%

Income Tax Expense (Benefit)                            (3,164)         1,541          (4,705)    (305.32)%
% of Net Sales                                           (1.81)%         0.87%

Net Loss                                                (5,466)         2,591          (8,057)    (310.96)%
% of Net Sales                                           (3.13)%         1.46%

Order Backlog                                         $ 41,567       $ 55,527       $ (13,960)     (25.14)%

</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.


                                       16
<PAGE>

RESULTS OF OPERATIONS FISCAL 2004 VERSUS FISCAL 2003 - CONTINUED

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 increased 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.

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.

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 as described below.

On March 5, 2003, the Company  completed a "Modified Dutch Auction" tender offer
for a  portion  of its  Senior  Notes.  In  April of  2003,  as a result  of the
"Modified Dutch Auction",  a total principal  amount of $12,798,000 of notes was
tendered by holders of the notes and accepted  for payment by the  Company.  The
"Clearing  Price" of $790 per $1,000  principal amount was paid on April 7, 2003
to  all  holders  who  tendered  their  notes.  The  Company  paid  a  total  of
$10,110,420, plus accrued interest of $123,181, to repurchase the notes. To fund
this  transaction,  the Company used funds borrowed  under its revolving  credit
facility  and  recorded a gain of $2.3  million in the fourth  quarter of fiscal
year 2003 related to this transaction.

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.

                                       17
<PAGE>

RESULTS OF OPERATIONS FISCAL 2004 VERSUS FISCAL 2003 - CONTINUED

ORDER BACKLOG:
The $13.9 million decrease in the order backlog was primarily due to the decline
in orders for the  Company's  commercial  cotton  products as a result of a high
level of over capacity in the textile  industry,  pressure from foreign  imports
and  inconsistent  demand at retail.  This  decline  was  somewhat  offset by an
increase in orders for uniform fabrics used in apparel sold to the United States
Department  of  Defense.  Over the last  several  years,  many of the  Company's
commercial  customers  have  shortened  lead  times for  delivery  requirements.
Because of  shortened  lead-times  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.

ADOPTION OF ACCOUNTING STANDARDS:
In December  2003,  the  Financial  Accounting  Standards  Board (FASB)  revised
Interpretation No. 46 (FIN 46),  "Consolidation of Variable Interest  Entities,"
which was  originally  issued in January  2003,  to provide  guidance  regarding
issues arising from the implementation of FIN 46. This interpretation  addresses
the  consolidation by business  enterprises of variable  interest  entities,  as
defined in the interpretation,  and sets forth additional  disclosure  regarding
such interests.  For entities  acquired or created before February 1, 2003, this
interpretation  is  effective  no later  than the end of the  first  interim  or
reporting period ending after March 15, 2004, except for those variable interest
entities  that are  considered  to be special  purpose  entities,  for which the
effective date is no later than the end of the first interim or annual reporting
period  ending  after  December 15, 2003.  For all entities  that were  acquired
subsequent to January 31, 2003, this interpretation is effective as of the first
interim or annual period ending after  December 31, 2003. The adoption of FIN 46
did not affect the Company's consolidated financial statements.








                                       18
<PAGE>

RESULTS OF OPERATIONS FISCAL 2003 VERSUS FISCAL 2002
<TABLE>
<CAPTION>

The following  table  summarizes  the  Company's  results for Fiscal 2003 versus
Fiscal 2002.

                                                                                   Increase/ (Decrease)
In thousands, except percentages                                                    From 2002 to 2003
                                                                                  -----------------------
                                                         2003            2002         $           %
                                                 ------------------------------------------------------------
<S>                                                 <C>             <C>              <C>            <C>
Net Sales                                           $ 177,193       $ 174,673        $ 2,520        1.44 %
% of Net Sales                                         100.00%         100.00%

Gross Profit                                           16,950           9,407          7,543       80.18 %
% of Net Sales                                           9.57%           5.39%

Selling, General and Administrative Expenses           11,370          11,634           (264)      (2.27)%
% of Net Sales                                           6.42%           6.66%

Impairment and Restructuring Expenses                     398           8,683         (8,285)     (95.42)%

Other Income                                              582             476            106       22.27 %

Operating Profit (Loss)                                 5,764         (10,434)        16,198     (155.24)%
% of Net Sales                                           3.25%          (5.97)%

Interest Expense (Net)                                  5,275           8,898         (3,623)     (40.72)%
% of Net Sales                                           2.98%           5.09%

Gain on Extinguishment of Debt                          3,643          16,072        (12,429)     (77.33)%

Income (Loss) Before Income Taxes                       4,132          (3,260)         7,392     (226.75)%
% of Net Sales                                           2.33%          (1.87)%

Income Tax Expense (Benefit)                            1,541          (1,198)         2,739     (228.63)%
% of Net Sales                                           0.87%          (0.69)%

Net Loss                                                2,591          (2,062)         4,653     (225.65)%
% of Net Sales                                           1.46%          (1.18)%

Order Backlog                                        $ 55,527        $ 47,813        $ 7,714       16.13%

</TABLE>


NET SALES:
Unit sales were approximately the same for both fiscal year 2003 and fiscal year
2002. The 1.44% increase in sales for fiscal year 2003 was principally due to an
increase of 2.20% in average sales price as a result of a change in product mix.
At the end of fiscal year 2003, there were  approximately  $6.0 million in sales
order deferments that remained in finished inventory as of June 28, 2003.

GROSS PROFIT:
The majority of the $7.5 million  gross profit  improvement  in fiscal year 2003
versus  fiscal  year  2002 was due to lower  cotton  raw  material  costs.  Also
contributing to the gross profit increase were reduced  manufacturing costs as a
result of the cost  reduction  program put in place at the  beginning  of fiscal
year 2003.  These cost  reductions  were  somewhat  offset by  disruption  costs
associated  with the  modernization  of the Estes  cotton  weaving  facility and
continued   downward   pressure  on  sales  prices  caused  by  cotton   garment
manufacturers expanding their supplier base to gain more competitive prices.

                                       19
<PAGE>

RESULTS OF OPERATIONS FISCAL 2003 VERSUS FISCAL 2002 - CONTINUED

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
The $0.3 million decrease in this category in fiscal year 2003 was due primarily
to a reduction in compensation  expense that was somewhat offset by increases in
insurance, legal and other fixed costs.

