<PAGE>   1
                                                                      EXHIBIT 13

Management's Discussion and Analysis

                          Revenues By Line of Business

<TABLE>
<CAPTION>                                 
                                               1997       1996       1995
                                               ----       ----       ----
                                                     (in millions)
     <S>                                      <C>        <C>        <C>
     Home fashions  . . . . . . . . . . .     $ 255.8    $ 243.2    $ 231.8
     Apparel fabrics  . . . . . . . . . .       220.6      136.4      153.0
                                              -------    -------    -------
                                                                         
     Total net sales  . . . . . . . . . .     $ 476.4    $ 379.6    $ 384.8
                                              =======    =======    =======
</TABLE>                                                                 


RESULTS OF OPERATIONS

Comparison of 53 Weeks Ended January 3, 1998 ("fiscal 1997") to 52 Weeks Ended
December 28, 1996, ("fiscal 1996")

         Net sales for the 53 weeks in fiscal 1997 were $476.4 million, an
increase of $96.9 million or 25.5% compared to $379.6 million for the 52 weeks
in fiscal 1996.  Net sales of home fashion products in fiscal 1997 were $255.8
million, an increase of $12.6 million or 5.2% compared to $243.2 million in
fiscal 1996. Net sales of apparel fabrics in fiscal 1997 were $220.6 million,
an increase of $84.3 million or 61.8% compared to $136.4 million in fiscal
1996.  The increase in net sales of home fashion products was due to higher
unit volume aided somewhat by higher average pricing reflecting an improved
product mix.  The increase in net sales of apparel fabrics resulted primarily
from the acquisition of The New Cherokee Corporation ("Cherokee"), which was
consummated on February 3, 1997.  Apparel fabrics unit volumes were up
significantly as a result of the acquisition, offset somewhat by lower average
pricing reflecting a sales mix that included a higher proportion of lower
priced greige fabrics that were sold to the converter trade (purchasers of
unfinished fabric who contract out the finishing to third parties) and higher
commission finishing sales.

         Gross profit in fiscal 1997 was $104.3 million (21.9% of net sales),
an increase of $32.1 million or 44.5% from gross profit of $72.2 million (19.0%
of net sales) for fiscal 1996.  The increase in gross profit was due to higher
unit volumes, lower raw material prices, and better manufacturing performance
in apparel fabrics where there were increased activity levels and reduced costs
as a result of the acquisition of Cherokee.

         Selling, general and administrative expenses for fiscal 1997 were
$54.2 million (11.4% of net sales) an increase of $8.6 million or 18.7% from
$45.7 million (12.0% of net sales) for fiscal 1996.  The increase was caused by
increased selling and administrative expenses as a result of the acquisition of
Cherokee, increased product design and roll-out costs associated with the
introduction of the "Nautica" brand of home fashions products, and higher
incentive compensation expense.

         The Company incurred a one-time charge in fiscal 1997 as a result of
its decision to close its Riverside apparel fabrics weaving operations in
Danville, Virginia, and a one-time gain as a result of its sale of the Wetumpka
yarn operation in Wetumpka, Alabama.  The net charge for the closure of
Riverside was $7.6 million ($4.7 million after tax; $0.32 per share); it
includes $0.4 million for severance and other employee benefit costs.  The
remainder of the charge relates principally to writedowns and other costs
associated with the divestiture of real estate and equipment.  This was offset
by a gain of $583,000 ($358,000 after tax; $0.02 per share) on the sale of the
Company's Wetumpka yarn operation in December 1997.  These items are reflected
under "Other Operating Costs, Net".

         For the reasons described above, operating income for fiscal 1997 was
$43.0 million (9.0% of net sales), an increase of $16.1 million or 59.8% from
$26.9 million for fiscal 1996.  Excluding the Other Operating Costs, Net,
operating income would have been $50.1 million (10.5% of net sales), an
increase of $23.5 million or 88.8% compared to fiscal 1996.





                                       1
<PAGE>   2
         Other income (expense), net for fiscal 1997 includes $0.6 million of
costs related to fees and expenses incurred in connection with a proposed
business combination that did not materialize, offset in part by miscellaneous
items of income.

         Interest expense was $21.1 million for fiscal 1997, an increase of
$3.0 million or 16.3% from $18.2 million for fiscal 1996.  The increase in
interest expense was due to higher debt levels for most of the year arising
from the acquisition of Cherokee, offset somewhat by lower average interest
rates.  The Company completed an initial public offering of its stock on
November 20, 1997, (the "Offering"), raising $64.5 million in net proceeds for
the Company, all of which was used to reduce outstanding debt.  Included in the
amounts paid off was the Company's outstanding Term Loan of $34.1 million.  As
a result of the Term Loan being prepaid and the writeoff of the associated debt
issuance costs, the Company recognized an extraordinary loss of $243,000 after
tax ($0.01 per share).

         The income tax provision was $8.4 million (38.6% of pre-tax income)
for fiscal 1997, an increase of $4.8 million compared to an income tax
provision of $3.6 million (38.6% of pre-tax income) recorded for fiscal 1996.

         Accordingly, net income for fiscal 1997 was $13.0 million or $0.89 per
basic share on 14.7 million shares outstanding compared to $5.7 million or
$0.40 per basic share for fiscal 1996 on 14.2 million shares outstanding.

Comparison of 52 Weeks Ended December 28, 1996 ("fiscal 1996") to 52 Weeks
Ended December 30, 1995, ("fiscal 1995")

         Net sales for the 52 weeks in fiscal 1996 were $379.6 million, a
decrease of $5.2 million or 1.4% compared to $384.8 million for the 52 weeks in
fiscal 1995.  Net sales of home fashions products were $243.2 million in fiscal
1996, an increase of $11.3 million or 4.9% when compared to $231.8 million for
fiscal 1995.  Net sales of apparel fabrics were $136.4 million, a decrease of
$16.6 million or 10.8% compared to $153.0 million in fiscal 1995.  The increase
in sales of home fashions products was due to higher unit volume partially
offset by lower average pricing reflecting a competitive pricing environment.
The decrease in sales of apparel fabrics reflects lower unit volume of shirting
fabrics, particularly commodity white and blue oxfords, due to a sluggish
retail environment for these products during the first half of the year.

         Gross profit for fiscal 1996 was $72.2 million or 19.0% of sales, a
decrease of $5.7 million or 7.4% from gross profit of $77.9 million (20.2% of
sales) for fiscal 1995.  The decrease in gross profit was due to lower sales of
apparel fabrics, higher cotton costs and poor manufacturing performance
associated with abbreviated running schedules during the first half of the year
because of the weak order position for apparel fabrics during that period.

         Selling, general and administrative expenses for fiscal 1996 were
$45.7 million (12.0% of sales) an increase of $0.8 million or 1.8% from $44.9
million (11.7% of net sales) in fiscal 1995.  The increase in these expenses
relates primarily to higher rent expense for the Company's New York office and
showrooms and higher incentive compensation, offset by lower costs from the
operation of fewer factory stores and lower general and administrative expense
for the year.

         Other Operating Costs, Net, reflects a net credit of $0.4 million in
fiscal 1996, compared to $9.0 million of net charges in fiscal 1995.  Fiscal
1995 charges include $4.4 million in writedowns of fixed assets relating to the
Company's ongoing modernization program, $3.0 million of costs associated with
the Company's decision to discontinue manufacturing and marketing a line of
apparel fabrics, and $1.6 million of costs associated with relocation of the
Company's design, merchandising and marketing staff from office space at 111
West 40th Street to new offices at 1325 Avenue of the Americas in New York
City.  Fiscal 1996 reflects the reversal of a portion of the 1995 charges
principally relating to the discontinued line of apparel fabrics ($0.9 million)
offset by $0.5 million of net charges for equipment writedowns associated with
the Company's modernization program.

         Operating income for fiscal 1996 was $26.9 million (7.1% of net
sales), an increase of $2.8 million or 11.8% from $24.1 million (6.3% of net
sales), in fiscal 1995.  The increase was caused by the favorable





                                       2
<PAGE>   3
comparison created by the absence in fiscal 1996 of the one-time charges that
were taken in fiscal 1995 and which are described above.  Excluding these
charges, operating income for fiscal 1996 would have been lower than fiscal
1995 by $6.6 million or 19.8% due to the lower sales of apparel fabrics, higher
cotton costs, and poor manufacturing performance associated with abbreviated
running schedules during the first half of the year because of the weak order
position for apparel fabrics during that period.

         Interest expense was $18.2 million for fiscal 1996, a decrease of $3.8
million or 17.2% from $21.9 million in fiscal 1995.  The reduction in interest
expense was due primarily to the conversion of the Company's 16.35% Convertible
Subordinated Junior Notes (the "Junior Notes") into shares of Class A common
stock in September 1995 and to a lesser extent because of lower rates and
levels for the Company's remaining debt.  The decrease in those debt levels was
due to lower levels of working capital during the year.

         The income tax provision was $3.6 million for fiscal 1996, or 38.6% of
pre-tax income, an increase of $1.4 million or 67.4% from the $2.1 million
(89.2% of pre-tax income) recorded for fiscal 1995.  The high effective tax
rate for fiscal 1995 reflects the nondeductibility of interest on the Junior
Notes that were outstanding during the first eight months of 1995.

