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

                                    FORM 10-K

                                   (Mark One)
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE  SECURITIES  EXCHANGE  ACT OF 1934 For the Fiscal Year
                   ended January 2, 1999

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

                         For the transition period from
                     _________________ to _________________

                           Commission File No. 0-5680

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

                (I.R.S. Employer Identification No.) 56-0506342

         State or other jurisdiction of incorporation or organization:
                                 North Carolina

                            191 Sterling Street, N.W.
                          Valdese, North Carolina 28690
               (Address of principal executive offices) (Zip Code)

              Registrant's telephone number, including area code:
                                  828 874-6341

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

          Common Stock No Par Value (Stated Value of $0.66 Per Share)
                                (Title of Class)

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 a 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 the 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
Form10-K.[ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant (computed by reference to the average bid and asked price on February
24, 1999) was $3,295,000.

Page 1 of 42

<PAGE>

The number of shares  outstanding of the registrant's only class of common stock
as of March 1, 1999 is 2,741,168 shares.


DOCUMENTS INCORPORATED BY REFERENCE

Portions  of the  Company's  proxy  statement  related to the annual  meeting of
shareholders  of the Company  scheduled  for May 18, 1999,  which is to be filed
pursuant to  Regulation  14A not later than 120 days after the end of the fiscal
year covered by this report,  are  incorporated by reference in Part III of this
report.

Page 2 of 42

<PAGE>

BURKE MILLS, INC.
PART I

ITEM 1 - BUSINESS
-----------------

a) General  Development  of  Business - General  business  development  of Burke
Mills,  Inc.  (the  Company)  during  the  fiscal  year  ended  January 2, 1999,
consisted of planning and implementing new products,  researching and purchasing
new machinery, and reacting to competitive pricing pressures in the market.

In 1998 the Company  began  production  and sales of two new products and made a
decision  to  add  another  in  1999.  Development  work  was  completed  on  an
intermingled  yarn,  which is  processed  by blending  different  colored  yarns
together.  The intermingled yarns will give the Company a value added product to
be sold primarily in the upholstery  market.  Sewing thread yarns, which will be
sold primarily to apparel markets, were also introduced during 1998.

Machinery  needs for new products and for cost  reductions  were analyzed during
the year,  and resulted in  commitments  for  machinery to be delivered in 1999.
Machinery for the intermingled yarns, at a cost of $194,000,  will arrive in the
second quarter.  Machinery for a new product, at a cost of $450,000,  will begin
to arrive in the second  quarter  and become  operational  in the second half of
1999.  Commitments  were  also  made for  automated  loading  equipment  for the
dyehouse  at a cost  of  $500,000  and  for new  dyeing  equipment  at a cost of
$1,582,000  that will  replace  older,  less  efficient  machinery  and increase
capacity (also see note 16).

During the fourth quarter the Company experienced a weakening market and pricing
pressures. The market conditions forced price reductions in an attempt to retain
customers  and  resulted  in lower  gross  margins.  The  Company  expects  this
condition to carryover into the first quarter of 1999.

Burke Mills, Inc., became ISO9002 Registered in October, 1998.

(b) Financial  Information  about  Industry  Segments - The Company had only one
industry segment during the fiscal year ended January 2, 1999.

(c)  Narrative  Description  of Business - The  Company is engaged in  twisting,
texturing, winding, dyeing, processing and selling of filament, novelty and spun
yarns and in the dyeing and processing of these yarns for others on a commission
basis.

The principal  markets served by the Company are upholstery and industrial  uses
through the knitting and weaving industry.

Page 3 of 42

<PAGE>

BURKE MILLS, INC.
PART I

ITEM 1 - BUSINESS (continued)
-----------------------------

The  Company's  products  are  sold  in  highly  competitive  markets  primarily
throughout the United States. Competitiveness of the Company's products is based
on price,  service and product  quality.  Many of the Company's  competitors are
divisions  or  segments  of larger,  diversified  firms with  greater  financial
resources than those of the Company.

The methods of distribution of the Company's  products consist of the efforts of
the  Company's  sales force which makes  contact with  existing and  prospective
customers.  The Company  markets its products  throughout  the United States and
Canada,  with the bulk of business being primarily in the eastern United States,
through three salesmen  employed  directly by the Company on salary and a number
of commissioned  sales agents working on various accounts.  The Company also has
begun to market  its  products  in Mexico,  Central  America  and South  America
through its fifty-percent (50%) owned affiliate, Fytek,S.A. de C.V.

The  dollar  amount of  backlog  of  unshipped  orders as of January 2, 1999 was
$3,832,000 and as of January 3, 1998 was  $4,098,000.  Generally,  all orders in
backlog at the end of a year are shipped  the  following  year.  The backlog has
been calculated by the Company's  normal practice of including  orders which are
deliverable  over  various  periods  and which may be changed or canceled in the
future.

The most important raw materials used by the Company are  unprocessed  raw yarn,
dyes and  chemicals.  The Company  believes that its sources of supply for these
materials are adequate for its needs and that it is not substantially  dependent
upon any one supplier.

With respect to the practices of the Company  relating to working capital items,
the Company  generally  carries enough  inventory for  approximately 54 days. On
average,  the Company turns its inventory  approximately 6 to 8 times each year.
The Company has been able to meet its  delivery  schedules  and has been able to
enjoy a ready supply of raw materials from suppliers.  For the fiscal year ended
January 2, 1999,  approximately 5.0% of the Company's sales were from dyeing and
processing  of yarn for  customers  who supplied the yarn.  The Company does not
allow customers the right to return  merchandise except where the merchandise is
defective. The Company rarely allows payment terms to its customers beyond sixty
(60) days, and the Company has experienced no significant problems in collecting
its accounts  receivable.  The Company believes that industry practices are very
similar to that of the Company in regard to these matters.

Page 4 of 42

<PAGE>

BURKE MILLS, INC.
PART I

ITEM 1 - BUSINESS (continued)
-----------------------------

Substantially  all  of  the  Company's  manufacturing   operations  are  run  by
electrical  energy  purchased from local utility  companies and its premises are
heated with oil and gas.  The  Company  has not  experienced  any  shortages  in
electricity,  oil or gas  during  the  fiscal  year.  The  Company  has  made no
arrangements for alternate sources of energy.  While energy related difficulties
are not  expected to prevent  the  Company  from  achieving  desired  production
levels,  energy  shortages of extended  duration could have an adverse impact on
the Company's operations.

The Company has established a recycling program for its major waste items: yarn,
cardboard, plastic tubes and cleaning fluid.

The Company has made various  changes in its plant that  regulates  discharge of
materials  into  the  environment.   The  Company  believes  its   manufacturing
operations are in compliance with all presently  applicable  federal,  state and
local  legislative  and  administrative   regulations  concerning  environmental
protection;  and,  although it cannot  predict the effect that future changes in
such  regulations  may have,  particularly  as such changes may require  capital
expenditures or affect earnings, it does not believe that any competitor subject
to the same or similar  regulations  will gain any  significant  and competitive
advantages as a result of any such changes. Compliance by the Company during the
fiscal year ended  January 2, 1999 with federal,  state and local  environmental
protection laws had no material effect on capital expenditures,  earnings or the
competitive position of the Company.

During 1996 in connection with a bank loan to the Company secured by real estate
the  Company  had a Phase  I  Environmental  Site  Assessment  conducted  on its
property.  The  assessment  indicated  the  presence  of a  contaminant  in  the
groundwater under the Company's property.  The contaminant was a solvent used by
the Company in the past but no longer used.  The  contamination  was reported to
the North Carolina  Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed.  The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and is
moving  toward a solution of natural  attenuation.  The Company  believes it has
made an adequate  provision  to earnings  in 1997 to cover any future  cost.  No
provision was made in 1998.  This situation will have no material  impact on the
capital expenditures, earnings or competitive position of the Company.

On, February 10, 1999, the Company had 307 employees.

The Company's yarn division is its only division.

Page 5 of 42

<PAGE>

BURKE MILLS, INC.
PART I

ITEM 1 - BUSINESS (continued)
-----------------------------

During the fiscal  year ended  January 2, 1999,  sales to CMI  Industries,  Inc.
exceeded  ten percent of the  Company's  revenue for that year.  The loss of the
customer  would have a material  adverse effect on the Company in the short run;
and, the Company believes that it would be able to replace the business within a
reasonable time.

The Company owns 49.8% of the stock and 50% of the voting control of Fytek, S.A.
de C.V. (Fytek),  a Mexican  corporation with its principal place of business in
Monterey,  Mexico.  The other  shareholder in Fytek is Fibras Quimicas,  S.A., a
Mexican  Corporation.  The purpose of Fytek is the  manufacture and marketing of
yarns.  The  Company  will  acquire  yarn from Fytek and use Fytek to market and
distribute its dyed yarn in Mexico,  Central  America and South  America.  Fytek
began production in the fourth quarter of 1997.

(d)  Financial  Information  about  Foreign and Domestic  Operations  and Export
Sales--  Company sales to Brazil,  Canada and Mexico  during 1998  accounted for
approximately  8% of total net sales.  During 1997 sales to these countries were
less than 6%, and such sales aggregated less than 7% in 1996.