IMPAIRMENT AND RESTRUCTURING EXPENSES:
During the year ended June 28, 2003, the Company incurred restructuring expenses
of  $0.4  million   related  to  the  closing  of  its  Catawba  plant,  a  yarn
manufacturing  facility in Maiden,  NC. During the year ended June 29, 2002, the
Company incurred  impairment and restructuring  expenses of $8.7 million related
to the closing of its Furman plant, a weaving only facility in Fountain Inn, SC.
The net book value of the closed facilities is presented as assets held for sale
on the consolidated balance sheet as of June 28, 2003.

OTHER INCOME:
Other  income was $0.6  million  for fiscal year 2003,  primarily  from gains on
equipment sales that occurred in the first quarter.  In fiscal year 2002,  other
income was $0.5 million,  primarily from gains on equipment  sales that occurred
in the fourth quarter.

OPERATING PROFIT (LOSS):
The $16.2 million  improvement in operating profit was principally the result of
a $7.6  million  improvement  in gross profit and a reduction of $8.3 million in
impairment and restructuring expenses discussed above.

INTEREST EXPENSE, NET:
The $3.6  million  decrease in net  interest  expense in fiscal year 2003 versus
fiscal  year  2002 was  principally  due to the  purchase  of a  portion  of the
Company's 9.625% Senior Notes and was somewhat offset by an increase in revolver
debt at a substantially lower rate of interest. Interest expense for fiscal year
2003 also  reflected $0.4 million of  capitalized  interest,  as a result of the
Company's 2003 capital expenditures.

GAIN ON EXTINGUISHMENT OF DEBT:
During fiscal year 2003, the Company  purchased $15.9 million face amount of its
9.625%  Senior Notes for $11.9  million,  and incurred  expenses  related to the
purchase of approximately  $0.2 million.  The Company  recognized a gain of $3.6
million  after the  write-off  of deferred  loan costs of $0.2  million.  During
fiscal year 2002, the Company  purchased $36.0 million face amount of its 9.625%
Senior Notes for $19.4 million.  The Company  recognized a gain of $16.1 million
after the write-off of deferred loan costs of $0.5 million.

INCOME TAX EXPENSE (BENEFIT):
The  effective tax rate of 37.3% for the year ended June 28, 2003 is higher than
the 36.7% effective tax rate for the year ended June 29, 2002, primarily because
of the effect of nondeductible  permanent differences on pretax income in fiscal
year 2003 compared to pretax losses in 2002.

NET INCOME (LOSS):
The $4.7 million improvement in net income in fiscal year 2003 was primarily due
to the  pretax,  year-to-year  changes in each of the  following:  $7.6  million
improvement  in  gross  profit,   $8.3  million   reduction  in  impairment  and
restructuring  expenses,  and a $3.6 million  reduction in net interest expense.
These  items  were  somewhat  offset  by a $12.4  million  reduction  in gain on
extinguishment of debt. Each of these items is discussed above.


                                       20
<PAGE>

RESULTS OF OPERATIONS FISCAL 2003 VERSUS FISCAL 2002 - CONTINUED

ORDER BACKLOG:
The  majority of the $7.7 million  increase in order  backlog was in the uniform
fabrics used in apparel sold to the United States Department of Defense.

LIQUIDITY AND SOURCES OF CAPITAL

SOURCES AND USES OF CASH.  The Company's  primary  sources of liquidity are cash
flow from  operations and its revolving  credit  facility with GMAC. The Company
generated $7.8 million in cash from operations in fiscal year 2004,  principally
from a $9.1  million  reduction in working  capital,  where  working  capital is
defined as current assets less current  liabilities.  An $11.8 million reduction
in inventory, a $5.9 million reduction in accounts receivable and a $1.8 million
increase in accrued employee  compensation  somewhat offset by reductions in the
outstanding  balance on the revolving credit facility,  trade accounts  payable,
income  taxes  payable  and  accrued and sundry  liabilities  accounted  for the
majority of the reduction in working capital. Also contributing to the Company's
cash sources was $0.9 million in proceeds from the sale of unused  assets.  Year
over  year,  inventory  turns  were  approximately  the same while days sales in
accounts receivable improved approximately 10%.

The  Company  used  cash  in  fiscal  year  2004 to  reduce  debt  and  deferred
compensation  liabilities  by $6.4 million and to fund capital  expenditures  of
$5.1  million.  Throughout  the year,  amounts  available  under  the  Company's
revolving credit facility were used to fund short-term cash flow needs; however,
for the fiscal  year,  repayments  on the  revolving  credit  facility  exceeded
borrowings by $3.5 million.  Availability  on the revolving  credit facility was
$12.5 million at July 3, 2004 and the Company was in compliance  with the credit
facility's  financial  covenants  at July 3,  2004.  The  Company  reduced  debt
associated with its deferred compensation plan by $2.9 million.

Capital  expenditures  were primarily used for the second phase of the Company's
modernization  project at its 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.  The third  phase will start in fiscal  year 2005 and  consists  of the
installation of a new dye range that will be designed for wide fabric finishing.
The majority of the $4.0 million  capital  expenditures  planned for fiscal year
2005 will be spent on this project, primarily in the third and fourth quarter of
fiscal year 2005,  which ends on July 2, 2005. With the completion of phases one
and two of this  modernization  plan,  the Company will be 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 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 in 2005 and beyond.

With its entry into the October  2004  amendment  to the GMAC  revolving  credit
agreement  described  below and  subject to  completion  of the  Company's  2005
realignment  discussed above, the Company believes that the cash flows generated
by its 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
and beyond.

DELTA MILLS' 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 3, 2004,  the  outstanding  balance of
the notes was $31,941,000,  unchanged from the balance at June 28, 2003.  During
the year ended June 28,  2003,  the Company  acquired  $15,878,000  in aggregate
principal amount of its 9.625% Senior Notes for $12,060,000  (including expenses
of  approximately  $172,000).  The purchase was funded by  borrowings  under the
Company's revolving credit facility.


                                       21
<PAGE>

THE GMAC REVOLVING CREDIT FACILITY.  The Company has a revolving credit facility
with GMAC with a term  lasting  until March 2007.  Borrowings  under this credit
facility  are based 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 4.362% at July 3, 2004 and is based on a spread over either  LIBOR or a base
rate.  Borrowings under this facility were $21.4 million and $24.9 million as of
July 3, 2004 and June 28, 2003,  respectively.  As of July 3, 2004, the revolver
availability was approximately $12.5 million, net of the $7 million availability
reduction described below.