         For the reasons described above, net income in fiscal 1996 was $5.7
million or $0.40 per basic share, an increase of $5.4 million from $0.3 million
or $0.02 per basic share for fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

General

         The Company relies on internally generated cash flow, supplemented by
borrowings under its Working Capital Facility to meet its working capital
needs, capital improvements and debt service requirements. In the past, the
Company has maintained substantial levels of leverage.  However, the Offering
resulted in a substantial reduction in that leverage.  The Company's total debt
to total capital ratio at January 3, 1998 was 46.4%.

Working Capital

         The Company's operations are working capital intensive. The Company's
operating working capital (accounts receivable and inventories less accounts
payable and accrued expenses) typically increases or decreases in relation to
sales and operating activity levels.

         Excluding the effect of the Cherokee acquisition, operating working
capital increased $3.7 million (4.2%) during fiscal 1997 reflecting increased
sales activity.  Net income plus noncash expense items (net) provided $49.4
million in cash during the year, which provided funding for $4.7 million used
by changes in operating assets and liabilities.  Those changes were a $2.7
million increase in prepaid expenses and other assets, a $1.6 million decrease
in other liabilities, as well as the $3.7 million increase in operating working
capital mentioned above.  As a result, net cash of $44.6 million was provided
by operating activities in fiscal 1997.

         Operating working capital decreased $17.3 million (16.7%) during
fiscal 1996 reflecting improved inventory management and to a lesser extent the
1.4% decrease in net sales from fiscal 1995.  Net income plus noncash expense
items (net) provided $28.4 million in cash during the year.  Additionally, cash
was provided by a $16.7 million reduction in operating assets and liabilities,
principally from the reduction in operating working capital mentioned here.
Accordingly, net cash of $45.1 million was generated from operating activities
in fiscal 1996.

         Operating working capital increased $5.7 million (5.8%) in fiscal 1995
reflecting the 3.6% increase in net sales from fiscal 1994.  Net income plus
noncash expense items (net) provided $29.6 million in cash during the year,
which provided funding for $7.0 million used by changes in operating assets and
liabilities. As a result, $22.5 million in net cash was provided by operating
activities in fiscal 1995.





                                       3
<PAGE>   4
         In connection with the purchasing of cotton for anticipated
manufacturing requirements, the Company may enter into cotton futures and
option contracts in order to reduce the risk associated with future price
fluctuations.  The Company generally covers open order requirements, which
average approximately three months of production, through direct purchase and
hedging transactions, and it may shorten or lengthen that period in accordance
with its perception of the direction of cotton prices.  Futures and option
contracts are accounted for as hedges and, accordingly, gains or losses are
deferred and reflected in cost of sales as an element of the cost of the
finished product.  Gains and losses related to hedging activity during the
three year period ended January 3, 1998 were not material to the Company's
results of operations.  There were no material cotton futures or options
contracts outstanding at January 3, 1998 or December 28, 1996.


Credit Facilities and Vendor Financing

         On February 3, 1997, in order to finance the Cherokee acquisition, the
Company replaced its $60.0 million revolving credit facility with a new
revolving credit facility (the "Working Capital Facility"), under which the
Company has $90.0 million aggregate borrowing availability, subject to a
borrowing base limitation, and a Term Loan Facility, under which the Company
had $35.0 million of aggregate borrowing availability, (together, the "Credit
Facilities").  The Working Capital Facility is secured by the Company's
accounts receivable and inventories.

         Following the completion of the Offering in November 1997 the net
proceeds to the Company from the Offering (approximately $64.5 million) were
used to retire various debt obligations of the Company and the Credit
Facilities were amended.  This resulted in the prepayment and termination of
the Term Loan Facility and a reduction in the interest rates applicable to
borrowings under the Working Capital Facility, as well as the prepayment and
termination of other obligations.

         As amended, the Working Capital Facility bears interest at the Base
Rate, as defined (8.50% as of February 23, 1998) or LIBOR plus .75% (6.38% as
of February 23, 1998) for periods of one, two, three or six months, at the
Company's option.  The Working Capital Facility is nonamortizing and any
amounts outstanding are due at the final maturity of February 28, 2001.  At
January 3, 1998, the Company had an aggregate of $18.5 million of borrowings
and $0.2 million in letters of credit outstanding under the Working Capital
Facility and had $61.4 million in unused and available borrowings under the
Working Capital Facility.

         The Working Capital Facility contains certain covenants including
requirements for the maintenance of a certain cash interest coverage ratio and
a minimum net worth and limitations on mergers and consolidations, affiliated
transactions, incurring liens, making restricted payments, entering into sale
and leaseback transactions, disposing of assets and owning, purchasing or
acquiring margin securities.  An event of default under the Working Capital
Facility includes a Change in Control (as defined) as well as the Company's
default on certain of its other indebtedness.  Borrowings under the Working
Capital Facility are tied to a borrowing base formula which is dependent on the
level of eligible accounts receivable and inventories, less $10 million.

         In addition, the Company finances certain capital improvements through
vendors of the capital assets, and will continue to utilize this method of
financing where it deems appropriate.

Capital Improvements

         The Company's capital improvements have been financed through a
variety of sources, including (i) internally generated funds and borrowings
under existing credit facilities, (ii) vendor financing and (iii) operating
leases.

         During fiscal 1997, the Company made capital improvements aggregating
$24.2 million.  The Company anticipates capital improvements in the range of
$30 million to $35 million in fiscal 1998, which will be used primarily for new
looms, air conditioning and other facility modernizations.





                                       4
<PAGE>   5
         Rental expense for fiscal 1997, 1996 and 1995 was approximately $7.4
million, $10.3 million and $13.0 million, respectively, net of rental income on
noncancellable leases and subleases of approximately $34,000, $76,000 and $1.5
million, respectively.  At January 3, 1998, the Company's future minimum lease
payments due under operating leases with noncancellable terms in excess of one
year were as follows:  1998, $4.6 million; 1999, $3.1 million; 2000, $2.3
million; 2001 and later, $18.5 million.  Approximately 5% of future rental
payments relate to operating leases for machinery and equipment used to produce
the Company's products.

         The table below sets forth the amount of capital improvements made
through specified financing sources during the past three fiscal years:

<TABLE>
<CAPTION>
                                                                           Fiscal Year  
                                                                1997           1996        1995 
                                                               -------        ------      -------
                                                                         (in millions) 
<S>                                                            <C>            <C>          <C>
Source of Financing:                                                                   
  Internal generated funds and borrowings . . . . . . . .       $ 24.2        $ 28.5       $ 20.8
  Vendor financings(1)  . . . . . . . . . . . . . . . . .           --           6.0          7.2
  Operating leases(2) . . . . . . . . . . . . . . . . . .           --           0.9          1.3
                                                                ------        ------       ------
Total capital improvements  . . . . . . . . . . . . . . .       $ 24.2        $ 35.4       $ 29.3
                                                                ======        ======       ======
</TABLE>

------------------

(1)  The financings provided by vendors for machinery and equipment typically
have maturities ranging from three to seven years and carry floating rates of
interest similar to the Company's Credit Facilities.  The 1996 and 1995 amounts
also include $3.6 million and $1.0 million, respectively, of financing from an
Industrial Development Authority for a home fashions accessory sewing plant and
a warehouse and distribution center.

(2)  Amounts reflect the fair market value of machinery and equipment which was
leased during the applicable period.

IMPACT OF YEAR 2000

         Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year.  As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000.  This could result in system
failures or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

         The Company has completed a business system assessment and will have
to modify or replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter.  The
assessment included not only a review for year 2000 compliance, but whether
existing systems were sufficient to serve as the base for the Company's future
operations.  As a result of the review, the Company decided to install a new
Enterprise Resource Planning (ERP) System which is year 2000 compliant and
which would provide significant business improvements.  The cost to implement
the ERP system is approximately $6 million of which $5 million is considered a
capital expenditure.  In addition, the Company plans to expense as incurred
approximately $1-2 million on modifying other systems to cause them to become
year 2000 compliant.

         The Company's target for completion of the ERP system installations
and modifications to other systems is December 31, 1998, which is prior to any
anticipated impact on its operating systems.  The Company believes that with
modifications to existing software and conversions to new software, the year
2000 issue will not pose significant operational problems for its computer
systems.  However, if such modifications and conversions are not made, or are
not completed in a timely manner, the year 2000 issue could have a material
impact on the operations of the Company.





                                       5
<PAGE>   6
         The Company has initiated formal communications with key suppliers and
large customers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to address their own
year 2000 issues.  There is no guarantee that the systems of other companies on
which the Company's systems rely will be timely converted and would not have an
adverse effect on the Company's systems.

         The costs outlined above and the date on which the Company believes it
will complete the year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions about future
events, including the continued availability of certain resources and other
factors.  There can be no assurance that these estimates will be achieved and
actual results could differ materially from those anticipated.  Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of trained personnel, the ability to locate and
correct all relevant computer codes, and similar uncertainties.

RECENT ACCOUNTING PRONOUNCEMENTS

         See Note 2 to the Consolidated Financial Statements.

MARKET AND DIVIDEND DATA

         The Company was privately held until the Offering was completed on
November 20, 1997, at which time its Class A Common Stock was listed on the New
York Stock Exchange, which is the principal United States market where the
stock is traded.  The initial public offering price of the Class A Common Stock
was $15 per share, and the price on January 2, 1998, the last trading date of
the Company's fiscal year, was $16.375. There is no established trading market
for the Class B Common Stock.  On February 19, 1998, there were 63 holders of
record of the Company's Class A Common Stock and eight holders of record of the
Company's Class B Common Stock.