ITEM 2. PROPERTIES
------------------

The  executive  offices  and  manufacturing  plant of the Company are located at
Valdese,  North  Carolina,  which  is 75 miles  northwest  of  Charlotte,  North
Carolina,  and 60 miles east of Asheville,  North  Carolina.  The main plant and
executive  offices  are  located  on a  sixteen-acre  tract of land owned by the
Company. Eleven acres of this tract are encumbered by a first priority lien deed
of trust held by First Union  National  Bank of North  Carolina.  The main plant
building used by the Company  contains  approximately  308,928  square feet. The
Company also owns an auxiliary  building  containing  36,600 square feet located
adjacent  to its  main  plant.  This  latter  building  is  currently  used  for
warehousing yarn and as a distribution center.

The  plant  buildings  are steel and brick  structures  protected  by  automatic
sprinkler systems. The various departments, with the exception of the production
dyehouse,  are heated,  cooled and  humidified.  The Company  considers  all its
properties  and  manufacturing  equipment to be in a good state of repair,  well
maintained and adequate for its present needs.

Page 6 of 42

<PAGE>

BURKE MILLS, INC.
PART I

ITEM 2. PROPERTIES (continued)
------------------------------

The Company  utilizes  substantially  all of the space in its main plant for its
offices,  machinery  and  equipment,  storage and receiving  areas.  The Company
utilizes  substantially all of the space in the auxiliary building for warehouse
and distribution purposes.

The approximate  maximum capacity in pounds per year of the Company's  machinery
and equipment,  based upon operating the machinery and equipment  seven (7) days
per  week  fifty  (50)  weeks  per  year,  and  the  approximate  percentage  of
utilization thereof during the fiscal year ended January 2, 1999 are as follows:


                                Pounds/Year 1998
     Department                  Capacity         Utilization
     ----------                  --------         -----------
     Twisting Machines             676,000           62%
     Winding Machines           21,218,000           45%
     Texturing Machines          4,835,000           60%
     Dyeing Equipment           20,000,000           71%


ITEM 3. LEGAL PROCEEDINGS
-------------------------

The  Company is not a party and its  property  is not  subject  to any  material
pending legal proceedings other than ordinary routine  litigation  incidental to
the business.


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

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

Page 7 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 
STOCKHOLDER MATTERS
-------------------

(a) The principal  United States (or other) market on which the Company's common
stock is being traded is the United States over-the-counter market. The range of
high and low bid  quotations  for the Company's  common stock for each quarterly
period during the past two fiscal years ended January 2, 1999, and on the latest
practicable date (as obtained from the NASDAQ Stock Market, Inc., in Washington,
DC)is as follows:

                  Quarter Ending 
                      1997                  High Bid          Low Bid
                    ------                  ------            ----- 
                  March 31                  $3.50             $2.625
                  June 30                   $3.375            $2.50
                  September 30              $3.375            $2.375
                  December 31               $3.50             $2.50

                  1998
                  ----
                  March 31                  $3.125            $2.50
                  June 30                   $4.313            $2.531
                  September 30              $4.438            $2.00
                  December 31               $3.75             $2.00

                  March 22, 1999            $1.875            $1.625

Such  over-the-counter  market quotations reflect inter-dealer  prices,  without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.

(b) As of February  25,  1999 there were 428 holders of the common  stock of the
Company.

(c) The Company has  declared no  dividends  on its common stock during the past
two years.


ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

The selected  financial data set forth on the following page, for the five years
ended January 2, 1999 have been derived from the audited financial statements of
the  Company.  The  data  should  be  read  in  conjunction  with  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
the audited  financial  statements and related notes thereto and other financial
information included therein.

Page 8 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 6.  SELECTED FINANCIAL DATA (continued)
--------------------------------------------
        (in thousands except per share data)

                                                Years Ended
                                  --------------------------------------------
                                 Jan. 2     Jan. 3   Dec. 28   Dec.30    Dec.31
                                  1999       1998     1996     1995       1994
                                  ----       ----     ----     ----       ----
SELECTED INCOME STATEMENT DATA
  Net Sales                      $42,169    $41,156  $40,649   $34,148  $36,194
  Cost of Sales                   37,825     36,765   36,887    30,666   30,928
                                  ------     ------   ------    ------   ------
  Gross Profit                   $ 4,344    $ 4,391  $ 3,762   $ 3,482  $ 5,266
                                 -------    -------  -------   -------  -------
  Income before Income Taxes     $ 1,172    $ 1,059  $   869   $ 1,156  $ 3,376
         Income Taxes                383        433      284       212      867
                                     ---        ---      ---       ---      ---

  Net Income                     $  789     $   626  $   585   $   944  $ 2,509
                                 ======     =======  =======   =======  =======
  Per Share (Note A)
    Net income                   $  .29     $   .23  $  .21    $   .34  $   .92
                                 ======     =======  ======    =======  =======
    Cash dividends declared
         Per common share          None        None     None      None     None
                                  ======     =======  ======    =======  ======
  Weighted average number
    of common shares
    outstanding                   2,741       2,741     2,741    2,741    2,741
                                  =====       =====     =====    =====    =====

SELECTED CASH FLOW DATA
  Capital expenditures          $ 2,162     $ 1,343   $ 1,025  $ 6,372  $ 1,541
                                =======     =======   =======  =======  =======
   Depreciation                  $ 1,744    $ 1,600   $ 1,508   $ 1,052  $ 1,006
                                =======    =======   =======   =======  =======
  Cash provided by
    operating activities        $ 1,926    $ 3,646   $ 1,527   $ 2,004  $ 2,186
                                =======    =======   =======   =======  =======


                                  Jan. 2     Jan. 3   Dec. 28   Dec.30    Dec.31
                                  1999       1998     1996      1995       1994
                                  ----       ----     ----      ----       ---- 
SELECTED BALANCE SHEET DATA
  Current assets                $11,213     $11,785  $ 9,905   $ 7,641   $ 8,814
  Current liabilities             3,383       3,378    1,738     2,171     2,944
                                  -----       -----    -----     -----     -----
  Working capital               $ 7,830     $ 8,407  $ 8,167   $ 5,470   $ 5,870
                                =======     =======  =======   =======   =======

  Current ratio                    3.31        3.49     5.70      3.52      2.99
                                   ====        ====     ====      ====      ====

  Total assets                  $24,396     $24,348  $22,554   $20,769   $16,621
                                =======     =======  =======   =======   =======

  Long-term debt                $ 4,563     $ 5,313  $ 6,000   $ 4,964   $   955
                                =======     =======  =======   =======   =======

  Deferred income taxes         $ 2,221     $ 2,218  $ 2,003    $ 1,406  $ 1,399
                                =======     =======  =======    =======  =======

  Shareholders' equity          $14,229     $13,440  $12,813    $12,228  $11,284
                                =======     =======  =======    =======  =======

(A) Income per share has been computed  based on the weighted  average number of
    common shares outstanding during each period.

Page 9 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
AND RESULTS OF OPERATIONS
-------------------------
The  following  table  sets  forth  selected  operating  data of the  Company as
percentages of net sales for the periods indicated.


                     Relationship to Total Revenue
                               For the Year Ended
                     ------------------------------   Period to Period
                       Jan. 2   Jan. 3  Dec. 28       Increase (Decrease)
                        1999    1998     1996         1997-1998 1996-1997
                        ----    ----     ----         -------------------
Net Sales              100.0%  100.0%   100.0%         2.5%       1.2%

Cost of Sales           89.7    89.3     90.7          2.9       (0.3)

Gross profit margin     10.3    10.7      9.3         (1.1)       16.7
                        ----    ----      ---         ----        ----

Selling, general,
 administrative and
    factoring expenses   7.1    6.9       6.3          5.8        11.9
                         ---    ---       ---          ---        ----

Operating earnings       3.2     3.8      3.0        (13.6)       26.6

Other income             0.4     0.4      0.3          6.8        35.8

Other expenses          (1.3)   (1.7)    (1.2)       (16.7)       37.5
                        ----    ----     ----        -----        ----
Income before income
  Taxes and net equity
  In affiliates          2.3     2.5       2.1        (8.5)       21.8

Income taxes             0.9     1.0       0.7        (11.4)      52.3
                         ---     ---       ---        ------      ----
                         1.4     1.5       1.4         (6.4)       7.0

Equity in Net Earnings   
Of Affiliate            0.5     0.1        --        860.0         --
                         ---     ---       ---        -----        ---   

Net income               1.9%    1.5%      1.4%       26.1%        7.0%
                         ===     ===       ===        ====         === 

Page 10 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
Results of Operations 1998 Compared to 1997
-------------------------------------------

Net Sales
---------

Net sales for 1998  increased to $42.2 million from $41.2  million in 1997.  The
net sales dollars increased by 2.5%, and total pounds shipped increased by 3.4%.
Full yarn sales dollars  increased 2.0%, and full yarn pounds shipped  increased
by 2.8%.  Sales of commission yarns (the dyeing and processing of customer owned
yarns) increased in both dollars and pounds by 19.2% and 23.0% respectively. The
increase in sales was mainly  attributable to the  introduction of new products.
In the fourth  quarter of 1998, the company  experienced a weakening  market and
pricing  pressures.  These  conditions  forced  reductions  in  prices to retain
customers and resulted in lower gross profits.

Cost of Sales and Gross Margin
------------------------------

Cost of sales for 1998 increased to $37.8 million, or 2.9%, as compared to $36.8
million in 1997.