Prior to April 19, 2004,  the GMAC credit  facility had a maximum loan amount of
$50 million,  and prior to August 18, 2004 had financial covenants that required
the Company to comply with a maximum leverage ratio and a minimum fixed coverage
charge ratio.  As a result of the operating  loss in the third quarter of fiscal
year 2004,  the Company was not in compliance  with the maximum  leverage  ratio
covenant at the end of that quarter. On April 19, 2004, GMAC granted the Company
a waiver and  amendment  that waived the  existing  default  with respect to the
maximum leverage ratio covenant,  temporarily amended the maximum leverage ratio
covenant for the fourth quarter of fiscal year 2004, and temporarily  eliminated
the fixed charge  coverage  ratio covenant for the fourth quarter of fiscal year
2004.  The Company was in  compliance  with these  amended  covenants at July 3,
2004.   The  April  2004  waiver  and  amendment   also  reduced  the  Company's
availability  under the credit  facility by $7 million for the remaining term of
the facility and increased the interest  rates under the credit  facility by 125
basis points;  however,  the interest  rates will revert to their  pre-amendment
levels  if the  Company  has net  income  for  fiscal  year 2005 and no event of
default  exists  under the credit  facility.  On August 18,  2004,  the  Company
entered into further  amendments to the GMAC credit  facility  pursuant to which
the maximum  availability  was reduced 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 sets required minimum EBITDA levels for each quarter
of fiscal year 2005 and provides that it will  constitute an event of default if
the  Company  and its  lender  fail to agree by the end of  fiscal  year 2005 to
minimum  EBITDA  levels for the  remainder of the term of the  revolving  credit
facility.

On October 18,  2004,  GMAC,  the lender  under Delta  Mills'  revolving  credit
facility,  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  is  expected  to allow  the  Company  to remain in
compliance with these covenants while executing its realignment plan.

RESTRICTIVE  COVENANTS.  The  Company's  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.  The Company may loan funds to Delta  Woodside  subject to
compliance with the same conditions. At July 3, 2004, the Company was prohibited
by these  covenants  from paying  dividends and making loans to Delta  Woodside.
During the year ended July 3, 2004 and the year ended June 28, 2003, the Company
did not pay any dividends to the Delta Woodside.

OTHER MATTERS.  The Company assigns a substantial  portion of its trade accounts
receivable  to GMAC  Commercial  Finance  LLC  (the  "Factor")  under  a  factor
agreement.  The assignment of these  receivables is primarily  without recourse,
provided  that  customer  orders are approved by the Factor prior to shipment of
goods, up to a maximum for each individual account.  The assigned trade accounts
receivable  are  recorded  on 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.

The Company has  entered  into  agreements,  and has fixed  prices,  to purchase
cotton  for  use in its  manufacturing  operations.  At July  3,  2004,  minimum
payments  under these  contracts  with  non-cancelable  contract terms were $7.1
million.


                                       22
<PAGE>

During  1998,  the  Delta  Woodside  received  notices  from the  State of North
Carolina  asserting  deficiencies in state corporate  income and franchise taxes
for the Delta Woodside's 1994 - 1997 tax years. The total assessment proposed by
the State  amounted to $1.5 million,  which  included  interest and penalties at
that time. The assessment was delayed  pending an  administrative  review of the
case by the State. In October 2002, the State proposed a settlement in which the
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.
Delta  Woodside  rejected  this  offer  and  continued  with its  appeal  due to
management's  belief  that  the  State's  legal  position  is in  conflict  with
established  principles of federal  constitutional law. Delta Woodside considers
all exposures in determining probable amounts of payment; therefore, any payment
in settlement  of this matter is not expected to result in a material  impact on
the Company's results of operations.

CONTRACTUAL  OBLIGATIONS.  As of July  3,  2004,  the  Company  had  contractual
obligations in the form of leases,  cotton commitments,  deferred  compensation,
debt, and related interest as follows (in thousands):

                           Payments Due by Fiscal Year
<TABLE>
<CAPTION>

        Contractual Obligations           2005       2006        2007        2008         2009     Thereafter     Total
                                       ---------------------- ----------- ------------ ----------- ----------- ------------

<S>                                         <C>     <C>       <C>         <C>          <C>         <C>          <C>
Cotton Commitments                          $7,093                                                                  $7,093
Deferred Compensation                        2,365     1,604         773                                             4,742
Non-Cancelable Operating Leases                248        82          77           76          37                      520
Revolving Credit Facility                                         21,388                                            21,388
Long-Term Debt                                                                 31,941                               31,941
Interest Payments on Long-Term Debt          3,074     3,074       3,074          512                                9,734
                                       ----------- ---------- ----------- ------------ ----------- ----------- ------------
Total                                      $12,780    $4,760     $25,312      $32,529         $37          $0      $75,418
                                       =========== ========== =========== ============ =========== =========== ============

</TABLE>




                                       23
<PAGE>

CRITICAL ACCOUNTING POLICIES

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

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 the  estimated  undiscounted  future  cash  flows  expected  to be
generated by the asset. If the carrying amount of an asset exceeds its estimated
undiscounted  future cash flows, an impairment charge is recognized equal to 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.  Estimates  of
future cash flows and asset selling prices are inherently  uncertain.  Different
estimates could result in materially different carrying amounts.

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  and  June  28,  2003,  the  Company  had
approximately $3.7 million and $6.9 million,  respectively,  in net deferred tax
liabilities.

The Company  evaluates on a regular basis the  realizability of its deferred tax
assets for each  taxable  jurisdiction.  In making this  assessment,  management
considers  whether it is more  likely  than not that some  portion or all of its
deferred tax assets will be realized.  The ultimate  realization of deferred tax
assets is  dependent  on the  generation  of future  taxable  income  during the
periods in which  those  temporary  differences  become  deductible.  Management
considers all  available  evidence,  both positive and negative,  in making this
assessment.  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.



                                       24
<PAGE>

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY RISK SENSITIVITY

As a part of the Company's  business of converting fiber to finished fabric, the
Company makes raw cotton purchase  commitments and then fixes prices with cotton
merchants who buy from producers and sell to textile manufacturers.  Under these
contracts,  nonperformance  by either  the buyer or the seller may result in net
cash settlement of the difference between the current market price of cotton and
the contract price. The Company has not utilized the net settlement provision in
the past, and does not anticipate  using it in the future.  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 price  movement can result in unfavorable
pricing of cotton for the Company.  Before fixing  prices,  the Company looks at
supply and demand  fundamentals,  recent  price  trends and other  factors  that
affect  cotton  prices.  The  Company  also  reviews  the backlog of orders from
customers as well as the level of fixed price cotton commitments in the industry
in general.  At July 3, 2004,  a 10%  decline in the market  price of the cotton
covered by the Company's  fixed price  contracts would have a negative impact of
approximately  $0.7 million on the value of the contracts.  At the end of fiscal
year 2003,  a 10%  decline  in the market  price of the  Company's  fixed  price
contracts would have had a negative impact of approximately  $0.8 million on the
value of the contracts.  The decline in the potential  negative impact from 2003
to 2004 is due principally to current cotton  commitments being at lower average
prices than in fiscal year 2003.