         The Company has paid no cash dividends during its two most recent
fiscal years and has no present intention to commence paying such dividends.





                                       6
<PAGE>   7
                                 DAN RIVER INC.

                          CONSOLIDATED BALANCE SHEETS

                     January 3, 1998 and December 28, 1996

<TABLE>
<CAPTION>
                                                                                       1997            1996
                                                                                       ----            ----
                                                                                      (in thousands, except
                                                                                    share and per share data)
<S>                                                                                  <C>             <C>
                                              ASSETS

Current assets:

   Cash and cash equivalents  . . . . . . . . . . . . . . . . . . . . . . . . . . .  $  1,759        $  5,042
   Accounts receivable (less allowance of $6,230 and $4,631)  . . . . . . . . . . .    70,676          55,782
   Inventories  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    92,376          72,493
   Prepaid expenses and other current assets  . . . . . . . . . . . . . . . . . . .     5,112           1,275
   Deferred income taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     7,628           5,643
                                                                                     --------        --------

     Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   177,551         140,235

Property, plant and equipment:
   Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     6,296           6,526
   Building and improvements  . . . . . . . . . . . . . . . . . . . . . . . . . . .    59,382          43,363
   Machinery and equipment  . . . . . . . . . . . . . . . . . . . . . . . . . . . .   250,849         209,568
   Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . .     5,467          15,241
                                                                                     --------        --------
                                                                                      321,994         274,698
   Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . .   113,866          99,348
                                                                                     --------        --------
   Net property, plant and equipment  . . . . . . . . . . . . . . . . . . . . . . .   208,128         175,350
Other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     6,616           5,465
                                                                                     --------        --------
                                                                                     $392,295        $321,050
                                                                                     ========        ========

                                       LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
   Current maturities of long-term debt   . . . . . . . . . . . . . . . . . . . . .  $    301        $  6,990
   Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    27,933          21,531
   Accrued compensation and related benefits  . . . . . . . . . . . . . . . . . . .    16,661          13,652
   Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     9,052           4,771
                                                                                     --------        --------
     Total current liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . .    53,947          46,944
Long-term debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   143,455         162,478
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    20,182          17,857
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     8,881           6,147

Common stock subject to put rights  . . . . . . . . . . . . . . . . . . . . . . . .        --           9,726

Shareholders' equity:
   Preferred stock, $.01 par value; authorized 50,000,000 shares; no shares issued         --              --
   Common stock, Class A, $.01 par value; authorized 175,000,000 shares; issued and
     outstanding 16,778,472 shares (12,712,945 shares at December 28, 1996) . . . .       168             127
   Common stock, Class B, $.01 par value; authorized 35,000,000 shares; issued and
     outstanding 2,062,070 shares (none at December 28, 1996) . . . . . . . . . . .        21              --
   Common stock, Class C, $.01 par value; authorized 5,000,000 shares; no shares
     outstanding (1,442,220 shares outstanding at December 28, 1996)  . . . . . . .        --              14
   Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . .   139,140          64,668
   Retained earnings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    26,501          13,698
   Pension liability adjustment . . . . . . . . . . . . . . . . . . . . . . . . . .        --            (609)
                                                                                     --------        -------- 
     Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . .   165,830          77,898
                                                                                     --------        --------
                                                                                     $392,295        $321,050
                                                                                     ========        ========
</TABLE>


                            See accompanying notes.





                                       7
<PAGE>   8
                                 DAN RIVER INC.

                       CONSOLIDATED STATEMENTS OF INCOME

      Years ended January 3, 1998, December 28, 1996 and December 30, 1995

<TABLE>
<CAPTION>
                                                                           1997         1996          1995
                                                                           ----         ----          ----
                                                                        (in thousands, except per share data)
<S>                                                                      <C>         <C>            <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $ 476,448    $ 379,567     $ 384,801

Costs and expenses:
   Cost of Sales  . . . . . . . . . . . . . . . . . . . . . . . .          372,165      307,383       306,879
   Selling, general and administrative expenses . . . . . . . . .           54,231       45,673        44,860
   Other operating costs, net . . . . . . . . . . . . . . . . . .            7,012         (428)        8,972
                                                                         ---------   ----------     ---------

Operating income  . . . . . . . . . . . . . . . . . . . . . . . .           43,040       26,939        24,090
Other income (expense), net . . . . . . . . . . . . . . . . . . .             (290)         485           241
Interest expense  . . . . . . . . . . . . . . . . . . . . . . . .          (21,135)     (18,168)      (21,941)
                                                                         ---------   ----------     --------- 
Income before income taxes and extraordinary item . . . . . . . .           21,615        9,256         2,390
Provision for income taxes  . . . . . . . . . . . . . . . . . . .            8,351        3,570         2,132
                                                                         ---------   ----------     ---------
Income before extraordinary item  . . . . . . . . . . . . . . . .           13,264        5,686           258
Extraordinary item, net of income taxes:
   Loss on early extinguishment of debt . . . . . . . . . . . . .             (243)          --            --
                                                                         ---------   ----------     ---------
Net income  . . . . . . . . . . . . . . . . . . . . . . . . . . .        $  13,021   $    5,686     $     258
                                                                         =========   ==========     =========

Earnings per share--basic:
   Income before extraordinary item . . . . . . . . . . . . . . .        $    0.90   $     0.40     $    0.02
   Extraordinary item . . . . . . . . . . . . . . . . . . . . . .            (0.01)          --            --
                                                                         ---------   ----------     ---------
   Net income per share--basic  . . . . . . . . . . . . . . . . .        $    0.89   $     0.40     $    0.02
                                                                         =========   ==========     =========

Earnings per share--diluted:
   Income before extraordinary item . . . . . . . . . . . . . . .        $    0.89   $     0.40     $    0.02
   Extraordinary item . . . . . . . . . . . . . . . . . . . . . .            (0.01)          --            --
                                                                         ---------   ----------     ---------
   Net income per share--diluted  . . . . . . . . . . . . . . . .        $    0.88   $     0.40     $    0.02
                                                                         =========   ==========     =========
</TABLE>


                            See accompanying notes.


                                       8
<PAGE>   9
                                 DAN RIVER INC.

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                 Years ended January 3, 1998, December 28, 1996
                             and December 30, 1995

<TABLE>
<CAPTION>
                                        Class A    Class B    Class C    Additional               Pension
                                        Common     Common     Common     Paid-In      Retained    Liability
                                         Stock      Stock      Stock     Capital      Earnings    Adjustment     Total
                                        ------     ------     ------     -------      --------    ----------     -----
                                                                       (in thousands)
<S>                                    <C>         <C>        <C>        <C>        <C>         <C>            <C>
Balance at December 31, 1994           $    99     $    --    $     14   $ 38,943   $  7,754    $       --      $ 46,810
Net income  . . . . . .                     --          --          --         --        258            --           258
Pension liability adjustment                --          --          --         --         --        (1,845)       (1,845)
Conversion of junior subordinated
  notes . . . . . . . .                     28          --          --     28,451         --            --        28,479
                                       -------     -------    --------   --------   --------     ---------      --------
Balance at December 30, 1995               127          --          14     67,394      8,012        (1,845)       73,702

Net income  . . . . . .                     --          --          --         --      5,686            --         5,686
Pension liability adjustment                --          --          --         --         --         1,236         1,236
Change in common stock subject to put
  rights  . . . . . . .                     --          --          --     (2,726)        --            --        (2,726)
                                       -------     -------    --------   --------    -------     ---------      -------- 
Balance at December 28, 1996               127           -          14     64,668     13,698          (609)       77,898

Net income  . . . . . .                     --          --          --         --     13,021            --        13,021
Pension liability adjustment                --          --          --         --         --           609           609
Initial public offering                     41          21         (14)    64,436         --            --        64,484
Termination of put rights                   --          --          --      9,726         --            --         9,726
Tax effect of stock options
  exercised . . . . . .                     --          --          --        310         --            --           310
Retirement of common stock                  --          --          --         --        (218)          --          (218)
                                       -------     -------    --------   --------    --------     --------     --------- 
Balance at January 3, 1998             $   168     $    21    $     --   $139,140    $ 26,501     $     --     $ 165,830
                                       =======     =======    ========   ========    ========     ========     =========
</TABLE>


                            See accompanying notes.