Material cost increased $1,162,000 or 4.9%.

Direct  labor  increased  by 5.7%,  primarily  as a result of  increased  pounds
produced and an annual wage increase.

Manufacturing overhead declined by 2.2% mainly as a result of cost controls.

Inasmuch as net sales for 1998 increased by 2.5% and cost of sales  increased by
2.9%, the 1998 gross margin decreased to 10.3% as compared to 10.7% in 1997.

Selling, General and Administrative Expenses
--------------------------------------------

Selling, general and administrative expenses for 1998 aggregated $2.8 million as
compared to $2.7 million in 1997.  Expenses  increased  primarily as a result of
adding a sales person for the new sewing thread products,  professional  service
paid for  software  evaluation,  an increase in  depreciation  expenses,  and an
increase in travel expenses.

Page 11 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
Results of Operations: 1998 Compared to 1997 (contd.)
-----------------------------------------------------

Factor's Charges
----------------

Factor's charges for 1998 aggregated  $186,000 or 0.4% of net sales, as compared
to  $183,000 or 0.4% of net sales in 1997.  There was no change in the  factor's
agreement during 1998.

Operating Margins
-----------------

As a result of the discussion above with respect to the decrease in gross profit
percentage and an increase in selling,  general and administrative expenses, the
operating  earnings  were $1.3  million in 1998 as compared  to $1.6  million in
1997.

Interest Income
---------------

Interest  income for 1998 was  $164,000 as  compared  to  $152,000 in 1997.  The
increase in interest  income was the result of a higher  average  investment  of
cash during the year. The 1998 and 1997 interest  income was primarily  interest
earned on short-term cash equivalents invested with the company's bank.

Interest Expense
----------------

Interest  expense for 1998 was  $463,000  as  compared to $503,000 in 1997.  The
Company's  average  long-term  debt was  lower  during  the year as a result  of
principal payments that began in February.

Loss on Disposal of Assets
--------------------------

In 1998 the loss on  disposal of assets was only $137 as compared to $177,000 in
1997.  In 1997 the Company wrote off $154,000 of software  which was  abandoned,
and $15,000 for the  original  undepreciated  installation  cost of the twisting
machines sent to Fytek, S.A. de c.v., its joint venture company.

Income Before Provision for Income Taxes and Equity in Net Earnings of Affiliate
--------------------------------------------------------------------------------

Income before provision for income taxes and equity in net earnings of affiliate
decreased  to $944,000  from  $1,032,000  in 1997.  The decrease was a result of
reduced operating earnings as discussed above.

Page 12 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
Results of Operations: 1998 Compared to 1997 (contd.)
-----------------------------------------------------

Provision for Income Taxes
--------------------------

Provision  for income taxes for 1998 was $383,000  compared to $433,000 in 1997.
The  decrease  in the  provision  for income  taxes was  primarily  due to lower
taxable  income in 1998. The provision for income taxes includes an amount which
represents the tax rate difference of approximately 5% between the United States
and Mexico as applied to the Company's  share of  undistributed  net earnings of
affiliate.

Equity in Net Earnings of Affiliate
-----------------------------------

The Company's Mexican joint venture, Fytek,  contributed earnings to the Company
of $228,000 in 1998  compared to $27,000 in 1997.  The joint  venture only began
operations in November of 1997.

Fytek had sales in 1998 of $7.5  million  with income  before taxes of $905,000,
and after tax  income of  $493,000.  The  balance  at the end of 1998 in Fytek's
stockholders equity was $810,000.

Other Discussion
----------------

During the fourth quarter the Company  experienced a weakening  market,  pricing
pressures  and smaller  quantities  per order.  The Company was forced to reduce
prices,  resulting in lower gross margins.  The Company primarily  produces on a
make to order basis,  due to the special colors  specific to each  customer.  As
pounds  per order  declined  in the  fourth  quarter,  there was a strain on the
capacity of the older, smaller dye machines while the newer, larger dye machines
were under utilized.  This order mix increased the Company's  manufacturing cost
per pound.

The  Company  has  instituted  plans to  offset,  at least in part,  the loss of
margins from lower prices and smaller order mix. Through  negotiations  with raw
material  vendors,  raw material  prices are being  lowered.  Also, the overhead
structure  has been  reviewed  and is being  adjusted.  The  savings  from these
actions will begin to take place in the first quarter of 1999.

The Company  believes the weak market  conditions will continue at least through
the first quarter.

Page 13 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
AND RESULTS OF OPERATIONS (continued)
-------------------------------------

Results of Operations 1997 Compared to 1996
-------------------------------------------

Net Sales
---------

Net sales for the 1997 fiscal year  aggregated  $41.1 million,  representing  an
increase of $ .5  million,  as  compared  to net sales  volume of $40.6  million
recorded by the Company for 1996. Net sales dollars  increased by 1.2% and total
pounds  shipped  increased by 3.5% over those of 1996.  Full yarn sales  dollars
increased  2.8% and full yarn  pounds  shipped  increased  by 4.6%.  Sales  from
commission  yarn sales (the  dyeing and  processing  of  customer  owned  yarns)
decreased in both dollars and pounds by 25.3% and 30.0%,  respectively,  in 1997
compared with 1996.

Cost of Sales and Gross Margin
------------------------------

Although  net sales  increased  by 1.2%,  and the sales mix  changed to a larger
portion of full yarn sales, cost of sales actually declined by $122,000.

Material cost declined by $321,000,  or 1.3%, mainly as a result of a lower unit
cost of yarns and an improvement in reworks.

Total  labor  cost  increased  by 2.1%  mainly  as a result  of an  annual  wage
increase.

Manufacturing  overhead  declined by 0.8% mainly as a result of  improvements in
reworks.

Inasmuch  as net sales for 1997 as compared to 1996,  increased  by 1.2%,  while
cost of sales  decreased by 0.3%,  the 1997 gross  margin  increased to 10.7% as
compared to 9.3% recorded in 1996.

Selling, General and Administrative Expenses
--------------------------------------------

Selling,  general and administrative  expenses for 1997 aggregated $2.7 million,
as  compared to $2.3  million in 1996.  During the fourth  quarter of 1997,  the
Company  recorded  $157,000  for the  severance  arrangements  for its  retiring
president.  The Company also experienced $63,000 in recruiting costs for its new
president.

Page 14 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------

Results of Operations 1997 Compared to 1996 (contd.)
----------------------------------------------------


Factor's Charges
----------------

Factor's  charges  for 1997  aggregated  $183,000,  or 0.4%,  of net  sales,  as
compared to $194,000, or 0.5%, of net sales. The ratio of sales made to factored
accounts versus non-factored accounts was slightly lower in 1997.

Operating Margins
-----------------

As a result of the  discussion  above with respect to the 1997 increase in sales
with an  increase  in gross  profit  percentage,  coupled  with an  increase  in
selling,  general, and administrative  expenses,  the Company reported operating
earnings of $1.6 million in 1997, compared to $1.2 million in 1996.

Interest Income
---------------

Interest  income for 1997 was  $152,000 as  compared  to $36,000  for 1996.  The
increase in interest income was the result of improved cash flow,  which allowed
the Company to maintain a higher  average  investment of cash. The 1997 and 1996
interest income was primarily  interest  earned on short-term  cash  equivalents
held in the Company's bank.

Interest Expense
----------------

Interest  expense for 1997 was  $503,000  as  compared to $495,000 in 1996.  The
Company's average long-term debt did not change during the year. The increase in
interest expense resulted  primarily from a 53-week fiscal year in 1997 compared
to a 52-week fiscal year in 1996.

Loss on Disposal of Assets
--------------------------

In 1997 the  Company  incurred a loss of  $177,000  on  disposal  of assets,  as
compared to a gain on  disposal of assets or $94,000 in 1996.  During the fourth
quarter,  the Company  wrote off $154,000 for  software  which it abandoned  and
$15,000  for the  original  undepreciated  installation  cost  for the  twisting
machines sent to Fytek, S.A. de C.V., its joint venture company.

Page 15 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
Results of Operations 1997 Compared to 1996 (contd.)
----------------------------------------------------

Income Before Provision for Income Taxes
----------------------------------------

Income before  provision for income taxes for 1997 was  $1,059,000,  compared to
$869,000 in 1996. The 1997 increase of $190,000 was the result of an increase in
operating earnings,  discussed above, and an increase in interest income,  which
was partially offset by a loss on disposal of assets.

Provision for Income Taxes
--------------------------

Provision for income taxes for 1997 was $433,000,  compared to $284,000 in 1996.
The  increase in the  provision  for income  taxes was  primarily  due to higher
taxable income in 1997.

Page 16 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------

Results of Operations 1998 - 1995 Sales Analysis
------------------------------------------------

The table below sets forth an  analysis  of sales  volume for the period 1995 to
1998, inclusive.  It discloses that full yarn sales prices decreased from a high
of $3.60 per pound in 1995 to $3.22 in 1998.  Unit prices for  commission  sales
have varied based on mix and market conditions.

The  decrease  in full yarn  average  sales  prices is a result of a shift  from
vertical  dyeing  and  winding  yarn on cones to  horizontal  dyeing  and direct
shipping which began in 1996, and lowering of sales prices in the fourth quarter
as discussed earlier.  The Company expects in the future a larger portion of its
sales will be from horizontal dyeing and direct shipping of yarn.

