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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-K
                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

  For the Fiscal Year Ended December 30, 2000

                                       OR

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

  For the transition period from         to

                         Commission File Number 1-13421

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

                                 DAN RIVER INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                <C>
             Georgia                                 58-1854637
  (State or other jurisdiction                    (I.R.S. Employer
of incorporation or organization)               Identification No.)
</TABLE>

                 2291 Memorial Drive, Danville, Virginia 24541
                    (Address of principal executive offices)

                                 (804) 799-7000
              (Registrant's telephone number, including area code)

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

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

                 Class A Common Stock par value $0.01 per share

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

                                      None

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

  Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  [X] No [_]

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

  The aggregate market value of voting stock held by non-affiliates of the
registrant as of February 23, 2001 (based on the last reported closing price
per share of Class A Common Stock as reported on the New York Stock Exchange on
such date) was approximately $29,056,096.

  As of February 23, 2001, the registrant had 19,703,439 and 2,062,070 shares
of Class A Common Stock and Class B Common Stock outstanding, respectively.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held on April 19, 2001 are incorporated by reference in Part III.

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                               INDEX TO FORM 10-K

                                 DAN RIVER INC.

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                                                                        Page
                                                                     References
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                                    PART I

Item 1. Business...................................................       1
Item 2. Properties.................................................      10
Item 3. Legal Proceedings..........................................      11
Item 4. Submission of Matters to a Vote of Security Holders........      11
Item X. Executive Officers of the Registrant.......................      11

                                   PART II

Item 5. Market for Registrant's Common Equity and Related
        Stockholders Matters.......................................      13
Item 6. Selected Financial Data....................................      13
Item 7. Management's Discussion and Analysis of Financial Condition
        and Results of Operations..................................      14
Item 7A. Quantitative and Qualitative Disclosures About Market
         Risk......................................................      24
Item 8. Consolidated Financial Statements and Supplementary Data...      24
Item 9. Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure...................................      46

                                   PART III

Item 10. Directors and Executive Officers of the Registrant........      46
Item 11. Executive Compensation....................................      46
Item 12. Security Ownership of Certain Beneficial Owners and
         Management................................................      46
Item 13. Certain Relationships and Related Transactions............      46

                                   PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on
         Form 8-K..................................................      47
</TABLE>

                                       i
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                                     PART I

  Unless otherwise indicated, references in this Annual Report to "we," "us,"
"our"' or "Dan River"' refer to the business of Dan River Inc. and its
predecessors and subsidiaries. References to a fiscal year refer to our fiscal
year, which is the 52- or 53-week period ending on the Saturday nearest to
December 31. All fiscal years presented consisted of 52 weeks other than fiscal
1997, which ended on January 3, 1998 and consisted of 53 weeks.

  This Annual Report contains certain forward-looking statements within the
meaning of the Securities Act of 1933, as amended, which we refer to as the
Securities Act, and the Securities Exchange Act of 1934, which we refer to as
the Exchange Act. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
included in such statements. Many of these statements appear under "Item 1.
Business," "Item 2. Properties," "Item 3. Legal Proceedings" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations." For further information regarding these forward-looking statements
and the associated risks and uncertainties, see the discussion in this Annual
Report under the caption "Forward-Looking Statements" under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

ITEM 1. BUSINESS

General

  We were founded in 1882 and are a leading designer, manufacturer and marketer
of products for the home fashions and apparel fabrics markets. We design,
manufacture and market a coordinated line of value-added home fashions products
consisting of bedroom furnishings such as comforters, sheets, pillowcases,
shams, bed skirts, decorative pillows and draperies, which we refer to as home
fashions products. We also design, manufacture and market a broad range of high
quality woven cotton and cotton-blend apparel fabrics, which we refer to as
apparel fabrics. Based on net sales, we believe that we are the leading North
American supplier of men's dress shirting fabrics. We recently commenced
manufacturing sports shirts at a new plant in Mexico. We also manufacture and
sell specialty engineered yarns and woven fabrics for use in making high-
pressure hoses and other industrial products, which we refer to as engineered
products.

  Certain financial information for the home fashions, apparel fabrics and
engineered products segments set forth in Note 12 to the Consolidated Financial
Statements is incorporated herein by this reference.

  We are a Georgia corporation and our principal offices are located at 2291
Memorial Drive, Danville, Virginia 24541. Our telephone number is (804) 799-
7000.

Acquisitions and Joint Ventures

  Cherokee Acquisition. In February 1997, we acquired substantially all of the
assets and assumed certain liabilities of The New Cherokee Corporation, which
we refer to as Cherokee, for an aggregate purchase price of approximately $65
million. Cherokee, which was a supplier of yarn-dyed fabrics to men's and
women's shirting manufacturers and of sportswear fabrics to the converting
trade, was our primary competitor for these fabrics. In connection with the
Cherokee acquisition, we acquired woven fabrics manufacturing facilities
located in Spindale, North Carolina and Sevierville, Tennessee, and a finishing
facility located in Harris, North Carolina. Since completing the acquisition,
we closed our Riverside Plant in the fourth quarter of fiscal 1997 and our
Spindale Plant in January 1999. As a result of this consolidation, we have
reduced the number of apparel fabrics weaving plants from four to two. This
consolidation provides us with better capacity utilization and, aided by our
aggressive capital expenditure program, reduces our fixed manufacturing costs.