                                       9
<PAGE>   10
                                 DAN RIVER INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 Years ended January 3, 1998, December 28, 1996
                             and December 30, 1995

<TABLE>
<CAPTION>
                                                                           1997           1996         1995
                                                                           ----           ----         ----
                                                                                     (in thousands)
<S>                                                                     <C>             <C>         <C>
Cash flows from operating activities:
  Net income  . . . . . . . . . . . . . . . . . . . . . . .             $   13,021      $ 5,686     $     258
     Adjustments to reconcile net income to net cash provided by
         operating activities:
         Noncash interest expense . . . . . . . . . . . . .                  1,359        1,166         4,110
         Depreciation and amortization  . . . . . . . . . .                 27,508       20,795        19,537
         Deferred income taxes  . . . . . . . . . . . . . .                    (59)       1,842        (1,379)
         Writedown/disposal of assets . . . . . . . . . . .                  7,161       (1,129)        7,045
         Extraordinary loss on extinguishment of debt . . .                    397           --            --
         Changes in operating assets and liabilities,
           excluding effects of business acquired:
              Accounts receivable . . . . . . . . . . . . .                    473         (691)        6,578
              Inventories . . . . . . . . . . . . . . . . .                 (8,790)      24,554        (8,423)
              Prepaid expenses and other assets . . . . . .                 (2,701)        (396)          512
              Accounts payable and accrued expenses . . . .                  4,646       (6,555)       (3,904)
              Other liabilities . . . . . . . . . . . . . .                  1,632         (194)       (1,796)
                                                                           -------      -------       -------- 
Net cash provided by operating activities . . . . . . . . .                 44,647       45,078        22,538
                                                                           -------      -------       -------- 
Cash flows from investing activities:
     Capital expenditures . . . . . . . . . . . . . . . . .                (24,231)     (27,582)      (24,316)
     Proceeds from sale of assets   . . . . . . . . . . . .                  4,005        2,385           322
     Acquisition of business  . . . . . . . . . . . . . . .                (64,583)          --            --
                                                                          --------     --------      --------
Net cash used by investing activities . . . . . . . . . . .                (84,809)     (25,197)      (23,994)
                                                                           -------      -------       -------- 
Cash flows from financing activities:
     Payments of long-term debt . . . . . . . . . . . . . .                (89,177)     (18,566)       (8,453)
     Net proceeds from issuance of long-term debt . . . . .                 62,972       25,187           700
     Net borrowings (payments)--working capital facility  .                 (1,400)     (23,000)        9,000
     Net proceeds from issuance of common stock . . . . . .                 64,484           --            --
                                                                           -------      -------       -------
Net cash provided (used) by financing activities  . . . . .                 36,879      (16,379)        1,247
                                                                           -------      -------       -------
Net increase (decrease) in cash and cash equivalents  . . .                 (3,283)       3,502          (209)
Cash and cash equivalents at beginning of year  . . . . . .                  5,042        1,540         1,749
                                                                           -------      -------       -------
Cash and cash equivalents at end of year  . . . . . . . . .                $ 1,759      $ 5,042       $ 1,540
                                                                           =======      =======       =======
</TABLE>


                            See accompanying notes.





                                       10
<PAGE>   11
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

1.       DESCRIPTION OF BUSINESS

                 Dan River Inc. and its former parent and sole shareholder,
         Braelan Corp. ("Braelan"), were organized in 1989 to acquire and
         operate Dan River Holding Company and its subsidiaries.  Dan River
         Inc. is a manufacturer and marketer of a variety of textile products,
         primarily home fashions and apparel fabrics.  Home fashions products
         consist mostly of packaged bedroom furnishings which are sold to
         domestic retailers.  Apparel products, which include a broad range of
         woven cotton and cotton-blend fabrics, are distributed primarily to
         domestic clothing manufacturers.

2.       SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS

         Basis of presentation

                 On December 29, 1995, Braelan was merged with and into Dan
         River Inc.  The consolidated balance sheets as of January 3, 1998 and
         December 28, 1996, and the consolidated statements of income,
         shareholders' equity and cash flows for each of the two fiscal years
         in the period ended January 3, 1998, represent the consolidated
         financial position, results of operations and cash flows of Dan River
         Inc. and its wholly-owned subsidiary, Dan River Factory Stores, Inc.
         The consolidated statements of income, shareholders' equity and cash
         flows for the year ended December 30, 1995, represent the consolidated
         results of operations and cash flows of Braelan and its subsidiaries.
         All significant intercompany balances have been eliminated.  Braelan
         and its subsidiaries, and Dan River Inc. and its subsidiary are
         collectively referred to as the Company.

         Fiscal year

                 The Company's fiscal year ends on the Saturday nearest to
         December 31.  All references to 1997 mean the 53-week fiscal year
         ended January 3, 1998, and all references to 1996, and 1995 mean the
         52-week fiscal years ended December 28, 1996 and December 30, 1995,
         respectively.

         Use of estimates

                 The preparation of financial statements in conformity with
         generally accepted accounting principles requires management to make
         estimates and assumptions that affect the amounts reported in the
         financial statements and accompanying notes.  Actual results could
         differ from those estimates.

         Cash equivalents

                 All highly liquid cash investments purchased with an initial
         maturity of three months or less are considered to be cash
         equivalents.





                                       11
<PAGE>   12
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

2.       SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--(CONTINUED)

         Inventories

                 Inventories are stated at the lower of cost or market, with
         cost determined under the first-in, first-out method.  Inventories at
         January 3, 1998 and December 28, 1996 respectively, by component are
         as follows:

<TABLE>
<CAPTION>
                                                                     1997         1996
                                                                    -------     --------      
                                                                       (in thousands)
                 <S>                                                <C>          <C>
                 Finished goods . . . . . . . . . . . . . . . .     $25,401      $24,558
                 Work in process  . . . . . . . . . . . . . . .      56,156       38,274
                 Raw materials  . . . . . . . . . . . . . . . .       2,429        2,679
                 Supplies . . . . . . . . . . . . . . . . . . .       8,390        6,982
                                                                    -------      -------
                      Total inventories . . . . . . . . . . . .     $92,376      $72,493
                                                                    =======      =======
</TABLE>

         Property, plant and equipment

                 Property, plant and equipment are stated at cost.
         Depreciation is computed on a straight-line basis over the estimated
         useful lives of the related assets, ranging from 10 to 35 years for
         buildings and improvements, and 3 to 14 years for machinery and
         equipment.  Leasehold improvements are amortized on a straight-line
         basis over the lease term or estimated useful life, whichever is less.

         Deferred financing fees

                 Debt financing fees are amortized over the term of the related
         debt.

         Revenue recognition

                 The Company generally recognizes revenues from product sales
         when goods are shipped.

         Stock-based compensation

                 The Company continues to follow the accounting method
         prescribed by Accounting Principles Board Opinion No. 25, "Accounting
         for Stock Issued to Employees" ("APB 25"), and has presented the
         disclosure-only provisions of Statement of Financial Accounting
         Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
         123").

         Income taxes

                 Deferred income taxes are accounted for under the liability
         method.  Under this method, deferred tax assets and liabilities are
         determined based on differences between financial reporting and tax
         bases of assets and liabilities and are measured using the enacted tax
         rates and laws that will be in effect when the differences are
         expected to reverse.





                                       12
<PAGE>   13
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

2.       SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS--(CONTINUED)

         Cotton futures contracts

                 In connection with the purchasing of cotton for anticipated
         manufacturing requirements, the Company may enter into cotton futures
         and option contracts in order to reduce the risk associated with
         future price fluctuations.  These contracts are accounted for as
         hedges and, accordingly, gains or losses are deferred and reflected in
         cost of sales as an element of the cost of the finished product.
         Transactions related to cotton futures and option contracts during the
         three year period ended January 3, 1998 were not material.

         Earnings per share

                 In 1997, the Company adopted Statement of Financial Accounting
         Standards No. 128, "Earnings per Share" ("SFAS 128").  SFAS 128
         replaced the previously reported primary and fully diluted earnings
         per share with basic and diluted earnings per share.  Unlike primary
         earnings per share, basic earnings per share excludes any dilutive
         effects of stock options.  Diluted earnings per share is similar to
         fully diluted earnings per share except that the antidilutive effect
         of the Company's convertible junior subordinated notes, which was
         taken into consideration for purposes of calculating fully diluted
         earnings per share in 1995, is not included in the calculation of
         diluted earnings per share.  All earnings per share amounts have been
         restated to conform to the SFAS 128 requirements.

         Recent accounting pronouncements

                 In June 1997, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards No. 131, "Disclosures
         about Segments of an Enterprise and Related Information" ("SFAS 131"),
         effective for years beginning after December 15, 1997.  SFAS 131
         requires that a public company report financial and descriptive
         information about its reportable operating segments pursuant to
         criteria that differ from those of Statement of Financial Accounting
         Standards No. 14, "Financial Reporting for Segments of a Business
         Enterprise".  Operating segments, as defined, are components of an
         enterprise about which separate financial information is available
         that is evaluated regularly by the chief operating decision maker in
         deciding how to allocate resources and in assessing performance.  The
         financial information to be reported includes segment profit or loss,
         certain revenue and expense items and segment assets and
         reconciliations to corresponding amounts in the general purpose
         financial statements.  SFAS 131 also requires information about
         products and services, geographic areas of operation, and major
         customers.  The Company is required to adopt SFAS 131 at the end of
         its 1998 fiscal year.  The Company has not completed its analysis of
         the effect of adoption on its financial statement disclosure, however,
         the adoption of SFAS 131 will not affect results of operations or
         financial position.

3.       PUBLIC OFFERING AND CAPITALIZATION

                 On November 20, 1997 the Company completed an initial public
         offering of its Class A common stock to the public (the "Offering"),
         which included the sale of 4,700,000 shares by the Company and
         2,619,200 shares by certain selling shareholders.  The Company used
         the net proceeds from the Offering, $64,484,000, to retire
         indebtedness.