                                                      % of            Sales $
                                      % of           Pounds of        Per
                                    Net Sales        Yarn Sold        Pound
                                    ---------        ---------        -----

1998:
     Yarn sales                        95%                91%          $3.22
     Commission sales                   5                  9            1.82
                                      ---                ---              
            Total                     100                100
                                      ===                ===

1997:
     Yarn sales                       96%                 93%           $3.24
     Commission sales                   4                  7             1.87
                                      ---                ---             
            Total                     100                100
                                      ===                ===

1996:
     Yarn sales                        94%                89%           $3.29
     Commission sales                   6                 11             1.74
                                       ---               ---              
            Total                      100               100
                                       ===               ===

1995:     
     Yarn sales                        88%                79%            $3.60
     Commission sales                  12                 21              1.82
                                       ---                ---               
            Total                      100                100
                                       ===                ===


Page 17 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------

Liquidity and Capital Resources:
--------------------------------

The  Company  sells  a  substantial  portion  of its  accounts  receivable  to a
commercial  factor so that the factor assumes the credit risk for these accounts
and  effects  the  collection  of the  receivables.  As of January 2, 1999,  the
Company had $2,864,000  due from its factor,  which matured on January 25, 1999.
The Company has the right to borrow up to 90% of the face amount of each account
sold to the factor.

The  Company has an  equipment  line of credit from its bank and under which the
Company may borrow up to $2,000,000 for the acquisition of production machinery.
The amounts  borrowed under the credit line would be converted to a note payable
in eighty-four (84) equal monthly installments plus accrued interest.

The Company had  inventories  of $3,706,000 as of January 2, 1999. The Company's
average inventories aggregated  approximately  $3,821,000 for 1998, representing
approximately  54  days  inventory  on  hand.  The  Company's  inventories  turn
approximately 6 to 8 times each year.

The Company's working capital decreased by approximately  $577,000 at January 2,
1999, from that of January 3, 1998,  primarily as a result of decreases in other
liabilities,  and an increase in inventory.  The working  capital of the Company
and its line of credit  with its bank are deemed  adequate  for the  operational
needs of the  Company.  The  following  table sets forth the  Company's  working
capital and working capital ratios as of the close of the last three years:

                                      1998           1997         1996
                                      ----           ----         ----
     Working Capital               $7,830,000     $8,407,000   $8,167,000
     Working Capital Ratio          3.31 to 1      3.5 to 1     5.7 to 1

As a measure of current  liquidity,  the Company's  quick position  (cash,  cash
equivalents and receivables over current liabilities) discloses the following at
January 2, 1999 and January 3, 1998:

                                    January 2         January 3
                                      1999               1998
                                      ----               ----
     Cash, cash equivalents
           and receivables          $6,845,000        $8,078,000
     Current liabilities             3,383,000         3,378,000
                                     ---------         ---------

     Excess of quick assets
         over current liabilities   $3,462,000        $4,700,000
                                    ==========        ==========


Page 18 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------

Liquidity and Capital Resources: (contd.)
-----------------------------------------

The  aggregate  long-term  debt at  January  2,  1999 and  January  3,  1998 was
$5,312,500 and $6,000,000  respectively.  In order to finance the acquisition of
new property, plant and equipment of $6,371,819 in 1995, and $1,024,598 in 1996,
the Company incurred a long-term debt of $6,000,000,  as more fully described in
Note 7 of Notes to Financial Statements. Pursuant to an agreement with its bank,
the obligation  had no principal  maturities  until  February 1998.  Thereafter,
principal   payments  of  $62,500  are  payable   monthly  for  ninety-six  (96)
consecutive months.

The Company's  long-term  debt to equity ratios  aggregated  32.1% at January 2,
1999, 39.5% at January 3, 1998, and 46.8% at December 28, 1996.

Capital budget expenditures approved for 1999 aggregate $3,500,000.  The Company
plans to finance its capital needs from cash provided from  operations  and bank
financing.

Year 2000 Compliance
--------------------

The  Company  has  assessed  its  systems  and  determined  the  areas  that are
non-compliant.   The  company  is  replacing  its  manufacturing   software  and
accounting  software with a fully  integrated  system.  It is estimated that the
software  will be  installed  and  running  by July  1999,  and will  solve  any
non-compliant  problems.  The  installation  is  coincidental  to the year  2000
problem as the Company  already had plans to upgrade  its  existing  software to
improve information efficiencies.

The Company has initiated  discussions  with its  significant  suppliers,  large
customers  and  financial   institutions  to  ensure  that  those  parties  have
appropriate  plans to remedy Year 2000 issues where their systems interface with
the  Company's  systems or  otherwise  impact its  operations.  The Company will
assess  the  extent  to  which  its  operations  are  vulnerable   should  those
organizations fail to remedy properly their computer systems.  While the Company
believes  its planning  efforts are adequate to address its Year 2000  concerns,
there can be no  guarantee  that the  systems  of other  companies  on which the
Company's  systems and operations  rely, will be converted on a timely basis and
will not have a material  effect on the  Company.  The Company has  alternate or
substitute sources for major raw material, gas, and fuel oil.

Page 19 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------

Year 2000 Compliance (contd.)
-----------------------------

The Company  entered  into a contract  on November 5, 1998 with Osprey  Systems,
Inc.,  to purchase  and  install  Enterprise  Resource  Planning  software.  The
software  will  replace  various  custom  manufacturing   applications  and  the
accounting  software,  giving the Company a full integrated software operational
system.  Currently,  the  Company's  manufacturing  applications  are not  fully
integrated, and there is no integration between manufacturing and accounting. It
is believed  that the new  software  will better  handle  growing  demands  from
customers for  information,  improve the order to cash cycle, and solve any Year
2000 problems.

The cost of the  project  to  include  software,  hardware,  implementation  and
training  will be  approximately  $900,000  paid over seven months that began in
November 1998. The Company will expense approximately $600,000 of the project in
1999 which is expected to be completed in July 1999.

The cost to bring the existing  software  into  compliance  for Year 2000 is not
known as the Company planned to replace the software.

The  Company  believes  the worst case  scenario  would  occur if the  Company's
electrical  utilities were  interrupted.  The Company has no alternate source or
substitute for  electricity,  and any interruption  would materially  affect the
Company.

Environmental Matters
---------------------

During  1996 in  connection  with a bank  loan to the  Company  secured  by real
estate, the Company had a Phase I Environmental Site Assessment conducted on its
property.  The  assessment  indicated  the  presence  of a  contaminant  in  the
groundwater under the Company's property.  The contaminant was a solvent used by
the Company in the past but no longer used.  The  contamination  was reported to
the North Carolina  Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed.  The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified  remediable issues and is
moving  toward a solution of natural  attenuation.  The Company  believes it has
made an adequate  provision  to earnings  in 1997 to cover any future  cost.  No
provision was made in 1998.  This situation will have no material  impact on the
capital expenditures, earnings or competitive position of the Company.

Page 20 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------

Inflation
---------

The Company does not believe that operations for the periods  discussed have bee
significantly  affected by  inflation.  Further,  the Company's  performance  in
maintaining  control  over  elements  of  overhead  have  enabled  it to  remain
competitive with its competition.

7A. Quantitative and Qualitative Disclosures about Market Risk
--------------------------------------------------------------

Under its loan agreement  dated March 29, 1996 with First Union National Bank of
North  Carolina,  providing for a term loan of  $6,000,000  and a line of credit
facility of $2,000,000, the effective rate of interest being paid by the Company
on its term loan is 8.06% per annum. The interest rate is in effect a fixed rate
because in a fixed rate hedge  contract  between the  Company and the bank,  the
bank  converted its floating rate into a fixed rate.  Under the fixed rate hedge
contract,  the  Company  pays the bank 8.06% per annum for the term of the loan.
The  floating  rate (LIBOR PLUS 1.9%) that the Company pays the bank is equal to
the floating rate that the bank's capital  markets will pay to the Company under
the  agreement.  Whether  LIBOR  rates  rise or fall  over  the life of the loan
agreement, the Company pays the bank a fixed rate of 8.06%, thereby resulting in
a fixed  rate loan.  Other  than the  foregoing  arrangement  with  First  Union
National  Bank,  the Company has not entered into any  instruments  resulting in
market  risk to the Company for  trading  purposes  or for  purposes  other than
trading purposes.

Forward Looking Statements
--------------------------

Certain  statements in this  Management's  Discussion  and Analysis of Financial
Condition and Results of Operations,  and other sections of this report, contain
forward-looking  statements within the meaning of federal  securities laws about
the Company's  financial  condition and results of operations  that are based on
management's  current   expectations,   beliefs,   assumptions,   estimates  and
projections  about the  markets  in which the  Company  operates.  Words such as
"expects", "anticipates",  "believes", "estimates", variations of such words and
other  similar  expressions  are  intended  to  identify  such   forward-looking
statements.  These  statements  are not  guarantees  of future  performance  and
involve  certain  risks,  uncertainties  and  assumptions  that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what

Page 21 of 42

<PAGE>

BURKE MILLS, INC.
PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------

Forward Looking Statements (contd.)
-----------------------------------

is expressed or forecasted in, or implied by, such  forward-looking  statements.
Readers  are  cautioned  not to place undue  reliance  on these  forward-looking
statements, which reflect management's judgement only as of the date hereof. The
Company undertakes no obligations to update publicly any of these forwardlooking
statements to reflect new information, future events or otherwise.