INTEREST RATE SENSITIVITY

The  revolving  credit  facility  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 3, 2004, an increase in the interest rate of 1%
would  have a  negative  impact of  approximately  $214,000  on annual  interest
expense.  As of June 28, 2003, an increase in the interest rate of 1% would have
had a negative impact of approximately  $249,000 on annual interest expense. The
decrease in the negative  impact is due to the  decreased  borrowings  under the
revolving credit facility in fiscal year 2004.

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








                                       25
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>


                                                                                                 Page
                                                                                                -------
<S>                                                                                               <C>
Report of KPMG  LLP                                                                               27
Consolidated Balance Sheets as of July 3, 2004 and June 28, 2003                                  28
Consolidated Statements of Operations for the fiscal years ended July 3, 2004,
                      June 28, 2003 and June 29, 2002                                             30
Consolidated Statements of Shareholder's Equity  for the fiscal years ended July 3, 2004,
                      June 28, 2003 and June 29, 2002                                             31
Consolidated Statements of Cash Flows for the fiscal years ended July 3, 2004,
                      June 28, 2003 and June 29, 2002                                             32
Notes to Consolidated Financial Statements                                                        33



</TABLE>



                                       26
<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 3,  2004 and June 28,  2003 and the  related
consolidated statements of operations,  shareholders' equity, and cash flows for
each  of  the  years  in  the  three-year  period  ended  July  3,  2004.  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 3, 2004 and June 28,  2003,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  July 3, 2004,  in  conformity  with U.S.  generally  accepted  accounting
principles.




                                    /s/ KPMG  LLP
                                    KPMG LLP



Greenville, South Carolina
July 30, 2004, except as to Note C, which is as of October 15, 2004






                                       27
<PAGE>
<TABLE>
<CAPTION>

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

                                                               July 3, 2004             June 28, 2003
                                                       ---------------------    ----------------------
ASSETS
CURRENT ASSETS
<S>                                                    <C>                      <C>
  Cash and cash equivalents                                            $585                      $520
  Accounts receivable:
     Factor and other                                                38,613                    44,628
    Less allowances for returns                                          20                       180
                                                       ---------------------    ----------------------
                                                                     38,593                    44,448
  Inventories
     Finished goods                                                   6,613                     7,711
     Work in process                                                 18,877                    25,765
     Raw materials and supplies                                       6,889                    10,659
                                                       ---------------------    ----------------------
                                                                     32,379                    44,135

  Deferred income taxes                                               1,113                     1,517
  Other assets                                                          302                       520
                                                       ---------------------    ----------------------
                      TOTAL CURRENT ASSETS                           72,972                    91,140
                                                       ---------------------    ----------------------

ASSETS HELD FOR SALE                                                  2,495                     3,948

PROPERTY, PLANT AND EQUIPMENT, at cost
     Land and land improvements                                       1,587                     1,587
     Buildings                                                       31,006                    30,943
     Machinery and equipment                                        116,696                   109,623
     Furniture, fixtures and office equipment                        11,948                     9,789
     Lease improvements                                               1,030                     1,030
     Construction in progress                                           765                     4,427
                                                       ---------------------    ----------------------
                                                                    163,032                   157,399
     Less accumulated depreciation and amortization                  99,907                    90,618
                                                       ---------------------    ----------------------
                                                                     63,125                    66,781

DEFERRED LOAN COSTS
             less accumulated amortization of $5,746
             and $5,634 in 2004 and 2003 respectively                   347                       459

                                                       ---------------------    ----------------------
                                                                   $138,939                  $162,328
                                                       =====================    ======================

</TABLE>











                                       28
<PAGE>

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

<TABLE>
<CAPTION>

                                                               July 3, 2004           June 28, 2003
                                                          ------------------      ------------------

LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
<S>                                                                  <C>                    <C>
  Trade accounts payable                                             $7,879                 $14,217
  Revolving credit facility                                          21,388                  24,856
  Payable to Affiliates                                               3,686                   3,517
  Accrued employee compensation                                       3,179                   1,414
  Income taxes payable                                               13,698                  13,698
  Accrued and sundry liabilities                                      5,543                   6,781
                                                          ------------------      ------------------
                    TOTAL CURRENT LIABILITIES                        55,373                  64,483

LONG-TERM DEBT                                                       31,941                  31,941
DEFERRED INCOME TAXES                                                 4,853                   8,421
DEFERRED COMPENSATION                                                 2,334                   7,573
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                                             (7,348)                 (1,882)
                                                          ------------------      ------------------
                                                                     44,444                  49,910
COMMITMENTS AND CONTINGENCIES
                                                          ------------------      ------------------
                                                                   $138,939                $162,328
                                                          ==================      ==================



</TABLE>


See notes to consolidated financial statements.






                                       29
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
Delta Mills, Inc.
(In Thousands)
<TABLE>
<CAPTION>

                                                                     Year Ended        Year Ended       Year Ended
                                                                    July 3, 2004     June 28, 2003     June 29, 2002
                                                                 ----------------  ---------------- -----------------

<S>                                                                     <C>               <C>               <C>
Net sales                                                               $174,358          $177,193          $174,673
Cost of goods sold                                                       166,314           160,243           165,266
                                                                 ----------------  ---------------- -----------------
GROSS PROFIT                                                               8,044            16,950             9,407
Selling, general and administrative expenses                              11,810            11,370            11,634
Impairment and restructuring expenses                                        847               398             8,683
Other income                                                                 766               582               476
                                                                 ----------------  ---------------- -----------------
  OPERATING PROFIT (LOSS)                                                 (3,847)            5,764           (10,434)
Other (expense) income:
  Interest expense                                                        (4,783)           (5,275)           (9,090)
  Interest income                                                                                                192
  Gain on extinguishment of debt                                                             3,643            16,072
                                                                 ----------------  ---------------- -----------------
                                                                          (4,783)           (1,632)            7,174
                                                                 ----------------  ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES                                         (8,630)            4,132            (3,260)
Income tax expense (benefit)                                              (3,164)            1,541            (1,198)
                                                                 ----------------  ---------------- -----------------

NET INCOME (LOSS)                                                        $(5,466)           $2,591           $(2,062)
                                                                 ================  ================ =================



</TABLE>


See notes to consolidated financial statements.