                                       13
<PAGE>   14
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                      DECEMBER 30, 1995, DECEMBER 28, 1996
                              AND JANUARY 3, 1998

3.       PUBLIC OFFERING AND CAPITALIZATION--(CONTINUED)

                 In connection with the Offering, the shareholders of the
         Company approved a multi-step recapitalization plan which became
         effective on November 3, 1997 (the "Recapitalization").  Prior to the
         Recapitalization, the Company's outstanding capital stock included
         1,500,000 authorized shares of voting stock, par value $.01 per share
         ("Old Voting Stock") (726,454 shares of which were outstanding), and
         1,500,000 authorized shares of nonvoting common stock, par value $.01
         per share ("Old Nonvoting Stock") (82,413 shares of which were
         outstanding).

                 The Company first amended and restated its Articles of
         Incorporation (the "Restated Articles"). Upon filing of the Restated
         Articles: (i) Class A Common Stock, par value $.01 per share, entitled
         to one vote per share, Class B Common Stock, par value $.01 per share,
         entitled to 4.39 votes per share, and Class C Common Stock, par value
         $.01 per share, nonvoting, were created; (ii) each outstanding share
         of Old Voting Stock was reclassified and exchanged for 17.5 shares of
         Class A Common Stock of the Company ("Class A Common") and (iii) each
         outstanding share of Old Nonvoting Stock was reclassified and
         exchanged for 17.5 shares of Class C Common Stock of the Company
         ("Class C Common") (the "Reclassification").  All share and per share
         amounts in the accompanying financial statements and the related notes
         have been adjusted to reflect the impact of the Reclassification on
         the number of shares outstanding and the per share amounts.  Shares of
         Class C Common automatically converted into shares of Class A Common
         on a share-for-share basis upon consummation of the Offering.

                 Upon consummation of the Offering, the Company completed an
         exchange offer (the "Exchange Offer") pursuant to which certain
         members of senior management of the Company (and certain of their
         family members) that held Old Voting Stock prior to the
         Reclassification exchanged 2,062,070 shares of Class A Common for
         shares of supervoting Class B Common Stock ("Class B Common") on a
         share-for-share basis.

                 The Company has the option until September 2001 to purchase
         the common shares held prior to the Offering by certain shareholders
         at a price equal to the fair market value at the date the option is
         exercised.  The Company's call option may only be exercised once
         during any 12-month period.  Mr. Joseph L. Lanier, Jr., Chairman and
         Chief Executive Officer, has a similar call option on certain issued
         and outstanding common shares, which has priority to the Company's
         call option.  In addition, certain shareholders have the right to
         require the Company to register, at its expense, their shares under
         the Securities Act of 1933.  Prior to the Offering, certain
         shareholders had the right to require the Company to repurchase
         annually a portion of their shares at the then fair market value, as
         defined.  As a result of certain financial covenants and other
         restrictions contained in the put agreement and the Company's debt
         agreements, the Company was not required to repurchase any securities.
         Upon consummation of the Offering the put agreement terminated.

                 On September 3, 1995 the Company's convertible junior
         subordinated notes (the "Junior Notes") with an outstanding balance of
         $28,479,000 were converted into 2,780,173 shares of Class A Common
         stock.  The Junior Notes were non-amortizing, and bore interest at
         16.35%, which accrued quarterly and was automatically capitalized and
         added to principal.





                                       14
<PAGE>   15
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995


4.       ACQUISITION

                 On February 3, 1997, the Company acquired substantially all
         the assets of The New Cherokee Corporation ("Cherokee"), a
         manufacturer of yarn-dyed shirting and sportswear fabrics, for
         $64,583,000 in cash, including transaction costs, and the assumption
         of approximately $6,600,000 in operating liabilities.  In addition,
         liabilities aggregating $2,000,000 were recorded, primarily for
         severance arrangements and the closure of Cherokee's marketing
         headquarters.  The majority of these liabilities were paid in 1997.
         The acquisition was funded at closing with $12,100,00 of cash on hand,
         and borrowings under a working capital line of credit and term loan.
         The acquisition has been accounted for as a purchase and did not
         result in the recording of goodwill.

                 The results of Cherokee's operations are reflected in the
         Company's financial statements from the date of acquisition.  The
         following summarized, unaudited pro forma results of operations assume
         the acquisition had occurred at the beginning of each year presented:


<TABLE>
<CAPTION>
                                                                           1997         1996  
                                                                          -------      -------
                                                                 (in thousands, except per share data)
                 <S>                                                     <C>         <C>
                 Net Sales  . . . . . . . . . . . . . . . . . .          $485,658    $480,639
                 Income before extraordinary item . . . . . . .            13,735       3,306
                 Net income . . . . . . . . . . . . . . . . . .            13,492       3,306
                 Earnings per share:
                      Basic . . . . . . . . . . . . . . . . . .              0.92        0.23
                      Diluted . . . . . . . . . . . . . . . . .              0.91        0.23
</TABLE>


                 The pro forma information is presented for informational
         purposes and is not indicative of results which would have occurred or
         which may occur in the future.

5.       LONG-TERM DEBT

         Long-term debt at January 3, 1998 and December 28, 1996, consists of
the following:

<TABLE>
<CAPTION>
                                                                          1997          1996  
                                                                         -------       -------
                                                                            (in thousands)
                 <S>                                                     <C>         <C>
                 Senior subordinated notes  . . . . . . . . . .          $120,000    $120,000
                 Working capital facility . . . . . . . . . . .            18,500          --
                 Other borrowings with various rates
                   and maturities . . . . . . . . . . . . . . .             5,256      49,468
                                                                         --------    --------
                                                                          143,756     169,468
                 Less current maturities  . . . . . . . . . . .               301       6,990
                                                                         --------    --------
                 Total long-term debt . . . . . . . . . . . . .          $143,455    $162,478
                                                                         ========    ========
</TABLE>





                                       15
<PAGE>   16
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

5.       LONG-TERM DEBT--(CONTINUED)

                 The senior subordinated notes (the "Notes") consist of
         $120,000,000 in nonamortizing ten-year notes issued pursuant to an
         indenture dated December 15, 1993, bearing interest at 10 1/8%,
         payable semi-annually.

                 The working capital facility as established February 3, 1997
         consists of a long-term $90 million working capital line of credit,
         the availability of which is tied to a defined borrowing base formula.
         At January 3, 1998, $18,500,000 was outstanding under the working
         capital line of credit, and $61,372,000 was available.  All borrowings
         under the working capital facility are nonamortizing, and are due
         February 28, 2001.  The borrowings bear interest at a Base Rate, as
         defined, or LIBOR plus .75%, as defined, at the option of the Company.
         The weighted average interest rate of the borrowings outstanding at
         January 3, 1998 was 6.72%.  The Company pays a commitment fee of 1/4%
         per annum on the unused portion of the $90,000,000 working capital
         line of credit.  The working capital facility also provides for the
         issuance of letters of credit up to $7,500,000 outstanding, of which
         $150,000 was outstanding at January 3, 1998. The obligations of the
         Company under the working capital facility are secured by a lien on
         substantially all accounts receivable and inventory.  This working
         capital facility was established on February 3, 1997 and replaced a
         $60,000,000 working capital facility terminated on that date.

                 The working capital facility and the Notes contain certain
         restrictive covenants which, among other things, require the Company
         to meet minimum net worth and earnings ratios, impose limitations on
         debt incurrence and restrict certain payments, including dividends and
         payments for the repurchase of capital stock.  At January 3, 1998,
         $6,501,000 of the Company's retained earnings was so restricted.

                 Other borrowings consist primarily of various industrial
         development revenue and pollution control obligations as of January 3,
         1998.  As of December 28, 1996, it also included various notes secured
         by machinery and equipment of the Company which were prepaid in
         November and December 1997 with the proceeds of the Offering.

                 The repayment of debt obligations with the proceeds of the
         Company's Offering resulted in an extraordinary loss of $396,000, less
         related income taxes of $153,000.

                 The aggregate annual scheduled principal repayments of
         long-term debt for 1998, 1999, 2000, 2001 and 2002 are $301,000,
         $315,000, $324,000, $18,839,000 (including $18,500,000 under the
         working capital facility) and $312,000, respectively.

                 Plant and equipment acquired in exchange for debt,
         substantially all of which was repaid out of the proceeds from the
         Offering, was $0, $5,951,000 and $7,203,000 for 1997, 1996 and 1995,
         respectively.

                 Cash payments of interest on debt were $19,791,000,
         $17,854,000 and $17,742,000 for 1997, 1996 and 1995, respectively.