Factors  that may cause  actual  outcome and results to differ  materially  from
those expressed in, or implied by, these forward-looking statements include, but
are not  necessarily  limited  to,  availability,  sourcing  and  pricing of raw
materials, pressures on sales prices due to competition and economic conditions,
reliance on and  financial  viability of  significant  customers,  technological
advancements,  employee relations,  changes in construction spending and capital
equipment  expenditures  (including  those  related  to  unforeseen  acquisition
opportunities),  the timely  completion of construction  and expansion  projects
planned or in process,  continued  availability of financial  resources  through
financing  arrangements and operations,  negotiations of new or modifications of
existing   contracts  for  asset  management  and  for  property  and  equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies,  policies and legislation,  and proceeds received from
the sale of  assets  held for  disposal.  In  addition  to these  representative
factors,  forward-looking  statements  could be impacted by general domestic and
international  economic and industry conditions in the markets where the Company
competes;  such as, changes in currency  exchange rates,  interest and inflation
rates, recession and other economic and political factors over which the Company
has no control.

Page 22 of 42

<PAGE>

BURKE MILLS, INC.
PART II



305 Madison Avenue                                         72 Essex Street
New York, NY 10165                                         Lodi, NJ  07644
(212) 972-9600                                              (201) 368-9300
FAX: (212) 972-9605                                    FAX: (201) 368-9069

Item 8 - Financial Statements and Supplementary Data
----------------------------------------------------

                          Independent Auditors' Report
                          ----------------------------

To the Board of Directors of
Burke Mills, Inc.

We have  audited the  accompanying  balance  sheets of Burke  Mills,  Inc. as of
January 2, 1999 and January 3, 1998,  and the related  statements of operations,
changes in shareholders'  equity,  and cash flows for each of the three years in
the  period  ended  January  2,  1999.   These  financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Burke Mills, Inc. as of January
2, 1999 and  January 3, 1998,  and the  results of its  operations  and its cash
flows for each of the three  years in the  period  ended  January  2,  1999,  in
conformity with generally accepted accounting principles.


Cole, Samsel & Bernstein LLC
Certified Public Accountants

Lodi, New Jersey
February 23, 1999

Page 23 of 42

<PAGE>

BURKE MILLS, INC.
PART II
                                 BALANCE SHEETS

                                                January 2       January 3
                                                  1999            1998
                                                  ----            ----
                                 ASSETS
Current Assets
  Cash and cash equivalents                    $ 3,384,439      $ 4,306,540
  Accounts receivable                            3,460,307        3,771,301
  Inventories                                    3,705,849        3,006,298
  Prepaid expenses, taxes,
                   and other current assets        313,872           38,832
  Deferred income taxes                            349,000          661,700
                                                   -------          -------
            Total Current Assets                11,213,467       11,784,671
                                                ==========       ==========

Equity Investment in Affiliate                     405,623          177,728
                                                   -------          -------

Property, plant & equipment - at cost           28,478,700       26,350,679
  Less: accumulated depreciation                15,869,275       14,158,330
                                                ----------       ----------
       Property, Plant and Equipment- Net       12,609,425       12,192,349
                                                ----------       ----------

Other Assets                                      167,077           193,316
                                                  -------           -------
  Deferred charges                             $24,395,592      $24,348,064
                                               ===========      ===========



                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities
  Current maturities of long-term debt         $   750,000      $   687,500
  Accounts payable                               2,303,876        2,081,237
  Accrued salaries and wages                       160,862          191,128
  Other liabilities and accrued expenses           137,096          417,821
  Income taxes payable                              31,600               --
  --------------------                              ------           ------ 
            Total Current Liabilities            3,383,434        3,377,686

Long-Term Debt                                   4,562,500        5,312,500

Deferred Income Taxes                            2,220,836        2,218,300
                                                 ---------        ---------
            Total Liabilities                   10,166,770       10,908,486
                                                ----------       ----------

Shareholders' Equity
  Common stock, no par value
     (stated value, $.66)
         Authorized - 5,000,000 shares
         Issued and outstanding -
         2,741,168 shares                        1,809,171         1,809,171
  Paid-in capital                                3,111,349         3,111,349
  Retained earnings                              9,308,302         8,519,058
                                                 ---------         ---------
         Total Shareholders' Equity             14,228,822        13,439,578
                                                ----------        ----------
                                               $24,395,592       $24,348,064
                                               ===========       ===========

See notes to financial statements.

Page 24 of 42

<PAGE>

BURKE MILLS, INC.
PART II
                            STATEMENTS OF OPERATIONS


                                                 Years Ended                    
                                  ------------------------------------------
                                 January 2        January 3       December 28
                                   1999              1998             1996
                                   ----              ----             ----

Net Sales                       $42,169,106       $41,155,629      $40,648,920
                                -----------       -----------      -----------

Costs and Expenses
  Cost of Sales                  37,825,038        36,764,917       36,887,077
  Selling, general and
    administrative expenses       2,813,137         2,651,031        2,337,450
  Factor's charges                  186,234           183,072          194,427
                                    -------           -------          -------
      Total Costs and Expenses   40,824,409        39,599,020        39,418,954
                                 ----------        ----------        ----------

Operating Earnings                1,344,697         1,556,609         1,229,966
                                  ---------         ---------         ---------

Other Income
  Interest income                   163,506           151,996            35,567
  Gain on disposal of
    property assets                    -                 -               93,940
  Other, net                          3,209             4,068             4,891
                                      -----             -----             -----
           Total Other Income       166,715           156,064           134,398
                                    -------           -------           -------

Other Expenses
  Interest expense                  463,099           503,306           495,009
  Loss on disposal of
    property assets                     137           177,234               -
  Other, net                        103,702                -                -   
                                     -----             -----             -----
           Total Other Expenses     566,938           680,540           495,009 
                                    -------           -------           ------- 

Income Before Provision for
  Income Taxes and Equity in
  Net Earnings of Affiliate          944,474        1,032,133           869,355

Provision for Income Taxes           383,125          432,529           283,954
                                     -------          -------           -------

Income Before Equity in
  Net Earnings of Affiliate          561,349          599,604           585,401

Equity in Net Earnings of
    Affiliate                        227,895           26,500              -
                                     -------           ------            ------ 

Net Income                       $   789,244      $   626,104       $   585,401
                                 ===========      ===========       ===========

Net Earnings per share           $       .29      $       .23       $       .21
                                 ===========      ===========       ===========

Weighted Average Common
  Shares Outstanding              2,741,168         2,741,168         2,741,168
                                  =========         =========         =========


See notes to financial statements.
Page 25 of 42

<PAGE>

BURKE MILLS, INC.
PART II
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANARY 2, 1999


                                  Common Stock
                                  No Par Value
                                  Stated Value
                                    $.66 Per Share
                                    5,000,000 Shares
                                    AUTHORIZED                         Total
                             Shares             Paid-In    Retained Shareholders
                             Issued    Amount   Capital    Earnings     Equity
                             ------    ------   -------    --------     ------

Balance at Dec. 30, 1995  2,741,168  $1,809,17 $3,111,349 $7,307,553 $12,228,073

Net Income for the year
  ended Dec. 28, 1996        -           -         -         585,401     585,401
                            -------    -------   -------     -------     -------

Balance at Dec. 28, 1996  2,741,168  1,809,171 3,111,349   7,892,954  12,813,474

Net Income for the year
  ended Jan.3, 1998          -           -         -         626,104     626,104
                            -------    -------  -------      -------     -------

Balance at Jan. 3, 1998   2,741,168  1,809,171 3,111,349  8,519,058   13,439,578

Net Income for the year
  ended Jan. 2, 1999         -           -         -         789,244     789,244
                            -------    -------  -------      -------     -------

Balance at Jan. 2, 1999   2,741,168 $1,809,171 $3,111,349 $9,308,302 $14,228,822
                          ========= ========== ========== ========== ===========

See notes to financial statements.