  Bibb Acquisition. In October 1998, we purchased all the outstanding capital
stock of The Bibb Company, which we refer to as Bibb, through a merger
transaction for an aggregate purchase price of approximately $240

                                       1
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million. The purchase price consisted of $86 million of cash and 4.3 million
shares of our Class A Common Stock. In connection with the acquisition, we also
assumed or repaid an aggregate of $95 million of Bibb's debt. Bibb, which was
founded in 1876, was a leading domestic manufacturer of home fashions textile
products. The Bibb acquisition broadened our home fashions products to include
juvenile products and products for the hospitality and health care markets. As
a result of the Bibb acquisition, we believe that we are the leading
manufacturer of bedding products for the juvenile market under such licensed
names and trademarks as "Barbie," "Blues Clues," "Looney Tunes," "Major League
Baseball" and "National Football League." The Bibb acquisition also
significantly expanded our home fashions products manufacturing capacity,
adding spinning and weaving operations located in Greenville, South Carolina,
finishing operations located in Brookneal, Virginia and sewing facilities
located in Fort Valley and Newnan, Georgia, and in Brookneal, Virginia. Our
engineered products manufacturing operations are located in Porterdale,
Georgia.

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

  Mexican Joint Ventures. In January 2000, we entered into an agreement with
Grupo Industrial Zaga, S.A. de C.V., which we refer to as Zaga, pursuant to
which we formed a company called Danza Textil, S. de R.L. de C.V., which we
refer to as Danza. We formed Danza to build and operate a manufacturing plant
in Mexico for the production of apparel fabrics. At the time Danza was formed
we planned to shift a significant portion of our apparel fabrics manufacturing
capacity into Mexico, where labor costs are significantly lower than in the
United States. As a result, we expected to improve the cost structure of our
apparel fabrics operations. Further analysis suggested, however, that other
costs, such as land, plant construction and utilities, were in fact higher than
originally anticipated. These higher costs, together with generally weak
apparel fabrics market conditions, reduced anticipated returns from this
investment to a level we considered unacceptable. As a result, we suggested to
Zaga that we should not proceed with construction of the Mexican apparel
fabrics manufacturing plant.

  In January 2000, we entered into another agreement with Zaga pursuant to
which we formed another company called Zadar S. de R.L. de C.V., which we refer
to as Zadar. We formed Zadar to build and operate a plant in Mexico for the
production of finished garments, primarily sports shirts, for sale to
retailers. These products are targeted to compete primarily with Asian imports.
The new facility has been constructed at Jilotepec in the State of Mexico and
is presently producing shirts. Laundry facilities are under construction to
complement the existing sewing operations. We expect that Zadar will purchase
fabric primarily from us. We believe Zadar creates an additional source of
demand for our apparel fabrics and will position us to better serve retailers
that seek a single source for garment design and assembly.

  When the joint ventures were formed we owned slightly in excess of 50% of
Danza and slightly less than 50% of Zadar. As a result of our decision not to
proceed with the Danza joint venture, we and Zaga negotiated an amicable
termination of both joint ventures in February 2001. We bought Zaga's interest
in Zadar for $3.2 million in cash. We and Zaga each continue to own a 50%
interest in Danza pending the satisfaction of certain contingencies relating to
a water well being constructed at the Zadar location. Generally, these
contingencies concern quantity and availability of water from the well to
Zadar's operations. If the well contingencies are satisfied, we have agreed to
transfer our interest in Danza to Zaga. Danza's sole material asset is a parcel
of land located in the State of Hidalgo, Mexico which is valued at
approximately $1.5 million. In the event that the well contingencies are not
satisfied, we expect that either Zaga may elect to purchase our interest in
Danza, or the land will likely be sold and 50% of the net proceeds of the sale
will be distributed to each of Zaga and us.

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

                                       2
<PAGE>

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

Home Fashions Products

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

  .  "Barbie,"
  .  "Blue's Clues,"
  .  "Looney Tunes,"
  .  "Major League Baseball,"
  .  "NASCAR," and
  .  "National Football League."

  We had net sales attributable to home fashions products of:

  .  $469.8 million in fiscal 2000,
  .  $431.8 million in fiscal 1999, and
  .  $321.8 million in fiscal 1998.

  We offer home fashions products in a wide variety of styles and patterns,
including fashion designs and, to a lesser extent, solid colors. Products range
from a 120-thread count muslin sheet of blended polyester and cotton to a top-
of-the-line 250-thread count percale 100% cotton sheet.

  We believe we have established ourselves as an innovator in merchandising
home fashions products. We were a leader in introducing the complete bed
ensemble to retailers, which we market under the name "Bed-in-a-Bag." The "Bed-
in-a-Bag" complete bed ensemble consists of a comforter with matching sheets,
pillowcases, shams and a dust ruffle. We further believe that our ability to
manufacture wide-width, yarn-dyed fabrics in short runs in a wide variety of
innovative styles, such as woven plaids, for use in home fashions products
differentiates us from our competitors.

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

  .  department stores,
  .  specialty home fashions stores,
  .  direct marketers,
  .  national chains,
  .  mass merchants, and
  .  regional discounters.

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

  We market our home fashions products to approximately 1,100 customers. We
have pursued and established strategic relationships with large, high volume
retailers including:

  .  Kmart Corporation,
  .  Wal-Mart Stores, Inc.,
  .  Target Corporation,
  .  J.C. Penney Company, Inc., and
  .  Federated Department Stores.

                                       3
<PAGE>

  Our acquisition of ISI, an importer of home fashions products primarily from
China and India, expanded our home fashions product line to include doormats,
throws and rugs and enables us to source certain niche products at attractive
margins.

  Sales of home fashions products to Kmart Corporation and Wal-Mart Stores,
Inc. accounted for approximately 12% and 11%, respectively, of our total net
sales in fiscal 2000. No other home fashions products customer accounted for
more than 5% of our total net sales in fiscal 2000. As a supplement to our
primary distribution channels, one of our subsidiaries operates factory outlet
stores which sell home fashions products directly to consumers. During fiscal
2000, less than 4% of our sales of home fashions products were to customers
outside the United States.

  Sales and Marketing. The home fashions products sales and marketing staff
consists of approximately 120 persons. They are headquartered in New York City
and have satellite offices in Atlanta, Boston, Chicago, Dallas, Los Angeles and
San Francisco. These marketing professionals, stylists and product development
personnel work as early as one year in advance of a retail selling season to
develop new fabrics, styles, colors, constructions and finishes. Together with
the marketing group, stylists often work directly with our customers and our
licensors to create fabrics and styles that respond to rapidly changing fashion
trends and customer needs. New styles are also developed internally for the
April and October bed and bath home textile trade shows, where they are shown
to buyers and are placed in production based on customer acceptance. Orders for
home fashions products are filled from inventory or, if inventory is not
available, products are manufactured and generally shipped within six to 12
weeks of order placement.