                                       16
<PAGE>   17
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

6.       INCOME TAXES

                 The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                                                      1997           1996         1995 
                                                                     -------        ------       -------
                                                                                (in thousands)
         <S>                                                        <C>            <C>           <C>
         Current:                                                                           
              Federal . . . . . . . . . . . . . . . . . .           $ 7,395        $ 1,645       $ 3,123
              State . . . . . . . . . . . . . . . . . . .             1,011             83           388
                                                                    -------        -------       -------
                                                                      8,406          1,728         3,511
                                                                    =======        =======       =======
         Deferred:                                                                          
              Federal . . . . . . . . . . . . . . . . . .              (267)         1,278        (1,365)
              State . . . . . . . . . . . . . . . . . . .               212            564           (14)
                                                                    -------        -------       ------- 
                                                                        (55)         1,842        (1,379)
                                                                    -------        -------       ------- 
         Provision for income taxes . . . . . . . . . . .           $ 8,351        $ 3,570       $ 2,132
                                                                    =======        =======       =======
</TABLE>

                 A reconciliation of the differences between the provision for
         income taxes and income taxes computed using the statutory federal
         income tax rate of 35% follows:
<TABLE>
<CAPTION>
                                                                     1997         1996         1995 
                                                                    -------      ------      -------
                                                                             (in thousands) 
         <S>                                                       <C>           <C>         <C>
         Amount computed using the statutory rate . . . .           $ 7,565      $ 3,240     $   837
         Increase (decrease) in taxes resulting from:                                     
              State taxes . . . . . . . . . . . . . . . .               795          421         243
              Nondeductible interest  . . . . . . . . . .                82           80       1,018
              Other, net  . . . . . . . . . . . . . . . .               (91)        (171)         34
                                                                   --------      -------     -------
         Provision for income taxes . . . . . . . . . . .          $  8,351      $ 3,570     $ 2,132
                                                                   ========      =======     =======
</TABLE>

                 Deferred income taxes reflect the net tax effects of temporary
         differences between the carrying amounts of assets and liabilities for
         financial reporting purposes and the amounts used for income tax
         purposes.  Significant components of the Company's deferred tax
         liabilities and assets at January 3, 1998 and December 28, 1996 are as
         follows:





                                       17
<PAGE>   18
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

6.       INCOME TAXES--(CONTINUED)

<TABLE>
<CAPTION>
                                                                          1997         1996  
                                                                        -------      -------
                                                                           (in thousands)
                 <S>                                                     <C>         <C>
                 Deferred tax liabilities:
                      Book carrying value in excess of tax
                         basis of property, plant and equipment          $29,728     $29,389
                      Other . . . . . . . . . . . . . . . . . .            2,971       1,376
                                                                         -------     -------
                           Total deferred tax liabilities . . .           32,699      30,765
                 Deferred tax assets:
                      Net operating loss and credit carryforwards         11,075      13,712
                      Nondeductible reserves and accruals . . .           10,335       8,437
                      Minimum pension liability adjustment  . .               --         399
                      Other . . . . . . . . . . . . . . . . . .            1,130         770
                                                                         -------     -------
                           Total deferred tax assets  . . . . .           22,540      23,318
                      Valuation allowance for deferred tax assets         (2,395)     (4,767)
                                                                         -------     ------- 
                           Net deferred tax assets  . . . . . .           20,145      18,551
                                                                         -------     -------
                           Net deferred tax liabilities . . . .          $12,554     $12,214
                                                                         =======     =======
</TABLE>

                 At January 3, 1998 the Company had available a minimum tax
         credit carryforward of $8,100,000, and investment credit and other
         general business credit carryforwards of $2,900,000. If not used, the
         majority of investment credit and other general business credit
         carryforwards will expire in the years 1998 through 2000.

                 The federal income tax returns of the Company for fiscal 1993
         and prior years are closed to assessment by the Internal Revenue
         Service. However, the net operating loss and credit carryforwards that
         existed at the end of 1993 remain open to adjustment.  The Company
         believes that it has adequately provided for income taxes, and that
         any potential adjustments or assessments that might be made by the
         Internal Revenue Service or other taxing authorities would not have a
         material impact on the Company's financial position or results of
         operations.

                 The Company made income tax payments of $4,815,000,
         $1,180,000, and $3,625,000 during 1997, 1996 and 1995, respectively.

7.       BENEFIT PLANS

         Retirement plans

                 The Company sponsors the Dan River Inc. Hourly Retirement Plan
         (the "Hourly Plan") and the Dan River Inc. Salary Retirement Plan (the
         "Salary Plan").  These plans are qualified noncontributory defined
         benefit plans and cover substantially all of the Company's full-time
         employees, other than hourly paid employees at its North Carolina and
         Tennessee manufacturing facilities.  Funding for the Hourly and Salary
         Plans is through employer cash contributions.





                                       18
<PAGE>   19
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

7.       BENEFIT PLANS--(CONTINUED)

                 Participants are generally eligible for full benefits at age
         65 or upon completion of five years of vesting service, if later.
         Vesting service is defined generally as years of service from hire.
         Benefits of the Hourly Plan are determined based upon years of service
         while benefits of the Salary Plan are determined based upon years of
         service and career average earnings.

                 The following table sets forth the funded status of the plans
         at January 3, 1998 and December 28, 1996:

<TABLE>
<CAPTION>
                                                                    Hourly Plan                   Salary Plan           
                                                               ----------------------      -------------------------    
                                                                  1997         1996           1997           1996       
                                                               ---------    ---------       --------       --------     
                                                                                 (in thousands)                         
         <S>                                                   <C>          <C>            <C>           <C>            
         Actuarial present value of benefit obligation:                                                                 
              Vested benefit obligation                        $ (10,528)   $  (8,551)     $  (9,064)    $  (7,258)     
              Accumulated benefit obligation                   $ (10,719)   $  (8,708)     $  (9,966)    $  (8,361)     
                                                               ---------    ---------      ---------     ---------      
                                                                                                                        
         Projected benefit obligation                          $ (10,719)   $  (8,708)     $ (11,390)    $  (9,883)     
         Plan assets at fair value                                11,601        7,697         10,340         8,521      
                                                               ---------    ---------      ---------     ---------      
         Projected benefit obligation less than (in excess)                                                             
              of plan assets                                         882       (1,011)        (1,050)       (1,362)    
         Unrecognized net loss                                     1,202        1,008            548           888      
         Minimum liability adjustment                                 --       (1,008)            --            --      
                                                               ---------    ---------       --------     ---------      
         Prepaid (accrued) pension cost                        $   2,084    $  (1,011)      $   (502)    $    (474)     
                                                               =========    =========       ========     =========      
</TABLE>

                 The Company's practice is to fund amounts which are required by
         statute and applicable regulations and which are tax deductible.  The
         minimum liability adjustment at December 28, 1996, represents the
         excess of unfunded accumulated benefit obligations over previously
         recorded liabilities.  A corresponding reduction is reflected in
         shareholders' equity at December 28, 1996, net of the related income
         tax effect of $399,000.

                 Net pension cost for the plans included the following
         components:


<TABLE>
<CAPTION>
                                                                      1997           1996          1995 
                                                                    --------       -------       -------
                                                                                (in thousands)        
         <S>                                                        <C>            <C>           <C>
         Service cost . . . . . . . . . . . . . . . . . .           $ 1,501        $ 1,728       $ 1,452
         Interest cost  . . . . . . . . . . . . . . . . .             1,541          1,401         1,181
         Actual return on assets  . . . . . . . . . . . .            (2,780)        (1,919)       (2,193)
         Other, net . . . . . . . . . . . . . . . . . . .             1,216            951         1,204
                                                                    -------        -------       -------
         Net periodic pension cost  . . . . . . . . . . .           $ 1,478        $ 2,161       $ 1,644
                                                                    =======        =======       =======
</TABLE>





                                       19
<PAGE>   20
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

7.       BENEFIT PLANS--(CONTINUED)

                 The projected benefit obligations were determined using an
         assumed discount rate of 7.4% at January 3, 1998 and 7.9% at December
         28, 1996.  An assumed long-term rate of increase in compensation of
         4.4% was used at January 3, 1998 and 4.9% at December 28, 1996.  The
         assumed long-term rate of return on plan assets was 9.5% at January 3,
         1998, December 28, 1996 and December 30, 1995.  Assets of the plans
         consist of various institutional investment funds and money market
         accounts.

                 The Company also sponsors a 401(k) plan which covers hourly
         paid employees at its North Carolina and Tennessee manufacturing
         facilities.  Generally, all full-time hourly employees with one year
         of service are eligible to participate.  Participants make mandatory
         salary reduction contributions to the plan and are also permitted to
         make elective contributions.  The plan also provides for matching
         contributions by the Company, beginning in 1998.

         Supplemental retirement plan

                 The Company sponsors an unfunded supplemental retirement plan
         for certain former employees that provides for payments upon
         retirement, death or disability over the longer of the employee's life
         or ten years.  The projected benefit obligations of $3,076,000 and
         $2,960,000 at January 3, 1998 and December 28, 1996, respectively, are
         accrued in the accompanying consolidated balance sheets.  The Company
         is a beneficiary of life insurance policies on certain participants in
         this plan.

         Stock option plans

                 In October 1997, the Company adopted stock incentive plans
         (the "1997 Plans") for key employees and directors that allow for the
         grant of stock options, restricted stock, stock appreciation rights
         ("SARs") and stock.  There are 1,925,000 shares of Class A common
         stock reserved for issuance under these plans. Options and SARs
         granted under the 1997 Plans will expire no later than 10 years after
         the date of grant, and the exercise prices of options and grant values
         for SARs will be no less than 100% of the fair market value of the
         Class A common stock on the date of grant.  Effective with the
         completion of the Offering on November 20, 1997, nonqualified options
         to purchase 589,000 shares were granted to employees at an exercise
         price equal to the Offering price of $15 per share.  These options
         vest in one-third increments annually, beginning on December 31, 1999,
         and expire ten years from the date of the Offering.  Directors were
         granted options to purchase 10,000 shares on identical terms, except
         the options vest in one-third increments annually, beginning December
         31, 1997.