Page 26 of 42

<PAGE>

BURKE MILLS, INC.
PART II
                            STATEMENTS OF CASH FLOWS

                                                        Years Ended
                                            -----------------------------------
                                            January 2    January 3   December 28
                                              1999          1998        1996
                                              ----          ----        ----
Cash flows from operating activities:
  Net income                                $  789,244   $  626,104  $  585,401
                                            ----------   ----------  ----------
  Adjustments  to  reconcile  net  income  to net  cash  provided  by  operating
   activities:
  Depreciation                               1,743,524    1,599,662   1,508,423
  (Gain) loss on sales of plant and
     equipment, including loss on disposals        137      177,234     (93,940)
  Deferred income taxes                        315,236      428,110     302,390
  Equity  in  net  earnings  of  affiliate   (227,895)  Changes  in  assets  and
  liabilities:
    Accounts receivable                        310,994     (573,090)   (224,110)
    Inventories                               (699,551)     444,507    (580,866)
    Prepaid expenses, taxes & other
      current assets                          (275,040)     184,536     159,145
    Other non-current assets                    26,239     (193,316)     (5,993)
    Accounts payable                           222,639      645,183     (72,422)
    Accrued salaries & wages                   (30,266)      61,176       6,315
    Other liabilities and accrued expenses    (280,725)     246,181     (57,472)
    Income taxes payable                        31,600         --           --
                                                ------      ------       ------
        Total adjustments                    1,136,892    3,020,183     941,470
                                             ---------    ---------     ------- 

Net cash provided by operating activities    1,926,136    3,646,287   1,526,871
                                             ---------    ---------   ---------

Cash flows from investing activities:
  Acquisition of property, plant
      and equipment                         (2,161,837)  (1,343,090) (1,024,598)
  Proceeds from sales of plant
      and equipment                              1,100       17,650         -
  Investment in affiliate                        --        (171,735)        -   
                                                ------      ------      ----- 

Net cash (used) by investing activities     (2,160,737)  (1,497,175) (1,024,598)
                                            ----------   ----------  ---------- 

Cash flows from financing activities:
  Proceeds from long-term bank note               -            -      1,670,663
  Principal payments of long-term debt        (687,500)        -       (850,341)
                                              --------    --------    -------- 
Net cash provided (used) by financing
  activities                                  (687,500)        -        820,322
                                              --------    --------      -------

Net increase (decrease) in cash and
  cash equivalents                            (922,101)   2,149,112   1,322,595
Cash & cash equivalents at beginning
  of year                                    4,306,540    2,157,428     834,833
                                             ---------    ---------     -------

CASH AND CASH EQUIVALENTS AT END OF YEAR    $3,384,439   $4,306,540  $2,157,428
                                            ==========   ==========  ==========

See notes to financial statements.
Page 27 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS


NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Accounting period - The Company's fiscal year is the 52 or 53 week period ending
the Saturday  nearest to December 31. Fiscal years 1998,  1997 and 1996 ended on
January 2, 1999, January 3, 1998 and December 28, 1996, respectively. The fiscal
years ended  January 2, 1999 and  December 28, 1996  consisted of 52 weeks.  The
fiscal year ended January 3, 1998 consisted of 53 weeks.

Statement of cash flows - For the purposes of the statements of cash flows,  the
Company considers cash and cash equivalents to include cash on hand, deposits in
banks,  interest  bearing demand  matured funds on deposit with factor,  and all
highly  liquid debt  instruments  with a maturity  of three  months or less when
purchased.

Inventories - Inventories are stated at the lower of cost (first-in,  first-out)
or  market.  Cost  elements  included  in work in  process  and  finished  goods
inventories are raw materials,  direct labor and manufacturing overhead.  Market
is considered to be net realizable value.

Property,  plant and  equipment - Property,  plant and  equipment  are stated at
cost.

Depreciation  and  amortization  of the property  accounts are provided over the
estimated  useful  lives  of  the  assets.  For  financial  reporting  purposes,
depreciation  on plant and  equipment  is provided  primarily  at  straight-line
rates. For income tax purposes,  depreciation has been provided at straight-line
rates for all  property,  plant  and  equipment  acquired  prior to 1981 and the
accelerated  and modified  accelerated  cost recovery system for property assets
acquired  subsequent to December 31, 1980.  The estimated  useful lives used for
computing depreciation for financial reporting purposes are generally:

         Buildings and improvements         5 - 45 years
         Plant machinery and equipment      5 - 17 years
         Office equipment                   5 - 10 years
         Automotive equipment               3 -  5 years
         Computer equipment                 3 -  5 years

Earnings per share - Earnings  per share are based on the net income  divided by
the weighted average number of common shares  outstanding  during the respective
periods.

Use  of  Estimates  in  Preparing  Financial  Statements  - The  preparation  of
financial statements in conformity with generally accepted accounting principles
requires  management  to make  estimates  and  assumptions  that affect  certain
reported amounts and disclosures.  Accordingly, actual results could differ from
those estimates.

Page 28 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS


NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE

The Company is engaged in twisting,  texturing,  winding, dyeing, processing and
selling of filament,  novelty and spun yarns and in the dyeing and processing of
these yarns for others on a commission basis.

With  respect to its  operations,  the  Company's  products and its services for
others on a commission basis are sold and/or  performed for customers  primarily
located in the  territorial  limits of the United  States.  The Company did have
sales to  customers in Mexico,  during the three  fiscal years ended  January 3,
1998,  which amounted to 1.0% in 1998,  1.7% in 1997 and 4.2% in 1996.  Sales to
customers  in  Canada in 1998,  1997 and 1996  aggregated  6.4%,  3.9% and 2.8%,
respectively.  Additionally,  the  Company  had sales to Brazil in 1998 and 1997
which amount to 0.3% and 0.2% respectively.  Other than sales to Mexico,  Canada
and  Brazil,  as  discussed  above,  the  Company  had no other sales in foreign
markets  during the three year period ended January 2, 1999.  For the three year
period ended January 2, 1999, the Company has operated  within a single industry
segment with classes of similar  products.  The principal  markets served by the
Company are  upholstery  and  industrial  uses  through the knitting and weaving
industry.

In connection with sales to major customers,  only one customer has exceeded 10%
of the Company's sales during each of the three years ended January 2, 1999. One
other customer has exceeded 10% in 1996. For the purpose of this  determination,
sales to groups of  companies  under  common  control  have  been  combined  and
accounted  for as sales to  individual  companies.  The  following  table  gives
information with respect to these two customers:

                                                                            % of
           1998                      Amount                Net Sales
           ----                      ------                ---------
        Customer 1                $5,793,000                  13.7
        Customer 2                     *
                                                                            % of
           1997                     Amount                 Net Sales
           ----                     ------                 ---------
        Customer 1                $5,737,000                  14.0
        Customer 2                     *

                                                                            % of
           1996                      Amount                Net Sales
           ----                      ------                ---------
        Customer 1                $5,387,000                  13.3
        Customer 2                 4,074,000                  10.0

      *Less than 10%

Page 29 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS


NOTE 3 - ACCOUNTS RECEIVABLE

Accounts receivable comprise the following:

                                      January 2           January 3
                                        1999                1998
                                        ----                ----
     Due from factor on
          regular factoring
          account                     $2,864,000         $3,328,000
     Non-factored accounts
          receivable                     596,000           443,000
                                         -------           -------
               Total                  $3,460,000        $3,771,000
                                      ==========        ==========

Pursuant to a factoring agreement, the Company sells substantial portions of its
accounts  receivable  to a commercial  factor  without  recourse,  up to maximum
credit  limits  established  by the  factor  for  individual  accounts.  Amounts
invoiced  to  customers  on  accounts  receivable  factored  in  excess  of  the
established  maximum  credit  limits are sold to the factor with recourse in the
event of nonpayment by customers.

The  Company  pays a service  charge to its  factor  to cover  credit  checking,
assumption of credit risk, record keeping and similar services.  In addition, if
the Company takes advances from its factor prior to the average  maturity of the
receivables  sold (as defined),  it is required to pay interest to the factor on
these  advances.  The Company  incurred no interest  costs during 1998 and 1997,
inasmuch  as it  borrowed  no funds  from its  factor  during  these  years.  In
connection  with such  advances from its factor for 1996,  the Company  incurred
interest costs of only $5,442.

The Company's factor is  collateralized  by the accounts  receivable sold to the
factor. No interest in inventory, other than returned goods, has been granted to
the factor under the factoring contract.


Page 30 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS


NOTE 4 - INVENTORIES

  Inventories are summarized as follows:

                                     January 2,       January 3,
                                       1999              1998
                                       ----              ----

     Finished & in process          $2,409,000        $1,813,000
     Raw materials                     728,000           716,000
     Dyes & chemicals                  413,000           337,000
     Other                             156,000           140,000
                                       -------           -------
     Total                          $3,706,000         $3,006,000
                                    ==========         ==========


NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

Major classifications of property, plant and equipment are as follows:

                                    January 2, 1999            January 3, 1998  
                                    ---------------            ---------------  
                                           Accumulated               Accumulated
                                  Cost     Depreciation      Cost   Depreciation
                                  ----     ------------      ----   ------------

Land                            $ 86,565    $      -     $   78,032   $        -
  Land improvements              175,697       82,017       136,504       77,709
  Building & improvements      6,376,050    4,222,677     6,337,114    4,056,293
  Plant machinery & equipment 20,502,754   10,813,831    18,694,009    9,448,212
  Office equipment             1,111,861      656,727       964,974      493,257
  Automotive equipment           225,773       94,023       140,046       82,859
                                 -------       ------       -------       ------
                  Total      $28,478,700  $15,869,275   $26,350,679  $14,158,330
                             ===========  ===========   ===========  ===========


NOTE 6 - LINE OF CREDIT LOAN

Pursuant to a loan agreement dated March 29, 1996, and amended October 12, 1998,
the Company  secured an Equipment  Loan facility of $2,000,000  and a $1,250,000
Letter  of  Credit  facility.  The  Equipment  Loan  shall be  evidenced  by the
Equipment  Note,  and shall bear  interest  at a rate that varies with the LIBOR
rate.  The  Equipment  Note would be payable in 84  installments.  At January 2,
1999, the Company had no borrowings under this line of credit.

Also under the Company's factoring arrangement,  the Company may borrow from the
factor up to 90% of the face amount of each  account  sold to the factor.  As of
January 2, 1999, the Company had no borrowings from its factor.