                                       30
<PAGE>

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

<TABLE>
<CAPTION>

                                                              Additional                                   Total
                                      Common Stock             Paid-In                                   Shareholder's
                                Shares          Amount         Capital        Accumulated Deficit          Equity
                             --------------  -------------  ---------------  -----------------------  -----------------
<S>                                    <C>             <C>         <C>                      <C>                <C>
Balance at June 30, 2001               100             $0          $51,792                  $(2,411)           $49,381
  Net Loss                                                                                   (2,062)            (2,062)
                             --------------  -------------  ---------------  -----------------------  -----------------
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
                             ==============  =============  ===============  =======================  =================

</TABLE>








See notes to consolidated financial statements.









                                       31
<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Delta Mills, Inc.
(In Thousands)
                                                                      Year Ended           Year Ended            Year Ended
                                                                     July 3, 2004         June 28, 2003         June 29, 2002
                                                                   ------------------   ------------------    ------------------
OPERATING ACTIVITIES
<S>                                                                         <C>                    <C>                 <C>
  Net income (loss)                                                         $(5,466)               $2,591              $(2,062)
  Adjustments to reconcile net income (loss) to net
     cash provided by operating activities:
     Depreciation                                                             8,830                8,979                 9,174
     Amortization                                                               112                  135                   370
     Decrease in deferred loan costs                                                                  175                   541
     Discount to face value on repurchase of bonds                                                (3,818)              (16,613)
     Impairment and restructuring expenses                                      847                  398                 8,683
     Change in deferred income taxes                                         (3,164)              (1,089)               (1,225)
     Gains on disposition of property
        and equipment                                                          (253)                (433)                 (356)
     Changes in operating assets and liabilities:
        Accounts receivable                                                   5,855                5,407              (12,251)
        Inventories                                                          11,756              (11,388)                10,455
        Other current assets                                                    218                 (495)                   522
        Deferred compensation                                                (2,920)                 306                   672
        Accounts payable and accrued expenses                                (7,997)               3,732                 4,512
                                                                   ------------------   ------------------    ------------------
          NET CASH PROVIDED BY OPERATING ACTIVITIES                           7,818                4,500                 2,422
                                                                   ------------------   ------------------    ------------------

INVESTING ACTIVITIES Property, plant and equipment:
     Purchases                                                               (5,146)              (6,442)               (6,496)
     Proceeds of dispositions                                                   861                  807                   429
                                                                   ------------------   ------------------    ------------------
           NET CASH USED IN
                         INVESTING ACTIVITIES                                (4,285)              (5,635)               (6,067)
                                                                   ------------------   ------------------    ------------------

FINANCING ACTIVITIES
  Proceeds from revolving lines of credit                                   176,501              195,461                44,979
  Repayments on revolving lines of credit                                  (179,969)            (181,970)              (33,614)
  Repurchase and retirement of long-term debt                                                    (11,888)              (19,383)
                                                                   ------------------   ------------------    ------------------
          NET CASH PROVIDED BY (USED IN)
                          FINANCING ACTIVITIES                               (3,468)               1,603               (8,018)
                                                                   ------------------   ------------------    ------------------

INCREASE (DECREASE) IN CASH AND
         CASH EQUIVALENTS                                                        65                  468              (11,663)

Cash and cash equivalents at beginning of year                                  520                   52                11,715
                                                                   ------------------   ------------------    ------------------
         CASH AND CASH EQUIVALENTS AT END OF YEAR                              $585                 $520                   $52
                                                                   ==================   ==================    ==================


</TABLE>





See notes to consolidated financial statements.

                                       32
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A--DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS: The Company manufactures woven fabrics that are sold to
customers.  The  Company's  operations,  all within the  textile  industry,  are
considered a single business segment.

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  thirty-two
years, but predominantly over seven to fourteen 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.

Prior to June 30, 2002, the impairment of long-lived assets was accounted for in
accordance  with SFAS No. 121,  "Accounting  for the  Impairment  of  Long-Lived
Assets and for  Long-Lived  Assets to be Disposed  Of." The adoption of SFAS No.
144 did not have a  material  impact  on the  Company's  consolidated  financial
statements.

REVENUE RECOGNITION: Sales are recorded upon shipment or designation of specific
goods for later  shipment at  customers'  request with related risk of ownership
passing to such customers.

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

INCOME TAXES:  Deferred income taxes 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.


                                       33
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

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

COTTON  PROCUREMENT:  The Company  contracts to buy cotton with future  delivery
dates at fixed  prices in order to reduce  the  effects of  fluctuations  in the
prices of cotton used in the  manufacture of its products.  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 requirements up to eighteen months
in the future.  If market prices for cotton fall below the  Company's  committed
fixed costs and it is estimated  that the cost of cotton is not  recoverable  in
future sales of finished  goods,  the  differential is charged to income at that
time. The Company's  management has determined that its cotton buying  contracts
meet the  criteria for  exclusion  under the normal  purchases  and normal sales
exemption of Statement of Financial  Accounting  Standards No. 133,  "Accounting
for Derivative Instruments and Hedging Activities", and its related amendments.

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 3, 2004             June 28, 2003           June 29, 2002
                                                            -----------------        ------------------      -----------------

<S>                                                      <C>                      <C>                        <C>
Net income (loss), as reported                           $           (5,466)      $             2,591        $       (2,062)

Add stock based employee compensation expense
included in reported net income (loss), net of tax                       25                       174                   136

Less total stock based compensation expense
   determined under fair value based method, net
   of related tax effects                                               (25)                     (496)                 (491)
                                                            -----------------        ------------------      -----------------

Pro forma net income (loss)                              $           (5,466)      $             2,269        $       (2,417)
                                                            =================        ==================      =================

</TABLE>


RECENT  ACCOUNTING  PRONOUNCEMENTS:  In April  2002,  the  Financial  Accounting
Standards Board (FASB) issued Statement No. 145,  "Rescission of FASB Statements
Nos. 4 and 64,  Amendment of FASB Statement No. 13, and Technical  Corrections."
Among other things,  Statement No. 145,  through the rescission of Statement No.
4, no longer requires extraordinary item treatment for gains and losses from the
extinguishment  of debt,  unless the debt  extinguishment  meets the  unusual in
nature  and  infrequency  of  occurrence  criteria  established  in APB 30.  The
Statement  was  effective  for fiscal  years  beginning  after May 15,  2002 and
requires  the  reclassification  of  prior  period  items  that do not  meet the
extraordinary item classification criteria in APB 30. Upon adoption, the Company
reclassified all extraordinary gains recognized for the early  extinguishment of
debt as a component  of income  (loss)  before  income  taxes for all  financial
statement periods presented.