                 The Company also maintains a nonqualified stock option plan
         pursuant to which options to purchase Class A common stock were
         granted prior to 1997.  Effective with establishment of the 1997
         Plans, options are no longer granted under this plan.  All options to
         purchase unissued shares granted under this plan have an exercise
         price of $6.85 per share, generally vest on December 31, 1999, and
         expire on December 31, 2001.  Prior to December 30, 1994, the plan
         also provided for the granting of options to purchase shares of the
         Company's Class A common stock from a certain principal shareholder at
         an exercise price of $0.57 per share.  All of these options were
         exercisable at January 3, 1998 and expire on December 31, 1999.





                                       20
<PAGE>   21
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

7.       BENEFIT PANS--(CONTINUED)

                 The Company has applied APB 25 in accounting for stock options
         and, accordingly, no compensation expense has been recorded in 1997,
         1996 or 1995.  If the Company had determined compensation expense
         based on the fair value at the grant date for its stock options under
         SFAS 123, net income and earnings per share would have been reduced to
         the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                               1997           1996          1995 
                                                             --------       -------       -------
                                                             (in thousands, except per share data)
         <S>                                                 <C>            <C>           <C>
         Net income:                                                                 
            As reported . . . . . . . . . . . . . . . . .    $ 13,021       $ 5,686       $   258
            Pro forma . . . . . . . . . . . . . . . . . .      12,949         5,683           258
         Per share:                                                                  
            As reported --                                                           
              Basic . . . . . . . . . . . . . . . . . . .       0.89           0.40          0.02
              Diluted . . . . . . . . . . . . . . . . . .       0.88           0.40          0.02
            Pro forma --                                                             
              Basic . . . . . . . . . . . . . . . . . . .       0.88           0.40          0.02
              Diluted . . . . . . . . . . . . . . . . . .       0.87           0.40          0.02
</TABLE>

                 The pro forma results reflect amortization of the fair value
         of stock options over the vesting period, and only take into
         consideration options granted after 1994.  The weighted average fair
         value of options granted in 1997, 1996 and 1995, was estimated to be
         $6.63, $1.60 and $0.45, respectively.  The fair value of each option
         grant was estimated on the date of grant using a Black-Scholes option
         pricing model, assuming a dividend yield of 0% for all years and
         weighted average risk-free interest rates of 5.89%, 5.30% and 6.26%
         for 1997, 1996 and 1995, respectively.  A 34% volatility factor was
         assumed for 1997 grants, whereas the 1996 and 1995 grants, which were
         made before the Company's equity was publicly traded, were valued
         assuming zero volatility.





                                       21
<PAGE>   22
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

7.       BENEFIT PLANS--(CONTINUED)

         The following is a summary of stock option activity:

<TABLE>
<CAPTION>
                                                          Options Exercisable         Options Exercisable
                                                        Against Unissued Shares   Against Principal Shareholder
                                                        -----------------------   -----------------------------
                                                                    Weighted-                       Weighted-
                                                                      Average                         Average
                                                          Number     Exercise           Number      Exercise
                                                        of Shares      Price          of Shares       Price 
                                                        ---------    --------         ---------     --------
         <S>                                           <C>            <C>              <C>           <C>
         Outstanding at December 31, 1994                603,750      $  6.85          524,300       $   0.57
         Granted                                          20,125         6.85                   
         Forfeited                                       (28,875)        6.85          (10,500)          0.57
                                                        --------      -------         --------       --------
         Outstanding at December 30, 1995                595,000         6.85          513,800           0.57
         Granted                                          13,125         6.85                   
         Exercised                                                                     (51,800)          0.57
         Forfeited                                       (13,300)        6.85           (5,250)          0.57
                                                        --------      -------         --------       --------
         Outstanding at December 28, 1996                594,825         6.85          456,750           0.57
         Granted                                         599,000        15.00                   
         Exercised                                                                     (57,250)          0.57
                                                                                                
         Forfeited                                       (11,375)        6.85                               
                                                     -----------     --------          -------       --------
         Outstanding at January 3, 1998                1,182,450      $ 10.98          399,500       $   0.57
                                                     ===========      =======          =======       ========
</TABLE>


                 Exercise prices and remaining weighted average contractural
         lives for options outstanding at January 3, 1998 against unissued
         shares were:  $6.85 per share (583,450 shares)--4 years; and $15.00
         per share (599,000 shares) - 9.9 years.  At January 3, 1998, 3,333 of
         these shares were exercisable at a price of $15.00 per share.  All
         options against shares held by the principal shareholder have been
         exercisable since June 30, 1995 at a price of $0.57 per share, and had
         a remaining contractural life of 2 years as of January 3, 1998.

8.       OTHER OPERATING COSTS, NET

                 During the second quarter of 1997 the Company recorded a
         charge of $7,875,000 as a result of its decision to close its
         Riverside apparel fabrics weaving facilities in Danville, Virginia.
         The charge included $4,194,000 for asset writedowns and $373,000 for
         severance and other benefits associated with the termination of
         approximately 200 employees.  The remainder of the charge related
         principally to estimated costs associated with the demolition and
         divestitures of two mill buildings and related land. As of January 3,
         1998, operations at the facilities has ceased, the termination of
         affected employees was complete, and most salvageable equipment had
         either been sold or was in the process of being moved to other
         facilities.  The Company anticipates that the demolition and
         divestitures of the real estate will be completed within two years.
         However, the actual timing of the disposition of these properties may
         vary due to their locations and market conditions.





                                       22
<PAGE>   23
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

8.       OTHER OPERATING COSTS, NET--(CONTINUED)

                 As a result of the completion of the first phase of the
         Riverside facility closures, the Company reversed $281,000 of the
         charge in the fourth quarter of 1997.  Also in the fourth quarter of
         1997, the Company sold its yarn mill in Wetumpka, Alabama, resulting
         in a gain of $583,000.  At January 3, 1998 the carrying value of
         assets held for sale, consisting mostly of Riverside assets, was
         $1,853,000.

                 In 1996, the Company reversed $849,000 of the prior year
         charge relating to a discounted product line due to better than
         anticipated recovery value of assets previously written down.  In
         addition, the Company reversed $84,000 of the prior year charge
         relating to the relocation of its marketing headquarters, primarily
         due to the early buyout of the existing lease.  These reversals were
         offset in part by net charges of $505,000 for writedowns and disposals
         of obsolete equipment.

                 During 1995 charges totaling $4,391,000 were recognized for
         writedowns and disposals of equipment rendered obsolete by the
         Company's modernization program.  Also in 1995, the Company recorded a
         $1,576,000 loss for the writedown of a leasehold and other costs
         related to the relocation of the Company's marketing headquarters in
         New York, and a $3,005,000 charge for the writedown of assets
         associated with the Company's decision to discontinue one of its
         apparel fabrics product lines.

9.       EARNINGS PER SHARE

                 The following table sets forth the computation of basic and
         diluted earnings per share:


<TABLE>
<CAPTION>
                                                                   1997             1996              1995      
                                                                  ------           -------          -------     
         <S>                                                   <C>              <C>              <C>           
         Numerator for basic and diluted earnings per share --                                                  
           income before extraordinary item (in thousands)     $     $13,264    $       5,686    $         258  
                                                               =============    =============    =============  
                                                                                                                
         Denominator:                                                                                           
           Denominator for basic earnings per share --                                                          
             weighted-average shares                              14,710,843       14,155,165       12,283,900  
                                                                                                                
           Effect of dilutive securities:                                                                       
             Employee stock options                                  127,943           24,889               --  
                                                               -------------    -------------    -------------  
           Denominator for diluted earnings per share --                                                        
             weighted-average shares adjusted for                                                               
             dilutive securities                                  14,838,786       14,180,054       12,283,900  
                                                               =============    =============    =============  
                                                                                                                
         Basic earnings per share                              $        0.90    $        0.40    $        0.02  
                                                               =============    =============    =============  
                                                                                                                
         Diluted earnings per share                            $        0.89    $        0.40    $        0.02  
                                                               =============    =============    =============  
</TABLE>



                                       23
<PAGE>   24
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995


10.      COMMITMENTS AND CONTINGENCIES

                 The Company leases certain manufacturing equipment, warehouses
         and office facilities under operating leases that expire at various
         dates through 2011.  Rental expense for 1997, 1996 and 1995 amounted
         to approximately $7,421,547, $10,296,000 and $13,032,000,
         respectively, net of rental income on noncancelable leases and
         subleases of approximately $34,000, $76,000 and $1,544,000,
         respectively.

                 The future minimum lease payments at January 3, 1998 due under
         operating leases with noncancelable terms in excess of one year are as
         follows:


<TABLE>
<CAPTION>
                                                           (in thousands)
                 <S>                                          <C>
                 1998                                         $   4,602
                 1999                                             3,132
                 2000                                             2,282
                 2001                                             2,128
                 2002                                             2,026
                 Later                                           14,296
                                                              ---------
                                                              $  28,466
                                                              =========
</TABLE>

                 Commitments for additions to plant and equipment amounted to
         approximately $13,700,000 at January 3, 1998.  Certain manufacturing
         and warehouse leases contain renewal options at their fair rental
         values.

                 The Company is subject to various legal proceedings and claims
         which have arisen in the ordinary course of its business and have not
         been finally adjudicated.  It is impossible at this time for the
         Company to predict with any certainty the outcome of such litigation.
         However, management is of the opinion, based upon information
         presently available, that it is unlikely that any such liability, to
         the extent not provided for through insurance or otherwise, would be
         material in relation to the Company's consolidated financial position
         or results of operations.