Page 31 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS


NOTE 7 - LONG-TERM DEBT

On March 29,  1996,  the Company  entered  into a loan  agreement  with its bank
providing for a term loan of  $6,000,000.  The new term loan  refinanced the two
formerly  existing  term  loans,  and  accordingly,  all term  obligations  were
consolidated into the one $6,000,000 obligation. This new loan is secured by (1)
a first  Deed of  Trust on  property  and  buildings  located  at the  Company's
manufacturing  sites in North  Carolina,  (2) a first lien  position  on the new
equipment and machinery  installed at these  manufacturing sites and (3) a first
lien position on the existing  machinery and equipment  located at the Company's
manufacturing sites.

Under the term loan agreement,  interest only was payable monthly until February
1998. Thereafter,  principal maturities are payable in the amount of $62,500 per
month for ninety-six (96) consecutive  months plus interest at the fixed rate of
8.06%.  In order to effect this fixed  interest  rate,  the bank  converted  its
interest  rate cap into a fixed  rate loan by  entering  into a fixed rate hedge
contract  with the Company.  Under this fixed rate hedge  contract,  the Company
will pay the bank 8.06% for the term of the  contract.  The floating rate (LIBOR
plus 1.9%) that the Company will pay the bank will be equal to the floating rate
that the bank's  capital  markets will pay to the Company.  Whether  LIBOR RATES
rise or fall over the life of the loan  agreement,  the Company will continue to
pay the  bank a fixed  rate of  8.06%  for  the  life of the  contract,  thereby
creating a fixed rate loan.

Among other things,  covenants include a debt service coverage ratio, a limit on
annual property asset acquisitions  exclusive of property acquired with the loan
proceeds  under this new loan  agreement,  the  retirement or acquisition of the
Company's  capital  stock in excess of a stated  amount,  the  maintenance  of a
minimum tangible net worth which shall increase by a stated amount  annually,  a
minimum quick ratio, and a maximum debt to tangible net worth ratio.

The annual principal  maturities of the long-term debt at January 2, 1999 are as
follows:

          Current portion                            $  750,000
          2000                        $  750,000
          2001                           750,000
          2002                           750,000
          2003                           750,000
          Thereafter                   1,562,500        4,562,500
                                       ---------        ---------
                                                       $5,312,500
                                                       ==========

Page 32 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS

NOTE 8 - OTHER LIABILITIES AND ACCRUED EXPENSES

Other liabilities and accrued expenses consist of the following:

                                       January 2          January 3
                                         1999               1998    
                                         ----               ----    
Employee 401k contributions            $   --            $ 47,113
Payroll taxes payable                    7,448            109,063
Utilities payable                       31,779            132,165
Accrued interest                        15,644             21,493
Accrued environmental cost              43,808             77,100
Other                                   38,417             31,887
                                        ------             ------
       Total                          $137,096           $417,821
                                      ========           ========


NOTE 9 - INCOME TAXES

The  Company  uses the  liability  method  as  required  by FASB  Statement  109
"Accounting  for Income  Taxes".  Under  this  method,  deferred  tax assets and
liabilities are determined based on the differences  between financial reporting
and tax bases of assets and  liabilities  and are measured using the enacted tax
rates and laws.

The items that comprise deferred tax assets and liabilities are as follows:
                                               Jan. 2        Jan. 3
                                                1999          1998
                                                ----          ----
Deferred tax assets:
  Alternative minimum taxes paid            $  349,000     $  608,825
  Net operating loss carry-forward                   -         12,190
  Inventory capitalization                           -         18,700
  Business credits                                   -         11,585
  Charitable contributions carryover                 -         10,400
                                              ---------     ---------
                                            $  349,000     $  661,700
                                            ==========     ==========

     Deferred tax liabilities:
        Accelerated depreciation for
          tax purposes                      $2,202,300      $2,218,300
        Undistributed earnings of foreign
            Affiliate, net of tax credit        12,700           --
        Other                                   5,836            --
        -----                                   -----          -----

                                            $2,220,836      $ 2,218,300 
                                            ==========      =========== 

     Provision for taxes consist of:
                                          Jan. 2        Jan. 3       Dec. 28
                                           1999          1998         1996
                                           ----          ----         ----
                Current:
                  Federal                $  49,445       $  4,419     $ -
                  State                     18,444            -         -
                Deferred                   315,236        428,110     283,954
                                           -------        -------     -------
                              Total      $ 383,125      $ 432,529   $ 283,954
                                         =========      =========   =========



Page 33 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS


NOTE 9 - INCOME TAXES (continued)

The  provision for income taxes on  historical  income  differs from the amounts
computed  by  applying  the  applicable  Federal  statutory  rates,  due  to the
following:

                                   January 2       January 3    December 28
                                     1999            1998          1996     
                                     ----            ----          ----     
Income before income taxes         $1,172,369      $1,058,633    $  869,355
Federal income taxes                       34%             34%           34%
                                       ------          ------        ------

Computed taxes at maximum
   statutory tax rate                 398,605         359,936        295,581
State income taxes, net of
   Federal income tax benefits         56,098          56,051         44,468
Adjustment for deferred
   income taxes                          -                -          (20,670)
Alternative minimum tax adjustment       -                -          (35,425)
Tax credit for foreign affiliate
   earnings                           (77,484)            -               -
Prior year tax examination
              and other                 5,906          16,542             -   
                                      -------          ------         --------  

     Provision for income taxes      $ 383,125      $  432,529      $  283,954
                                     =========      ==========      ==========



NOTE 10 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS

The company owns 49.8% of Fytek, S.A. de C.V. (Fytek),a Mexican corporation. 
The company accounts for the ownership using the equity method. During 1998, 
the Company had sales of $165,000 to Fytek compared to no sales in 1997. 
Purchases from Fytek were $1,337,000 compared to $156,000 in 1997.

At January 2, 1999,  Fytek owed the Company  $130,000 for leased equipment which
will be paid in March 1999.

In 1998, the Company purchased  $151,000 of yarns from Nafees Cotton Mills, Ltd.
The Company paid for the yarn  purchased by wire transfer 30 days after the Bill
of Lading date and by Letter of Credit 120 days after the Bill of Lading date.

Humayun N. Shaikh,  Chairman and CEO of the Company,  is also director of Nafees
Cotton Mills, Ltd.

Aehsun  Shaikh,  Director of the  Company,  is also a Director of Nafees  Cotton
Mills, Ltd., since 1993 and of Legler-Nafees Denim Mills, Ltd., since 1999.


Page 34 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS


NOTE 11 - STATEMENTS OF CASH FLOWS

FASB  No.  95  requires  that  the  following  supplemental  disclosures  to the
statements  of cash  flows be  provided  in related  disclosures.  Cash paid for
interest was $470,000 in 1998,  $494,000 in 1997 and $515,000 in 1996. Cash paid
for income taxes  aggregated  $33,500 in 1998 and $6,000 in 1996. Taxes refunded
in 1997 aggregated $125,000.


NOTE 12 - RENTAL EXPENSES AND LEASE COMMITMENTS

Rental  expenses  under all lease  commitments  for the three fiscal years ended
January 2, 1999, aggregated $37,000, $45,000 and $40,000, respectively.  Minimum
lease commitments under terms of all non-cancelable  leases,  which consist only
of leased equipment, are as follows as of January 2, 1999:
                    1999                  $26,000
                    2000                   23,000
                    2001                   22,000
                    2002                    4,000
                                           ------
                                          $75,000
                                          =======


NOTE      13 - QUARTERLY  FINANCIAL  DATA  (UNAUDITED)  (in thousands of dollars
          except for per share amounts)
                                                    QUARTER
                                       ---------------------------------------
  1998                                 First      Second     Third     Fourth 
  ----                                 -----      ------     -----     ------ 
  Net sales                          $10,649     $10,023    $11,509    $ 9,988
  Cost of sales                        9,388       9,055      9,976      9,406
  Gross profit                         1,261         968      1,533        582
  Net income (loss)                      307         208        394       (120)
  Net income (loss)
      per common share               $   .11      $  .08    $   .14    $  (.04)

  1997
  ----
  Net sales                          $10,060     $10,442    $ 9,874     $10,780
  Cost of sales                        9,061       9,393      8,797       9,514
  Gross profit                           999       1,049      1,077       1,266
  Net income                             143         181        230          72
  Net income
      per common share               $   .05     $   .07    $   .08     $   .03

 1996
 ----
 Net sales                           $ 9,905     $10,304    $10,225     $10,215
 Cost of sales                         9,215       9,519      9,122       9,031
 Gross profit                            690         785      1,103       1,184
 Net income (loss)                       (40)         26        285         314
 Net income (loss)
     per common share                $  (.02)    $   .01    $   .11     $   .11


Page 35 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS

NOTE 14 - EMPLOYEE BENEFIT PLAN

The Company is a  participating  employer in the Burke Mills,  Inc.  Savings and
Retirement  Plan and Trust that has been  qualified  under Section 401(k) of the
Internal  Revenue  Code.  This plan allows  eligible  employees to  contribute a
salary  reduction  amount  of not  less  than  1% nor  greater  than  25% of the
employee's  salary but not to exceed  dollar limits set by law. The employer may
make a discretionary  contribution  for each employee out of current net profits
oraccumulated  net profits in an amount the  employer may from time to time deem
advisable. No provision was made for a discretionary  contribution in 1998, 1997
or 1996.