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.

                                       34
<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 2003
and 2002 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 assigned trade accounts receivable are recorded
on the Company's  books at full value and  represent  amounts due to 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.

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 2004,  the  Company had two  customers,  V.F.  Corporation,  and
Levi-Strauss  and  their  respective  subcontractors,   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  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. For fiscal year 2002, the Company had two
customers,  Levi-Strauss and V.F.  Corporation,  net sales to each of which each
exceeded 10% of  consolidated  net sales.  The Company's  aggregate net sales to
these customers were $63 million,  or approximately 36%, of net sales for fiscal
year 2002. The foregoing amounts include sales directly to subcontractors of the
named  companies.  In addition,  during fiscal years 2004,  2003,  and 2002, net
sales of military fabrics to apparel customers  accounted for approximately 44%,
33%, and 31%, 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

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 3, 2004, the outstanding  balance of the notes was  $31,941,000,  unchanged
from the balance at June 28, 2003.

At July 3, 2004,  the carrying  value of the Senior Notes was  $31,941,000.  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 3, 2004 due to the variable interest rate provision of the facility.

The Company has a revolving  credit facility with GMAC with a term lasting until
March 2007. Borrowings under this credit facility are based 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 4.362% at July 3, 2004 and is based on
a spread over either LIBOR or a base rate.  Borrowings  under this facility were
$21.4  million  and  $24.9  million  as of July  3,  2004  and  June  28,  2003,
respectively.  As of July 3, 2004, the revolver  availability was  approximately
$12.5 million, net of the $7 million availability reduction described below.

                                       35
<PAGE>

NOTE C--LONG-TERM DEBT AND LEASES - CONTINUED

Prior to April 19, 2004, the GMAC credit  facility had financial  covenants that
required the Company to comply with a maximum leverage ratio and a minimum fixed
coverage charge ratio. As a result of the operating loss in the third quarter of
fiscal year 2004,  the Company was not in compliance  with the maximum  leverage
ratio covenant at the end of that quarter.  On April 19, 2004,  GMAC granted the
Company a waiver and amendment that waived the existing  default with respect to
the maximum  leverage ratio covenant,  temporarily  amended the maximum leverage
ratio  covenant  for the fourth  quarter of fiscal  year 2004,  and  temporarily
eliminated  the fixed charge  coverage  ratio covenant for the fourth quarter of
fiscal year 2004. The Company was in compliance with these amended  covenants at
July 3, 2004.  The April 2004 waiver and  amendment  also reduced the  Company's
availability  under the credit  facility by $7 million for the remaining term of
the facility and increased the interest  rates under the credit  facility by 125
basis points;  however,  the interest  rates will revert to their  pre-amendment
levels  if the  Company  has net  income  for  fiscal  year 2005 and no event of
default  exists  under the credit  facility.  On August 18,  2004,  the  Company
entered into further  amendments to the GMAC credit  facility  pursuant to which
the maximum  availability  was reduced to $38 million,  and the maximum leverage
ratio and fixed charge  coverage  ratio  covenants  were replaced with a minimum
EBITDA  covenant.  The new covenant sets required minimum EBITDA levels for each
quarter of fiscal year 2005 and  provides  that it will  constitute  an event of
default if the  Company  and its lender  fail to agree by the end of fiscal year
2005 to minimum  EBITDA  levels for the  remainder of the term of the  revolving
credit facility.

On October 18,  2004,  GMAC,  the lender  under Delta  Mills'  revolving  credit
facility,  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.

The Company's  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.  The Company may
loan funds to Delta Woodside subject to compliance with the same conditions.  At
July 3,  2004,  the  Company  was  prohibited  by these  covenants  from  paying
dividends and making loans to Delta Woodside. During the year ended July 3, 2004
and the year ended June 28, 2003, the Company did not pay any dividends to Delta
Woodside.

Total interest  expense  incurred by the Company was $4,783,000,  $5,275,000 and
$9,090,000 for fiscal years 2004, 2003, and 2002,  respectively,  net of $46,000
and   $386,000  of   capitalized   interest  in  fiscal  years  2004  and  2003,
respectively.  There was no  interest  capitalized  in fiscal  year 2002.  Total
interest  paid  during  fiscal  years  2004,  2003,  and  2002  was  $4,781,000,
$5,778,000 and $10,252,000, respectively.

Rent expense relating to operating leases was approximately  $466,000,  $435,000
and $ 1,733,000 for fiscal years 2004, 2003 and 2002, respectively.

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

                           Long-term             Operating
         Fiscal Year          Debt                 Leases
         -----------       ----------            ---------

                  2005                           $248,000
                  2006                             82,000
                  2007                             77,000
                  2008    $31,941,000              76,000
                  2009                             37,000
                      ----------------  ------------------
                          $31,941,000            $520,000
                      ================  ==================

                                       36
<PAGE>

NOTE D--EMPLOYEE BENEFIT PLANS

The Company  participates  in the Delta Woodside  Industries,  Inc. 40l(k) Plan.
During  fiscal  years 2004,  2003 and 2002,  the Company  contributed  $556,000,
$617,000,  and  $574,000,  respectively,  to the 401(k)  plan to match  employee
contributions.

The Company participates in a Deferred  Compensation Plan, managed by DWI, which
permitted certain management employees to defer a portion of their compensation.
Deferred  compensation  accounts are credited with interest and are  distributed
after retirement,  disability or employment termination.  As of July 3, 2004 and
June  28,  2003,  the  Company's   liability  was  $4,665,000  and   $7,573,000,
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
will  be  paid  to  the  participant  upon  the  earlier  of  the  participant's
termination of employment or in accordance  with a schedule of payment that will
pay approximately 40%, 30%, 20% and 10% of the participant's  current account on
February 15 of 2004,  2005,  2006 and 2007,  respectively.  Any such February 15
payment will be conditioned on there being no default under the Company's Senior
Note Indenture or the Company's revolving credit facility and on compliance with
the fixed charge  coverage  ratio test in the Senior Note Indenture for the most
recently ended four full fiscal quarters,  determined on a pro forma basis. As a
result of this amendment to the deferred  compensation plan,  approximately $2.3
million,  which  represents  the February 15, 2005 payment,  plus  distributions
anticipated to occur in the next twelve months due to  participant  retirements,
has been  reclassified  on the  consolidated  balance sheet at July 3, 2004 from
deferred  compensation to accrued employee  compensation in current liabilities.
The first payment of approximately $3.1 million was made in February 2004.