11.      FINANCIAL INSTRUMENTS

         Off balance sheet risk

                 In connection with the purchase of cotton for anticipated
         manufacturing requirements, the Company enters into cotton forward
         purchase commitments, futures and option contracts in order to reduce
         the risk associated with future price fluctuations.  The Company does
         not engage in speculation.  There were no material cotton futures or
         options contracts outstanding at January 3, 1998 or December 28, 1996.
         See Note 2 for information on the Company's accounting policy with
         respect to cotton futures and option contracts.





                                       24
<PAGE>   25
                                 DAN RIVER INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

11.      FINANCIAL INSTRUMENTS--(CONTINUED)

         Concentrations of credit risk

                 Financial instruments that potentially subject the Company to
         a concentration of credit risk consist principally of temporary cash
         investments and trade accounts receivable.  The Company places its
         temporary cash investments with high credit quality financial
         institutions.  Concentration of credit risk with respect to trade
         accounts receivable is managed by an in-house professional credit
         staff.  The Company performs periodic credit evaluations of its
         customers' financial condition and generally does not require
         collateral.

         Fair values

                 The carrying values of cash and cash equivalents, accounts
         receivable and accounts payable approximate fair values due to the
         short-term nature of these instruments.  The fair value of the
         Company's senior subordinated notes, based on quoted market prices,
         was $127,800,000 and $120,600,000 at January 3, 1998 and December 28,
         1996, respectively, compared to a carrying value of $120,000,000.
         Based on rates available for similar types of borrowings, the carrying
         values of the Company's other debt approximated fair value at January
         3, 1998 and December 28, 1996.

12.      QUARTERLY FINANCIAL DATA (UNAUDITED)

                 The Company's unaudited consolidated results of operations are
         presented below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              First       Second         Third        Fourth   
         Year ended January 3, 1998:                         Quarter      Quarter       Quarter       Quarter  
                                                             -------      -------       -------       -------  
              <S>                                           <C>          <C>            <C>           <C>      
              Net sales . . . . . . . . . . . . . . . . .   $105,736     $122,199       $116,254      $132,259 
              Gross Profit  . . . . . . . . . . . . . . .     20,149       27,066         28,235        28,833 
              Income before extraordinary item  . . . . .      1,993          321          5,009         5,941 
              Net income  . . . . . . . . . . . . . . . .      1,993          321          5,009         5,698 
              Per share:                                                                                       
                   Income before extraordinary item--                                                          
                      Basic . . . . . . . . . . . . . . .       0.14         0.02           0.35          0.37 
                      Diluted . . . . . . . . . . . . . .       0.14         0.02           0.35          0.36
                   Net income --                                                                               
                      Basic . . . . . . . . . . . . . . .       0.14         0.02           0.35          0.35 
                      Diluted . . . . . . . . . . . . . .       0.14         0.02           0.35          0.35 
</TABLE>  

<TABLE>
<CAPTION>
                                                              First       Second         Third        Fourth
         Year ended December 28, 1996:                       Quarter      Quarter       Quarter       Quarter
                                                             -------      -------       -------       -------
              <S>                                           <C>           <C>           <C>          <C>
              Net sales . . . . . . . . . . . . . . . . .    $83,738       $93,203       $95,090      $107,536
              Gross Profit  . . . . . . . . . . . . . . .     13,604        18,263        19,189        21,128
              Net income (loss) . . . . . . . . . . . . .     (1,428)        1,336         2,305         3,473
              Per share --                                                          
                   Basic  . . . . . . . . . . . . . . . .       0.10          0.09          0.16          0.25
                   Diluted  . . . . . . . . . . . . . . .       0.10          0.09          0.16          0.24
</TABLE>





                                       25
<PAGE>   26
                                 DAN RIVER INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       JANUARY 3, 1998, DECEMBER 28, 1996
                             AND DECEMBER 30, 1995

12.      QUARTERLY FINANCIAL DATA (UNAUDITED)--CONTINUED

                 The fourth quarter of the year ended January 3, 1998
         represents a 14-week period. All other quarters presented consist of
         13 weeks.

                 The interim earnings (loss) per share amounts were computed as
         if each quarter was a discrete period.  As a result, the sum of the
         earnings (loss) per share by quarter will not necessarily total the
         annual earnings per share.

                 Results for the second quarter of 1997 include a pre-tax
         charge of $7,875,000 ($4,839,000 net of tax benefits, or $0.34 per
         share) relating to the closure of the Company's Riverside apparel
         fabrics weaving facilities.  The fourth quarter results include a
         pre-tax gain of $583,000 from the sale of a yarn operation, and a
         reversal of $281,000 of the pre-tax charge recorded in the second
         quarter. Together these items increased net income for the fourth
         quarter by $531,000, or $0.03 per share.  Also in the fourth quarter
         of 1997, an extraordinary loss associated with the early retirement of
         debt was recorded, which decreased net income by $243,000, or $0.01
         per share.  Results for the fourth quarter of 1996 include the
         reversal of $441,000 in pre-tax charges that had been recorded in
         1995, primarily relating to fixed asset writedowns.  After taxes, the
         reversal increased net income by $271,000, or $0.02 per share. See
         Notes 5 and 8.





                                       26
<PAGE>   27
Report of Independent Auditors


The Board of Directors and Shareholders
Dan River Inc.


                 We have audited the accompanying consolidated balance sheets
         of Dan River Inc. as of January 3, 1998 and December 28, 1996, and the
         related consolidated statements of income, shareholders' equity, and
         cash flows for the each of the three fiscal years in the period ended
         January 3, 1998.  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 consolidated financial
         position of Dan River Inc. at January 3, 1998 and December 28, 1996,
         and the consolidated results of its operations and its cash flows for
         each of the three fiscal years in the period ended January 3, 1998 in
         conformity with generally accepted accounting principles.



                                                           /s/ Ernst & Young LLP


Greensboro, North Carolina
February 4, 1998





                                       27
<PAGE>   28
<TABLE>
<CAPTION>
                                             Five Year Summary of Selected Financial Data

(in thousands except per share data)                   1997(1)          1996            1995              1994           1993
-------------------------------------------------------------------------------------------------------------------------------- 
<S>                                                   <C>           <C>             <C>               <C>            <C>
Statement of Income Data:
Net sales                                             $476,448      $379,567        $384,801          $371,534       $317,566
Cost of sales                                          372,165       307,383         306,879           297,460        259,148
Gross profit                                           104,283        72,184          77,922            74,074         58,418
Selling, general and administrative
  expenses                                              54,231        45,673          44,860            43,908         38,550
Other operating costs, net(2)                            7,012         (428)           8,972             1,534          3,039
Operating income                                        43,040        26,939          24,090            28,632         16,829
Other income (expense), net                              (290)           485             241               144            505
Interest expense                                        21,135        18,168          21,941            20,419         12,691
Income before extraordinary item                        13,264         5,686             258             3,525          2,171
Extraordinary item                                       (243)             -               -                 -            348
Net income                                              13,021         5,686             258             3,525          2,519
Redeemable preferred stock
  dividends                                                  -             -               -                 -          2,091
Net income applicable to common
  stock                                                 13,021         5,686             258             3,525            428
Earnings per share--basic:
  Income before extraordinary
    item                                                  0.90          0.40            0.02              0.31           0.01
  Net income per share--basic                             0.89          0.40            0.02              0.31           0.04

Earnings per share--diluted:
  Income before extraordinary
    item                                                  0.89          0.40            0.02              0.31           0.01
  Net income per share--diluted                           0.88          0.40            0.02              0.31           0.04

=================================================================================================================================
Balance Sheet Data (at end of fiscal year):
Working capital                                       $123,604       $93,291        $109,763          $103,973       $ 94,040
Total assets                                           392,295       321,050         330,944           329,902        289,384
Convertible junior subordinated
  notes                                                      -             -               -            25,220         21,485
Total debt, including current
  maturities                                           143,756       169,468         179,703           196,436        170,066
Common stock subject to put
  rights                                                     -         9,726           7,000             7,000          7,000
Shareholders' equity                                   165,830        77,898          73,702            46,810         42,493
Common shares outstanding                               18,841        14,155          14,155            11,375         11,375
                                                              
=================================================================================================================================
Other Financial Data:
EBITDA(3)                                              $77,560       $47,306         $52,599           $48,353        $36,314
Depreciation and amortization of property,
  plant and equipment                                   27,508        20,795          19,537            18,187         16,446
Capital expenditures in cash                            24,231        27,582          24,316            24,793         12,839

=================================================================================================================================
</TABLE>





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(1)      Fiscal year 1997 represents a 53-week period.  All other fiscal years
         presented represent a 52-week period.

(2)      Other Operating Costs, Net includes various non-recurring charges and
         credits, the most significant of which relate to fixed asset
         writedowns, plant closure costs and a discontinued product line.  See
         Note 8 to the Consolidated Financial Statements.

(3)      EBITDA represents operating income before depreciation and
         amortization, adjusted to excluded Other Operating Costs, Net.  EBITDA
         is presented to provide information related to the Company's ability
         to service debt, and should not be considered as an alternative
         measure of operating results or cash flow as determined in accordance
         with generally accepted accounting principles.





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