NOTE 15 - CONCENTRATIONS OF CREDIT RISK

Financial  instruments that potentially  subject the Company to concentration of
credit risk consist  principally of occasional  temporary cash  investments  and
amounts due from the factor on receivables  sold to the factor on a non-recourse
basis.  The  receivables  sold to the  factor  during a month  generally  have a
maturity  date on the 21st to the 30th of the  following  month.  At  January 2,
1999,  the Company had  $2,864,000  due from its factor which matured on January
25, 1999. Upon maturity,  the funds are automatically  transferred by the factor
to the Company's bank.


NOTE 16 - OTHER COMMITMENTS

a) The Company  entered into a supply  agreement,  dated November 23, 1996, with
its joint venture  company,  Fytek,  S.A. de C.V. to purchase twisted yarns. The
Company agrees to purchase approximately $1,800,000 of twisted yarn annually for
the five years beginning November 1997.

b)The Company  entered into a supply  agreement,  dated November 19, 1996,  with
Fibras  Quimicas,  S.A. to purchase  yarn.  The Company  agrees to purchase yarn
based on the schedule below, beginning February 1, 1997, for a five year period.
                  Year 1            Approximately $2,600,000
                  Year 2            Approximately $6,400,000
                  Year 3            Approximately $7,100,000
                  Year 4            Approximately $7,700,000
                  Year 5            Approximately $7,700,000


Page 36 of 42

<PAGE>

BURKE MILLS, INC.
PART II
NOTES TO FINANCIAL STATEMENTS


c) During 1996 in  connection  with a bank loan to the  Company  secured by real
estate, the Company had a Phase I Environmental Site Assessment conducted on its
property.  The  assessment  indicated  the  presence  of a  contaminant  in  the
groundwater under the Company's property.  The contaminant was a solvent used by
the Company in the past but no longer used.  The  contamination  was reported to
the North Carolina  Department of Environment and Natural Resources (DENR). DENR
required a Comprehensive Site Assessment that has been completed.  The Company's
outside engineering firm conducted testing and prepared a Corrective Action Plan
that was submitted to DENR. The Company has identified remediation issues and is
moving  toward a solution of natural  attenuation.  The Company  believes it has
made an adequate  provision  to earnings  in 1997 to cover any future  cost.  No
provision was made in 1998.  This situation will have no material  impact on the
capital expenditures, earnings or competitive position of the Company.

d) The Company was committed to three outstanding  irrevocable import Letters of
Credit for machinery purchases on January 2, 1999.

   1) Latest ship date May 15, 1999,  expiring  June 15, 1999,  in the amount of
      $194,000  payable 90% against Bill of Lading and 10% at 60 days of Bill of
      Lading date.

   2) Latest ship date March 31, 1999,  expiring on September  30, 1999,  in the
      amount of  approximately  $447,000  payable  6 months  from Bill of Lading
      date.

   3) Latest ship date April 30, 1999,  expiring on May 21, 1999,  in the amount
      of $500,000  payable 50% against Bill of Lading and 50% upon  presentation
      by Burke Mills of Commissioning Certificate.

e) The  Company  entered  into an  agreement  to purchase  $1,582,000  of dyeing
equipment  to be  delivered  in 1999.  The Company made a deposit of $176,000 in
1998,  with the remainder to be paid by Letter of Credit to be  established  one
month before shipment.


Page 37 of 42

<PAGE>

BURKE MILLS, INC.
PART III


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

There have been no changes in nor  disagreements  with accountants on accounting
and  financial  disclosure  during the Company's two most recent fiscal years or
during any  subsequent  interim  period.  The  current  accounting  firm for the
Company,  Cole,  Samsel & Bernstein  LLC of New York,  New York,  and Lodi,  New
Jersey,  has served as  accountants  for the Company  during the last two fiscal
years.


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
-------------------------------------------------------------

The  information  required  for  Part  III  of  this  report  (Items  10-13)  is
incorporated  by reference from the Company's  definitive  proxy statement to be
filed  pursuant  to  Regulation  14A  for the  annual  meeting  of  shareholders
scheduled  for May 18,  1999,  involving  the  election of  directors,  which is
expected  to be filed not later than 120 days  after the end of the fiscal  year
covered by this report.


Page 38 of 42

<PAGE>

BURKE MILLS, INC.
PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------

(a) The following documents are filed as a part of this report.

    (a) 1.  Report of Independent Certified Public Accountants.
            ---------------------------------------------------

    The  following  financial  statements  of Burke Mills,  Inc. and the related
    auditors'  report  required  to be  included  in Part II Item 8, are  listed
    below:

                  Auditors' report

                  Balance sheets
                    January 2, 1999
                    January 3, 1998

                  Statements of operations Year ended January 2, 1999 Year ended
                     January 3, 1998 Year ended December 28, 1996

                  Statements  of  changes  in  shareholders'  equity  Year ended
                     January  2,  1999 Year  ended  January  3, 1998 Year  ended
                     December 28, 1996

                  Statements of cash flows Year ended January 2, 1999 Year ended
                     January 3, 1998 Year ended December 28, 1996

                  Notes to financial statements

Page 39 of 42

<PAGE>


BURKE MILLS, INC.

Financial statement  schedules have been omitted since the required  information
is not present in amounts sufficient to require  submission of the schedule,  or
because the required  information is included in the financial statements or the
notes thereto.

   (a)2.  The exhibits  required by Item 601 of Regulation S-K and paragraph (c)
of Item 14 are the articles of  incorporation  and by-laws of the Company  which
are incorporated  herein by reference from the Amendment on Form 8 to the annual
report on Form 10-K of the  Company  for the fiscal  year ended  January 2, 1982
previously  filed with the  Commission.  The exhibit  required by Item 601(c) of
Regulation SK, Financial Data Schedule, is set forth on page 41 of this report.

   (b) During the last quarter of the period covered by this report no report on
Form 8-K was filed.

   (c) See sub-Item (a)2 above.

   (d) Not applicable.


Page 40 of 42

<PAGE>

Burke Mills, Inc.

Financial Data Schedule

                    Pursuant to Item 601(c) of Regulation S-K

         THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
           FROM THE FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT
          ON FORM 10K AND IS  QUALIFIED  IN ITS  ENTIRETY BY  REFERENCE  TO SUCH
          FINANCIAL STATEMENTS FOR THE YEAR ENDED JANUARY 2, 1999.


NUMBER              ITEM DESCRIPTION                                 AMOUNT

5-02(1)             cash & cash items                               $ 3,384,439
5-02(2)             marketable securities                                     0
5-02(3)(a)(1)       notes & accounts receivable-trade                 3,460,307
5-02(4)             allowances for doubtful accounts                          0
5-02(6)             inventory                                         3,705,849
5-02(9)             total current assets                             11,213,467
5-02(13)            property, plant & equipment                      28,478,700
5-02(14)            accumulated depreciation                         15,869,275
5-02(18)            total assets                                     24,395,592
5-02(21)            total current liabilities                         3,383,434
5-02(22)            bonds, mortgages & similar debt                   4,562,500
5-02(28)            preferred stock - mandatory redemption                    0
5-02(29)            preferred stock - no mandatory redemption                 0
5-02(30)            common stock                                      1,809,171
5-02(31)            other stockholders' equity                       12,419,651
5-02(32)            total liabilities & stockholders' equity         24,395,592
5-03(b)1(a)         net sales of tangible products                   42,169,106
5-03(b)1            total revenues                                   42,169,106
5-03(b)2(a)         cost of tangible goods sold                      37,825,038
5-03(b)2            total costs & expenses applicable
                       to sales and revenues                         37,825,038
5-03(b)3            other costs & expenses                                    0
5-03(b)5            provision for doubtful accounts & notes                   0
5-03(b)(8)          interest & amortization of debt discount            463,099
5-03(b)(10)         income before taxes & other items                 1,172,369
5-03(b)(11)         income tax expense                                  383,125
5-03(b)(14)         income/loss continuing operations                   789,244
5-03(b)(15)         discontinued operations                                   0
5-03(b)(17)         etraordinary items                                        0
5-03(b)(18)         cumulative effect - changes in accounting
                       principles                                             0
5-03(b)(19)         net income or loss                                  789,244
5-03(b)(20)         earnings per share - primary                           $.29
5-03(b)(20)         earnings per share - fully diluted                     $.29


Page 41 of 42

<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.


Date: March 29, 1999                    BURKE MILLS, INC.

                                        By: Humayun N. Shaikh   /s
                                            ----------------------
                                            Humayun N. Shaikh,
                                            Chairman of the Board
                                            (Principal Executive Officer)


                                        By: Thomas I. Nail       /s
                                            -----------------------
                                            Thomas I. Nail
                                            Vice President of Finance
                                           (Principal Financial Officer)
                                           (Principal Accounting Officer)


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

Date: March 29, 1999                    By: Humanyun N. Shaikh      /s
                                            ---------------------------
                                            Humayun N. Shaikh, Director


Date: March 29, 1999                    By: Aehsun Shaikh           /s
                                            ---------------------------
                                            Aehsun Shaikh, Director


Date: March 29, 1999                    By: Charles P. McCamy       /s
                                            ---------------------------
                                            Charles P. McCamy, Director


Date: March 29, 1999                    By: Robert P. Huntley       /s
                                            ---------------------------
                                            Robert P. Huntley, Director


Date: March 29, 1999                    By: William T. Dunn         /s
                                            ---------------------------
                                            William T. Dunn, Director




Page 42 of 42
End