Apparel Fabrics

  Products. We manufacture and market a broad range of high quality woven
cotton and cotton-blend fabrics, which we market primarily to manufacturers of
men's, women's and children's clothing. Our yarn-dyed and piece-dyed woven
apparel fabrics include:

  .  oxford cloth,
  .  pinpoint oxford cloth,
  .  fancy broad cloth,
  .  seersuckers,
  .  mid and light weight denim,
  .  twills,
  .  chambrays, and
  .  bottom weights--yarn-dyed and piece-dyed.

  We also manufacture and distribute (1) fabrics for uniforms, (2) fabrics for
use in decorating, crafts and garment sewing, (3) 100% cotton and cotton-blend
upholstery fabrics and (4) greige (unfinished) fabrics to converters. We had
net sales attributable to apparel fabrics products of:

  .  $143.6 million in fiscal 2000,
  .  $150.4 million in fiscal 1999, and
  .  $186.5 million in fiscal 1998.

  We believe that we enjoy a reputation as a leader in creating new fabric
styles and designs within the apparel fabrics market. Our product development
professionals work independently as well as directly with customers to develop
new fabric styles and constructions. In addition, our product development
personnel increasingly work directly with retailers to develop fabrics. These
retailers often specify that our fabrics be used by their suppliers in the
manufacture of garments to be sold by them. We believe that we are a leader in
wrinkle resistant technology for shirting fabrics, and we market Dri-Don(R)
blended easy care fabrics and 100% cotton Wrinkl-Shed(R) fabrics. We also
manufacture and market fabrics utilizing Tencel(R) lyocell which is an
innovative natural fiber. Versatile lyocell fabrics have been used primarily in
manufacturing women's sportswear; however, we are offering use of lyocell in
new fabrics for mens' shirting and bottom ("pant") weight fabrics.
Additionally, we have commenced manufacturing sports shirts at our new facility
in Mexico.

                                       4
<PAGE>

  Customers. We distribute our apparel fabrics primarily to domestic
manufacturers of men's, women's and children's clothing which, in turn, operate
sewing plants throughout the United States, Mexico, Central America and the
Caribbean. We market our apparel fabrics to in excess of 900 customers, none of
which accounted for more than 2% of our total net sales in fiscal 2000.
Customers market clothing manufactured from our apparel fabrics under such
brand names as:

  .  Arrow,
  .  Brooks Brothers,
  .  Hathaway,
  .  Liz Claiborne,
  .  L.L. Bean,
  .  Land's End,
  .  Osh Kosh B'Gosh, and
  .  Van Heusen,

as well as under private labels through retailers such as J.C. Penney Company,
Inc., Kohl's Corporation, Mervyn's Inc. and Sears Roebuck & Co. We market
uniform fabrics to customers such as Cintas Corporation and VF Corporation. We
also distribute apparel fabrics to home sewing retailers such as Wal-Mart and
Jo-Ann Stores, Inc., and through various wholesale distributors, for use in
decorating and crafts, as well as garment sewing. Our upholstery fabrics are
sold primarily to furniture manufacturers such as Broyhill Furniture
Industries, Inc. and Bassett Furniture Incorporated. During fiscal 2000,
approximately 4% of our sales of apparel fabrics were to customers located
outside the United States.

  During its start-up phase, production from Zadar's new Mexican sewing plant
has been sold primarily to off-price distributors. Zadar has, however, taken
initial orders from a major apparel retailer which are expected to be shipped
in May 2001.

  Sales and Marketing. Our apparel fabrics sales and marketing staff consists
of approximately 50 full time persons as well as commission agents. They are
headquartered in New York City and have satellite offices in Atlanta, Chicago,
Dallas, Danville, High Point (North Carolina) and Los Angeles. Apparel fabrics
are generally "made to order" products which are manufactured and shipped
within six to ten weeks of order placement. Orders for apparel fabrics are
based on customer selections from offerings of color, content, construction,
design and finish, and fabrics are made to customer specifications, which may
be developed jointly with the customer. Presently one individual is primarily
responsible for marketing the production of the Zadar sewing plant.

Engineered Products

  Products. Our engineered products consist of yarns and woven fabrics that are
manufactured to customer specification for use in such products as high
pressure hoses for the automotive industry, conveyer belts and other industrial
applications. We had net sales attributable to engineered products of:

  .  $50.1 million in fiscal 2000,
  .  $46.7 million in fiscal 1999, and
  .  $9.1 million in fiscal 1998 (11 weeks following the Bibb acquisition).

  Customers. We sell our engineered products primarily to companies serving the
automotive industry, which in turn utilize them as components in their own
products. We believe our ability to meet stringent industrial certification
standards and to provide domestic sourcing to customers has helped us establish
strong relationships with our customers. We market our engineered products to
approximately 75 customers, none of which accounted for more than 3% of our net
sales in fiscal 2000. During fiscal 2000, substantially all of our sales of
engineered products were to domestic customers.

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

                                       5
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Manufacturing Process

  We are a vertically integrated manufacturer involved in all aspects of the
woven textile manufacturing process, from spinning and weaving to dyeing,
finishing, and sewing.

  In addition to the expansion of our manufacturing operations through
acquisitions, we make significant investments in facility modernization focused
on advanced manufacturing technologies in an effort to be the low cost
manufacturer in the industry. Within our home fashions operations, we have
installed:

  .  modern, high-speed air-jet looms,
  .  automatic sheet cutting, hemming and folding equipment,
  .  lower cost open-end spinning equipment, and
  .  computerized comforter equipment.