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 $66,000 in fiscal year 2004 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),  $280,000,  and  $198,000  for  fiscal  years  2004,  2003 and  2002,
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 3, 2004,  the balance of the payable to
affiliate was $3.7  million, as compared to a balance of $3.5 million as of June
28, 2003. The increase of $0.2 million in fiscal year 2004 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.



                                       37
<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 $8.8 million which will be
reported in the fiscal year 2004 consolidated Federal income tax return with its
parent,  DWI.  The  consolidated  tax  group  had  a  regular  taxable  loss  of
approximately $9.0 million and alternative minimum taxable loss of approximately
$11.0 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  management  believes  that the  reversal  of existing
taxable temporary  differences will provide sufficient taxable income to realize
the remaining deferred tax assets.  Accordingly, no valuation allowance has been
provided for 2004 or 2003.

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

                                                  2004                     2003
                                                  ----                     ----
Assets:
<S>                                            <C>                      <C>
Deferred compensation                          $  1,926,000             $  3,026,000
Accrued and sundry liabilities                    1,157,000                1,389,000
Net operating loss carryforwards                  3,704,000                  284,000
Inventories                                                                   62,000
Other                                                 8,000                   68,000
                                              ------------------       ----------------
Gross deferred tax assets                         6,795,000                4,829,000
Valuation allowance
                                              ------------------       ----------------
Deferred tax assets                               6,795,000                4,829,000
                                              ------------------       ----------------

Liabilities:
Depreciation                                     10,483,000               11,733,000
Inventories                                          52,000
                                              ------------------       ----------------
Deferred tax liabilities                         10,535,000               11,733,000
                                              ------------------       ----------------
      Net deferred tax liabilities              $(3,740,000)             $(6,904,000)
                                              ==================       ================
</TABLE>


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

                                                             2004                     2003                     2002
                                               -------------------     --------------------     --------------------
<S>                                            <C>                     <C>                      <C>
Current:
     Federal income taxes                                                       $2,230,000
     State income taxes                                                            400,000                  $15,000
                                               -------------------     --------------------     --------------------
           Total current                                                         2,630,000                   15,000
Deferred:
      Federal income taxes                            $(2,939,000)                (804,000)              (1,009,000)
      State income taxes                                 (225,000)                (285,000)                (204,000)
                                               -------------------     --------------------     --------------------
           Total deferred                              (3,164,000)              (1,089,000)              (1,213,000)

                                               -------------------     --------------------     --------------------
Total income tax expense (benefit)                    $(3,164,000)              $1,541,000              $(1,198,000)
                                               ===================     ====================     ====================

</TABLE>

                                       38
<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>

                                                                 2004                 2003                   2002
                                                      ------------------   --------------------   ------     -----


<S>                                                   <C>                  <C>                    <C>
Income tax expense (benefit) at statutory rates       $     (3,021,000)    $     1,446,000        $    (1,141,000)
State tax expense (benefit), net of federal benefit           (146,000)             75,000               (123,000)
Other                                                            3,000              20,000                 66,000
                                                      ------------------   ------------------     -----------------
                                                      $     (3,164,000)    $     1,541,000        $    (1,198,000)
                                                      ==================   ==================     =================
</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 3, 2004           JUNE 28, 2003
                                   ------------           -------------

Current assets                         $ 83                   $  88
Noncurrent assets                        13                      38
Current Liabilities                   2,275                   1,912
Noncurrent liabilities                  697                   1,047
Stockholder's deficit                (2,876)                 (2,833)

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

<TABLE>
<CAPTION>

                                                             Year Ended
                                         -------------------------------------------------
                                         July 3, 2004      June 28, 2003     June 29, 2002
                                         ------------      -------------     -------------


<S>                                         <C>                <C>               <C>
Net sales -intercompany commissions         $3,909             $3,986            $3,930
Cost and expenses                            3,952              4,033             4,250
Net loss                                       (43)               (47)             (320)

</TABLE>

                                       39
<PAGE>

NOTE H--COMMITMENTS AND CONTINGENCIES

The Company has  entered  into  agreements,  and has fixed  prices,  to purchase
cotton  for  use in its  manufacturing  operations.  At July  3,  2004,  minimum
payments  under  these  contracts  with   non-cancelable   contract  terms  were
approximately $7.1 million.

Two of the Company's  South Carolina  plants,  the Delta 2 and Delta 3 Finishing
Plants,  have  experienced  high  nitrate  levels at the  spray  field for these
plants. The Company is working with the South Carolina  Department of Health and
Environmental  Control  ("DHEC") to address this issue.  On August 5, 2004, DHEC
proposed a consent  agreement,  which establishes a groundwater mixing zone with
nitrate  parameters that the Company believes it can satisfy without  additional
material  cost or future  violations.  Although  there is no assurance  that the
Company will be successful and it could face  administrative  penalties if it is
not,  the  Company  does not  currently  believe  that this  matter  will have a
material adverse impact on the Company's financial position.

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 that the Company is required to meet by April
1, 2006.  Discharges  from nitrate  recovery wells have exceeded this parameter.
The Company has proposed to convert the recovery wells into monitoring  wells to
eliminate  the zinc  discharge  and  understands  that DHEC is  amenable to this
approach. Although there is no assurance that the Company will be successful and
it could be required to construct a zinc  wastewater  treatment  feature  and/or
face  administrative  penalties if it does not,  the Company does not  currently
believe that 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
$306,000  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.  At the time of this  filing,
management  believes that the escrow is sufficient to cover any expenses related
to the remediation of this property.

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 the
Company'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 the Company
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. The
Company  believes that the Selling  Corporation's  share of the  liabilities  at
either of these sites will be immaterial.

At the Mississippi  site, the PRP group completed the surface removal action and
investigated  soil and  groundwater  contamination,  both at the site and in the
surrounding  area.  The  Company'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 the Company'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  for an EPA RCRA  contractor to determine if any
homes  around the site still used  private  water wells and  located  three such
homes.


                                       40
<PAGE>

NOTE H -- COMMITMENTS AND CONTINGENCIES - CONTINUED

Although no assurance can be provided,  the Company 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 the  Company.  The Company 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.