  Additionally, within the past five years, we have built:

  .  a new home fashions accessory sewing plant,
  .  a new distribution center, and
  .  a new graphics printing facility primarily for production of home
     fashions packaging materials.

We built these facilities in Danville, Virginia. They, along with our newly
acquired distribution facility, are in close proximity to our other Danville
home fashions facilities and our Brookneal, Virginia finishing and sewing
operations. We believe that as a result of our acquisitions and investments we
are positioned to better and more efficiently service our home fashions
customers and accommodate further growth of our home fashions business.

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

  In addition to modernizing operations, we have consolidated our manufacturing
operations to improve operating costs within our apparel fabrics operations. In
fiscal 1997, we closed our Riverside apparel fabrics weaving facility and
consolidated these operations into an existing facility located in Danville,
Virginia. In January 1999, we closed our Spindale, North Carolina weaving
facility and consolidated these operations into our existing Danville, Virginia
and Sevierville, Tennessee apparel fabrics manufacturing plants. Together,
these actions have aided our efforts to fully utilize our most cost-effective
equipment in the manufacture of apparel fabrics.

  In fiscal 2000, Zadar commenced manufacturing sport shirts at its new Mexican
sewing plant. When construction of this facility is complete, it will also
include industrial laundry and warehouse facilities from which we will be able
to ship a complete, packaged, finished garment to our targeted customers.

  Our engineered products facilities include weaving equipment and coating
ranges for finishing both yarns and fabrics. We are continuing to modernize the
twisting and winding operations. Additionally, our engineered products
facilities have achieved ISO 9001 certification.

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

Raw Materials

  We use substantial quantities of cotton in our manufacturing operations. By
law, U.S. textile companies are generally prohibited from importing cotton,
subject to certain exceptions that take effect primarily when U.S.

                                       6
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cotton prices exceed world cotton prices for a period of time. Cotton is an
agricultural product subject to weather conditions and other factors affecting
agricultural markets. Accordingly, the price of cotton is subject to
considerable fluctuation.

  We purchase cotton primarily in the domestic market directly from merchants
or through brokers. Generally, we seek to purchase sufficient amounts of cotton
to cover existing order commitments. We may purchase cotton in advance of
orders on terms that we deem advantageous, and while we do not speculate on the
price of cotton, we may hedge prices from time to time through forward
contracts and in the futures and options markets. We also use significant
quantities of polyester, which is available from several sources.

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

  We also use various other raw materials, such as dyes and chemicals, in
manufacturing operations. We believe these materials are readily available from
a number of sources. We also supplement our internal manufacturing capabilities
by purchasing yarn and unfinished fabrics from outside sources and by
contracting with third parties for various manufacturing services, including
certain printing and sewing operations. During fiscal 2000, we purchased less
than 12% of our manufacturing requirements from outside sources.

Trademarks and Licenses

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

  .  "Colours by Alexander Julian,"
  .  "Di Lewis,"
  .  "Lilly Pulitzer,"
  .  "Barbie,"
  .  "Blue's Clues,"
  .  "Looney Tunes,"
  .  "Major League Baseball,"
  .  "NASCAR," and
  .  "National Football League,"

as well as other names or marks, and to use certain designs on our home
fashions products. Such licenses generally provide that we have the right for a
limited period, generally three years subject to renewal for additional
periods, to use the respective brand name and/or design in the sale of certain
types of products in certain geographic regions. We also hold licenses with
respect to the use and advertising of certain processes or synthetic fibers or
fabrics. We believe that our failure to continue to hold any one of our
licenses or trademarks, other than "Dan River," would not have a material
adverse effect on our business.

Competition

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

  .  price,
  .  product styling and differentiation,
  .  quality,
  .  flexibility of production and finishing,
  .  delivery time, and
  .  customer service.

We sell our products primarily to domestic customers and compete with both
large, vertically integrated textile manufacturers and numerous smaller
companies specializing in limited segments of the market. Our competitors

                                       7
<PAGE>

include both domestic and foreign companies, a number of which are larger in
size and have significantly greater financial resources than we do.

  We are one of several domestic manufacturers of home fashions products.
Although the Bibb acquisition has increased our sales of home fashions
products, certain of our competitors still have a significantly greater share
of the domestic market, including WestPoint Stevens Inc. and Springs
Industries, Inc., which we believe collectively account for over 50% of the
home fashions bedding products market.

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

  We are subject to foreign competition. We believe that over 70% of the
apparel fabrics, much of which are imported in the form of garments, and
approximately 25% of the home fashions products sold in the U.S. are
manufactured overseas. Most sport shirts sold in the U.S. are manufactured
outside of the U.S.

  One of our business strategies is to seek niche apparel fabrics markets that
are less susceptible to foreign competition. We believe that our manufacturing
base in the United States, our design expertise, our product development
efforts, and our emphasis on shortening production and delivery times allow us
to respond more quickly to changing fashion trends and to our domestic
customers' delivery schedules than can producers located outside the Western
Hemisphere. Additionally, we believe our Mexican garment operation will not
only provide an additional outlet for our U.S. manufactured apparel fabrics but
will better enable us to serve retailers who desire garment packages in which
they can specify both fabric and garment design through one single source.

  The extent of import protection afforded by the U.S. government to domestic
textile producers has been, and is likely to remain, subject to considerable
domestic political deliberation. NAFTA, which was entered into by the United
States, Canada and Mexico, has created the world's largest free-trade zone. The
agreement contains safeguards sought by the U.S. textile industry, including a
rule of origin requirement that products be processed in one of the three
countries in order to benefit from NAFTA. NAFTA will phase out all trade
restrictions and tariffs on textiles and apparel among the three countries. In
addition, NAFTA requires merchandise to be made from yarns and fabrics
originating in North America in order to avoid trade restrictions. Thus, not
only must apparel be made from North American fabric but the fabric must be
woven from North American spun yarn. Although we believe that we derive some
benefit from NAFTA, there can be no assurance that the removal of these
barriers to trade will not in the future have a material adverse effect on our
business.

  We benefit from protections afforded to apparel manufacturers based in
certain Caribbean and Central American countries which ship finished garments
into the U.S. under Item 9802.00.80 of the Harmonized Tariff Schedule of the
U.S. as authorized by the Caribbean Basin Recovery Act, which we refer to as
CBI. Item 9802.00.80 reduces certain tariffs which would otherwise apply to
apparel garments manufactured outside the U.S. and shipped into the U.S.,
provided that the garments are manufactured from fabric produced and cut
domestically. The Caribbean Basin Trade Partnership Act, which we refer to as
CBTPA, became law in 2000. The CBTPA expands the current CBI program by
allowing duty-free and quota-free treatment for imports of certain apparel from
the Caribbean Basin, and by extending NAFTA-equivalent tariff treatment to a
number of other products previously excluded from the CBI program.
Specifically, under the CBTPA, garments assembled in one or more CBTPA
designated countries from fabrics wholly formed and cut in the U.S. from yarns
wholly formed in the U.S., would be eligible for such favorable treatment. CBI,
as modified by CBTPA, is beneficial for us and other domestic producers of
apparel fabrics, because it creates an attractive manufacturing base for
apparel in close proximity to the U.S.

  In 1995, the World Trade Organization, or WTO, established mechanisms to
progressively liberalize world trade in textiles and clothing by eliminating
quotas and reducing duties over a 10-year period beginning in

                                       8
<PAGE>

January 1995. The selection of products at each phase is made by each
importing country and must be drawn from each of the four main textile groups:
tops and yarns, fabrics, made-up textile products and apparel. In 2000,
Congress passed and the President signed the African Growth and Opportunity
Act, which we refer to as the AGOA, which is intended to promote growth and
economic prosperity of certain sub-Saharan African countries through, among
other things, greater duty-free access to U.S. markets. The elimination of
quotas and the reduction of tariffs under the WTO, together with the effects
of the AGOA, may result in increased imports of certain textile products and
apparel into North America. These factors could make our products less
competitive against low cost imports from developing countries.

Order Backlog

  Our order backlog was approximately $157 million at December 30, 2000, as
compared to approximately $172 million at January 1, 2000. Substantially all
of the orders on hand at December 30, 2000 are expected to be filled within
four months of that date.

Governmental Regulation

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

  In January 2001, the Occupational Safety and Health Administration
promulgated a final ergonomics standard, which applies to all general industry
employers in the U.S., including the textile and apparel industries. The
standard applies primarily to injuries incurred over a period of time and
caused by repetitive motion. The new regulatory requirements are to be phased
in commencing in October 2001 and include extensive training, recordkeeping,
job analysis and control requirements. The standard also includes a
requirement that employees who are unable to work due to ergonomics problems
receive 90% pay until they can return to their former job, a health care
provider determines they can never return to their former job, or 90 days have
passed. It is too soon to determine precisely the effect the ergonomics
standard will have on textile and apparel companies such as Dan River. As of
March 2001, Congress and the President were reviewing the ergonomics standard
with the possibility that the standard would be repealed, modified, or that
implementation would be delayed.

  We believe that we currently comply in all material respects with applicable
environmental or health and safety laws and regulations. We do not believe
that the cost of, or any operational constraints or modifications required to
assure, future compliance with such laws or regulations, or to remediate
existing environmental contamination, will have a material adverse effect on
our results of operations or financial condition. However, there can be no
assurance that:

  . the newly promulgated ergonomics standard will not have a material
    adverse effect on our operations or on our financial condition,
  . environmental requirements will not become more stringent in the future,
  . that the position taken by various regulatory agencies in respect of
    regulatory matters will not change in a manner materially adverse to us,
  . that claims in material amounts will not be brought by third parties,
  . that additional sites which are alleged to have been contaminated by us
    or our predecessors will not be discovered, or
  . that we will not incur material costs in order to address any such
    matters.

  At the Brookneal, Virginia finishing plant, which we acquired from Bibb, we
are subject to a consent order in connection with our wastewater treatment
system, which Bibb negotiated in 1996. The order required, among

                                       9
<PAGE>

other things, substantial upgrades to the wastewater treatment facilities. The
construction activities required by the order have been substantially
completed, and our wastewater discharge permit has been renewed. We believe
substantial further upgrades to the wastewater treatment system will not be
required to maintain compliance with the permit. Pursuant to the order, the
Commonwealth of Virginia also required the closure of the existing wastewater
treatment basins and lagoons. This work is substantially complete, and
resultant sampling data is being reviewed by the responsible regulatory
agencies.

  During our due diligence at the Morven, North Carolina facility, which we
acquired in December 1998, we discovered low levels of groundwater
contamination from perchloroethylene. Prior to purchasing the facility, our
personnel met with regulatory authorities regarding the options for dealing
with this contamination. As a result of those discussions, we elected to pursue
a brownfields agreement for the property with the State of North Carolina.
Under the North Carolina brownfields program, contaminated industrial sites are
placed into productive use by allowing owners to perform less intensive
cleanups than would be required for residential sites or drinking water
sources. Discussions with the State of North Carolina are continuing in
connection with a brownfields agreement.

  At the closed Abbeville, South Carolina facility, which we plan to sell, Bibb
previously worked with the South Carolina Department of Health and
Environmental Control, which we refer to as DHEC, to identify the source of low
levels of freon and certain other volatile organic compounds which were found
in a water supply well located on-site. We believe that this contamination
originates off-site. No active on-site remediation is being required by the
State at this time. DHEC is planning to conduct further studies of the site in
an attempt to confirm origin of the contamination.

Employees

  At December 30, 2000, we had approximately 7,400 employees, of which
approximately 6,300 were hourly employees. Of these hourly employees,
approximately 3,400 are located primarily in our Danville, Virginia operations
and represented by a collective bargaining agreement that expires in June 2005.
We believe that our relations with our employees are good.