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 Delta Mills, Inc., Park Yarn Mills Company,  Inc. ("Park Yarn"), owned
the Site for approximately six (6) years, from approximately 1977 to 1983 (prior
to the time Delta Mills, Inc. became a subsidiary of Delta Woodside  Industries,
Inc.) Delta Mills,  Inc. 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.

During 1998,  Delta Woodside  received  notices from the State of North Carolina
asserting  deficiencies  in state  corporate  income and franchise taxes for the
Delta  Woodside'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 Delta Woodside's tax years 1994 - 2000. Delta Woodside
rejected this offer and  continued  with its appeal due to  management's  belief
that the State's legal  position is in conflict with  established  principles of
federal   constitutional   law.  Delta  Woodside   considers  all  exposures  in
determining probable amounts of payment; therefore, any payment in settlement of
this matter  will not result in a material  impact on the  Company's  results of
operations.

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.


NOTE I--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited  quarterly results of operations for
the years ended July 3, 2004 and June 28, 2003:
<TABLE>
<CAPTION>

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

<S>                                 <C>                 <C>              <C>               <C>
Net sales                           $42,581             $48,500          $37,919           $45,358

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

Net income (loss)                    (1,977)                287           (1,238)           (2,538)

2003 QUARTER ENDED
(IN THOUSANDS)                 SEPTEMBER 28        DECEMBER 28         MARCH 30          JUNE 28
                               ------------        -----------         --------          -------

Net sales                           $46,179             $35,853          $46,489           $48,672

Gross profit                          5,545               3,695            2,840             4,870

Net income (loss)                     1,432                 293           (1,100)            1,966
</TABLE>

                                       41
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

NOTE J--GAIN ON EXTINGUISHMENT OF DEBT

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.  During fiscal year 2002, the Company purchased
$35,996,000  face amount of its 9.625%  Senior Notes for  $19,383,000  including
expenses of approximately $500,000. The Company recognized a gain of $16,072,000
after the  write-off  of deferred  loan costs of  $541,000.  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

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 is in the  process of  liquidating  the
assets associated with this facility.

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 and the Company is in the process of  liquidating  the
assets associated with this facility.

On August  24,  2004,  the  Company  contracted  to sell the 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 has since  terminated  the proposed sale as permitted by the contract.
The Company has lowered its offering price for the property to reflect the price
in the terminated contract.

During  fiscal year 2004 and fiscal year 2003,  the Company  paid  $342,000  and
$196,000,  respectively, in restructuring costs and has a remaining liability of
$0 and $342,000 as of July 3, 2004 and June 28, 2003, respectively.

As of July 3, 2004 and June 28,  2003,  the  Company  had $2.5  million and $3.9
million,  respectively,  in assets  held for sale  related to the closing of the
Catawba facility and the Furman plant.



                                       42
<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 3, 2004,  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.  There were no changes in the  Company's
         internal  controls over financial  reporting  during the fiscal quarter
         ended July 3, 2004 that have  materially  affected,  or are  reasonably
         likely to  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.


                                       43
<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.

<TABLE>
<CAPTION>
AUDIT FEES AND SERVICES                  FISCAL 2004                    FISCAL 2003

<S>                                               <C>                            <C>
Audit Fees                                        $174,700                       $115,000
Audit Related Fees                                   9,000(1)                      12,500(1)
Tax Fees                                            36,800(2)                      92,045(2)
All Other Fees                                           0                              0
                                    -----------------------        -----------------------
TOTAL FEES FOR ALL SERVICES                       $220,500                       $219,545
                                    =======================        =======================
</TABLE>


1)   Audit  related fees for both fiscal  years 2004 and 2003  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  2004  and  2003  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.





                                       44
<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 3, 2004 and June 28, 2003.

         Consolidated  statements of operations--Years  ended July 3, 2004, June
         28, 2003, and June 29,2002.

         Consolidated  statements of shareholder's  equity-- Years ended July 3,
         2004, June 28, 2003, and June 29,2002.

         Consolidated  statements of cash flows-- Years ended July 3, 2004, June
         28, 2003, and June 29,2002.

         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:
<TABLE>


<S>               <C>
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").
3.2               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").*
4.3.1             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 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
4.3.1.1           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 Mills,  Inc. for the fiscal year ended June 30, 2001 (the "DMI 2000 10-K").*
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.

                                       45
<PAGE>

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K - CONTINUED

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.
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.
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 Company's Current Report on Form 8-K dated
                  March 31, 2000 and filed with the Securities and Exchange Commission on April 13, 2000.
4.3.4             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.*
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.


                                       46
<PAGE>

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 eriod 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).




</TABLE>






                                       47
<PAGE>
<TABLE>

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - CONTINUED
-------- ----------------------------------------------------------------------------

<S>               <C>
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 10.7:  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
                  the Company 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 Company's Report on Form 10-K for the fiscal year ended June 30, 2001 and filed with the Securities and
                  Exchange Commission on September 24, 2001, the "2001 10-K."
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 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.*
10.11             See Exhibits 4.2, 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.

</TABLE>

*                 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.



<PAGE>


         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)      Reports on Form 8-K

                  None

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

         (d)      Financial Statement Schedules
                  Not applicable



















                                       49
<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)


      October 15, 2004                        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 on the dates indicated.

<TABLE>

<S>                                   <C>              <C>                                                      <C>
/s/ E. Erwin Maddrey, II              10/15/2004       /s/ William F. Garrett                                   10/15/2004
------------------------------------- -------------    -------------------------------------------------------- -------------
E. Erwin  Maddrey,  II                Date             William F. Garrett                                       Date
Director                                               President, Chief Executive Officer and Director

/s/ Buck A. Mickel                    10/15/2004       /s/ William H. Hardman, Jr.                              10/15/2004
------------------------------------- -------------    -------------------------------------------------------- -------------
Buck A. Mickel                        Date             William H. Hardman, Jr.                                  Date
Director                                               Vice President, Treasurer, and Chief Financial Officer

                                                       /s/ Donald C. Walker                                     10/15/2004
                                                       -------------------------------------------------------- -------------
                                                       Donald C. Walker                                         Date
                                                       Vice President, Assistant Secretary, and Controller



</TABLE>









                                       50
<PAGE>

<TABLE>

              EXHIBIT INDEX

<S>           <C>
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.

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.

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.





</TABLE>





<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>            <C>
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
                                   ================                     ================      ==================      ==============

Year ended June 29, 2002                   $ 51,000                           $1,795,000(1)       $(1,814,000)(2)            $32,000
                                   ================                     ================      ==================      ==============

</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.





                                       F-2