ITEM 2. PROPERTIES

  The Bibb, Morven and distribution center acquisitions added approximately 2.9
million square feet of manufacturing and warehouse space which is currently in
use for our home fashions products. Taking this additional space into account,
as well as the office and warehouse space which we lease as a result of the ISI
acquisition, our home fashions manufacturing and warehousing facilities consist
of approximately 6.4 million square feet of space located in Georgia, North
Carolina, South Carolina and Virginia. Of this space we own approximately 5.6
million square feet and lease the remainder.

  The Cherokee acquisition added approximately 600,000 square feet of
manufacturing and warehouse space which is currently in use for our apparel
fabrics operations. Taking this additional space into account, our apparel
fabrics manufacturing and warehousing facilities consist of approximately 2.6
million square feet of space located in North Carolina, Tennessee and Virginia.
We own these facilities with the exception of our Sevierville, Tennessee,
manufacturing plant, which we lease with an option to purchase for nominal
consideration in 2018. We also own an apparel manufacturing plant in Jilotepec,
State of Mexico.

  Our engineered products are manufactured at a 600,000 square foot facility in
Georgia, which we acquired in the Bibb acquisition.

  We own most of our office space in Danville, Virginia, including corporate
and home fashions and apparel fabrics divisional offices. We lease additional
office space in Danville, as well as each of our marketing and sales offices
and, through our subsidiary, Dan River Factory Stores, Inc., we lease five
outlet stores in Florida, Georgia, North Carolina, South Carolina and
Tennessee. These stores average approximately 6,000 square feet of total space
each. We own our factory outlet store in Danville, Virginia.

                                       10
<PAGE>

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

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

  Not applicable.

ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT

  The following table sets forth information concerning executive officers:

<TABLE>
<CAPTION>
   Name                   Age                   Position Held
   ----                   ---                   -------------
   <S>                    <C> <C>
   Joseph L. Lanier,
    Jr...................  69 Chairman, Chief Executive Officer and Director
   Richard L. Williams...  67 President, Chief Operating Officer and Director
   Barry F. Shea.........  52 Executive Vice President--Chief Financial Officer
   Gregory R. Boozer.....  45 Executive Vice President--Manufacturing
   Anthony J. Bender.....  43 Vice President--Information Systems
   Joseph C. Bouknight...  48 Vice President--Human Resources
   Harry L. Goodrich.....  50 Vice President, Secretary and General Counsel
   George R. Herron......  60 Vice President--Cotton Procurement
   Denise Laussade.......  42 Vice President--Finance
   Gary D. Waldman.......  44 Vice President--Controller
</TABLE>

  Joseph L. Lanier, Jr. has been chairman of the board of directors and chief
executive officer of our company and its predecessor since 1989. Mr. Lanier is
also a director of SunTrust Banks, Inc. (a bank holding company), Flowers
Industries, Inc. (a food company), Torchmark Corporation (an insurance
company), Dimon Incorporated (a tobacco products company) and Waddell & Reed
Financial, Inc. (a mutual fund company).

  Richard L. Williams has been a director and president and chief operating
officer of our company and its predecessor since 1989.

  Barry F. Shea was vice president--finance, chief financial officer and
assistant secretary of our company and its predecessor from 1989 until 1996 and
was vice president--chief financial officer from 1996 until October 1998, when
he was elected executive vice president--chief financial officer.

  Gregory R. Boozer was vice president--manufacturing services of our company
from 1989 until October 1998, when he was elected executive vice president--
manufacturing.

  Anthony J. Bender has been vice president--information systems of our company
since 1995. Mr. Bender was director of systems development of Springs
Industries, Inc. (a manufacturer and distributor of textile products) from 1993
until 1995.

                                       11
<PAGE>

  Joseph C. Bouknight has been vice president--human resources of our company
since January 1999. Mr. Bouknight was staff vice president--organization
effectiveness with Sonoco Products Company from 1994 until 1999. Prior to that
he served as director of international human resources of Sonoco from 1992
until 1994.

  Harry L. Goodrich has been secretary and general counsel of our company and
its predecessor since 1989 and has been vice president since 1995.

  George R. Herron has been vice president--cotton procurement of our company
since 1987.

  Denise Laussade has been vice president--finance of our company since October
1999 and was assistant treasurer of Darden Restaurants, Inc. from 1995 to 1999.
From July to October 1999, Ms. Laussade served as director--marketing analysis
for a subsidiary of Darden Restaurants, Inc.

  Gary D. Waldman has been controller of our company since 1996. He was
assistant controller from 1992 until 1996, and director of taxes from 1990
until 1992. He was elected vice president--controller in February 2001.

  Other significant employees are:

  .  Robert E. Major, who has headed our engineered products operations since
     1987 and is 58 years old,
  .  James E. Martin, who has headed our apparel fabrics operations since
     1990 and is 51 years old, and
  .  Thomas L. Muscalino, who has headed our home fashions operations since
     1993 and is 50 years old.

  Our executive officers are elected by the board of directors and generally
hold office until the next annual meeting of our shareholders or until their
successors are elected and qualified.

                                       12
<PAGE>

                                    PART II

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

  Our Class A Common Stock is listed on the New York Stock Exchange, or the
NYSE, under the symbol "DRF." There is no established trading market for the
Class B Common Stock. On February 23, 2001, there were approximately 200
holders of record of our Class A Common Stock and nine holders of record of our
Class B Common Stock.

  We have not paid cash dividends during our two most recent fiscal years. Our
credit agreement prohibits payment of cash dividends prior to 2003.

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

<TABLE>
<CAPTION>
                                                                     High   Low
                                                                    ------ -----
   <S>                                                              <C>    <C>
   1999:
   First Quarter................................................... $11.19 $6.56
   Second Quarter..................................................  10.38  7.38
   Third Quarter...................................................   7.81  6.38
   Fourth Quarter..................................................   6.44  4.38
   2000:
   First Quarter...................................................   6.44  4.63
   Second Quarter..................................................   6.25  4.31
   Third Quarter...................................................   4.88  4.13
   Fourth Quarter..................................................   4.19  1.94
</TABLE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                              Fiscal Year
                              ------------------------------------------------
                                2000      1999      1998    1997(1)     1996
                              --------  --------  --------  --------  --------
                                 (in thousands, except per share data)
<S>                           <C>       <C>       <C>       <C>       <C>
Statement of Income Data:
Net sales...................  $663,467  $628,899  $517,443  $476,448  $379,567
Cost of sales...............   541,063   512,977   406,619   372,165   307,383
Gross profit................   122,404   115,922   110,824   104,283    72,184
Selling, general and
 administrative expenses....    67,335    64,547    58,410    54,231    45,673
Amortization of goodwill....     3,137     2,859       589       --        --
Other operating costs,
 net(2).....................       --     (2,267)    5,347     7,012      (428)
Operating income............    51,932    50,783    46,478    43,040    26,939
Other income (expense),
 net........................       226       603       334      (290)      485
Equity in loss of joint
 venture....................      (226)      --        --        --        --
Interest expense............    32,931    28,416    18,713    21,135    18,168
Income before extraordinary
 item.......................    10,773    14,715    17,101    13,264     5,686
Extraordinary item..........       --        --       (405)     (243)      --
Net income..................    10,773    14,715    16,696    13,021     5,686
Earnings per share--basic:
  Income before
   extraordinary item.......      0.49      0.64      0.86      0.90      0.40
  Net income per share--
   basic....................      0.49      0.64      0.84      0.89      0.40
Earnings per share--diluted:
  Income before
   extraordinary item.......      0.49      0.63      0.85      0.89      0.40
  Net income per share--
   diluted..................      0.49      0.63      0.83      0.88      0.40
</TABLE>


                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                  Fiscal Year
                                  --------------------------------------------
                                    2000     1999     1998   1997(1)    1996
                                  -------- -------- -------- -------- --------
                                                 (in thousands)
<S>                               <C>      <C>      <C>      <C>      <C>
Balance Sheet Data (at end of
 fiscal year):
Working capital.................. $232,374 $174,365 $221,854 $123,604 $ 93,291
Total assets.....................  745,473  684,582  720,210  392,295  321,050
Total debt, including current
 maturities......................  369,271  314,784  354,268  143,756  169,468
Common stock subject to put
 rights..........................      --       --       --       --     9,726
Shareholders' equity.............  277,192  270,952  258,774  165,830   77,898
Common shares outstanding........   21,766   22,636   23,219   18,841   14,155
Other Financial Data:
Depreciation and amortization of
 property, plant and equipment... $ 37,210 $ 38,912 $ 30,220 $ 27,508 $ 20,795
Capital expenditures in cash.....   33,743   36,729   39,454   24,231   27,582
</TABLE>
--------
(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 these charges relate to fixed asset
    writedowns and plant closure costs. See Note 7 to the Consolidated
    Financial Statements.

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

Overview

  Our strategy is to expand our home fashions business both internally and
through acquisitions as well as to maintain our niche position as a leading
producer of light weight yarn-dyed apparel fabrics. We also continue to
implement cost reductions, which we believe are critical in order to remain
competitive in the global marketplace.

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

  Operating profits for our home fashions segment were $43.3 million in fiscal
2000, down from $50.9 million in fiscal 1999, despite a sales increase to
$469.8 million in fiscal 2000 from $431.8 million in fiscal 1999. Although we
began fiscal 2000 with a strong order position, actual performance during
fiscal 2000 did not meet our expectations for a variety of reasons, including
problems associated with the installation of a new enterprise resource planning
system in our home fashions products and engineered products businesses. Data
issues associated with the implementation of the system in our home fashions
division caused disruptions in the second half of fiscal 1999 and during the
first few months of fiscal 2000, which negatively impacted our ability to
accurately match supply requirements with demand forecasts. This led to the
production of excess inventory and reduced customer service levels. These
excess inventory levels adversely impacted our performance through the
remainder of the year, particularly during the fourth quarter of fiscal 2000,
when there was a general softening in demand at the retail level for home
fashions products. Additionally, we introduced a significant program with a
large mass merchant that caused us to outsource an increased amount of home
fashions production during the first three quarters of fiscal 2000. This put
further stress on our internal systems at a critical time in relation to the
implementation issues we were experiencing at the beginning of the year.
Lastly, the economy slowed during the last six months of fiscal 2000, which
reduced retail demand for our home fashions products. This contributed to
higher inventory levels and reduced margins due to a much less favorable sales
mix as we attempted to reduce inventory levels during a period of decreasing
demand.

                                       14
<PAGE>

  Historically, our apparel fabrics operations have been more sensitive to
downturns within the textile industry. As a result, the contribution to our
operating income by the apparel fabrics segment has been significantly less
than, and has tended to fluctuate more than, the contribution to our operating
income by the home fashions segment. The variations in operating income
attributable to apparel fabrics that we experienced during fiscal 2000, 1999
and 1998 are representative of the fluctuations that can occur in that
business. In fiscal 2000, operating profits for apparel fabrics were $10.9
million, up from $4.4 million in fiscal 1999, but down from $23.7 million in
fiscal 1998. In recent years we have taken several steps to improve the
performance of our apparel fabrics operations, including, (1) the replacement
of older manufacturing equipment, (2) the acquisition of Cherokee at the
beginning of fiscal 1997 (which gave us greater critical mass in our apparel
fabrics operations), (3) the closure and consolidation of our Riverside Plant
(which was the least efficient of our apparel fabrics plants) at the end of
fiscal 1997 and (4) the closure of our Spindale Plant in January 1999. Due to
the high fixed costs associated with our manufacturing operations in the
apparel fabrics business, we seek to maintain full manufacturing schedules.
During fiscal 2000, we were able to maintain reasonably consistent
manufacturing schedules during the first three quarters of the year. During the
fourth quarter of fiscal 2000, however, we experienced reduced demand which has
carried over into 2001 and will likely lead to reduced levels of profitability
in the apparel fabrics segment for fiscal 2001.

  Despite recent plant closures, the cost structure of our apparel fabrics
operations continues to make it difficult to compete effectively with garments
or fabrics imported from countries with significantly lower labor costs and to
provide an adequate return on the assets employed in that business. To address
these issues, in January 2000, we formed Danza in partnership with Zaga to
build and operate a manufacturing plant for the production of apparel fabrics
in Mexico, where labor costs are significantly lower than in the United States.
The facility was to contain yarn-dyeing and weaving operations for the
production of light and medium weight apparel fabrics. In February of 2001, we
agreed to terminate our Danza venture because we did not believe we would be
able to obtain an adequate return on the projected investment.

  At the same time we terminated Danza, we purchased Zaga's interest in Zadar.
Zadar is another joint venture that we formed with Zaga in January 2000 to
build and operate a plant in Mexico, including sewing and laundry operations,
for the production of finished garments, primarily sport shirts for sale to
apparel and retail customers. These products are targeted to compete with Asian
imports. The facility is partially operational at the current time and we
expect it to be fully operational by mid-2001. We believe Zadar will benefit us
because it is likely to create an additional source of demand for our apparel
fabrics and will position us to better serve retail customers that seek a
single source for garment design and assembly.

  As we move into fiscal 2001, we are currently experiencing moderate levels of
demand for our home fashions products and apparel fabrics. We remain focused on
reducing inventory levels, and as a result, we expect to curtail our home
fashions weaving operations for two to three weeks in the first half of fiscal
2001, which will negatively impact our profitability. We believe our
competitors are also reducing inventory levels during the current environment
of retail softness. If industry-wide inventory levels become more balanced with
retail demand, we expect to improve our operating schedules. Factors that will
affect our performance during fiscal 2001 include the prevailing retail
environment, our ability to increase prices in order to recover increases in
our energy costs and wages, and our ability to keep inventory levels consistent
with the demand for our products.

                                       15
<PAGE>

Performance By Segment

  We operate in three industry segments: products for the home fashions
markets, products for the apparel fabrics markets and engineered products for
the industrial markets. The following table sets forth certain information
about segment results for fiscal 2000, 1999 and 1998.

<TABLE>
<CAPTION>
                                                    Fiscal    Fiscal    Fiscal
                                                     2000      1999      1998
                                                   --------  --------  --------
                                                         (in thousands)
<S>                                                <C>       <C>       <C>
Net Sales
Home fashions..................................... $469,758  $431,828  $321,807
Apparel fabrics...................................  143,639   150,401   186,491
Engineered products...............................   50,070    46,670     9,145
                                                   --------  --------  --------
    Total......................................... $663,467  $628,899  $517,443
                                                   ========  ========  ========
Operating Income
Home fashions..................................... $ 43,344  $ 50,878  $ 33,848
Apparel fabrics...................................   10,930     4,358    23,656
Engineered products...............................    2,341     2,725       169
                                                   --------  --------  --------
    Total segment operating income................   56,615    57,961    57,673
Corporate items not allocated to segments:
  Amortization of goodwill........................   (3,137)   (2,859)     (589)
  Other operating costs, net......................      --      2,267    (5,347)
  Other expenses not allocated to segments........   (1,546)   (6,586)   (5,259)
                                                   --------  --------  --------
    Total operating income........................ $ 51,932  $ 50,783  $ 46,478
                                                   ========  ========  ========
</TABLE>

Results Of Operations

Comparison of 52 Weeks Ended December 30, 2000 ("fiscal 2000") to 52 Weeks
Ended January 1, 2000 ("fiscal 1999")

Net Sales

  Net sales for fiscal 2000 were $663.5 million, an increase of $34.6 million
or 5.5% from net sales of $628.9 million for fiscal 1999.

  Home Fashions. Net sales of home fashions products for fiscal 2000 were
$469.8 million, up $37.9 million or 8.8% from net sales of $431.8 million for
fiscal 1999. Incremental sales from the ISP business we acquired in April 2000
were $10.0 million. The remainder of the increase occurred in the second half
of the fiscal year and was attributable to the rollout of a significant program
with a large mass merchant and the introduction of some new juvenile programs.
These programs more than offset lower sales early in fiscal 2000 caused by
disruptions from poor weather and a major systems implementation, and the
effects of a general softening in demand for our home fashions products at the
retail level that began toward the end of the second quarter of fiscal 2000.

  Apparel Fabrics. Net sales of apparel fabrics for fiscal 2000 were $143.6
million, down $6.8 million or 4.5% from net sales of $150.4 million for fiscal
1999. Most of the decrease was in the segment's largest product category,
shirting fabrics. Sales for both years were low by historical standards, which
we believe reflected both the decline in dress shirting at the retail level
resulting from the popularity of business casual dress, and the continued
increase in low cost fabric and garment imports.

  Engineered Products. Net sales of engineered products were $50.1 million for
fiscal 2000, up $3.4 million or 7.3% from net sales of $46.7 million for fiscal
1999. The increase reflected a strong demand for this segment's products for
most of the first three quarters of fiscal 2000 and new fabric finishing
capabilities,

                                       16
<PAGE>

which have enabled us to better meet the demand for certain of our products.
Sales in the fourth quarter of fiscal 2000 declined by $1.1 million over the
fourth quarter of fiscal 1999, which generally reflected the slowdown in
activity in the automobile and tire industries.

Selling, General and Administrative Expenses

  Selling, general and administrative expenses for fiscal 2000 were $67.3
million (10.1% of net sales), an increase of $2.8 million or 4.3% from $64.5
million (10.3% of net sales) for fiscal 1999. Most of the increase was
attributable to incremental expenses from ISP.

Operating Income

  Total operating income for fiscal 2000 was $51.9 million (7.8% of net sales)
compared to $50.8 million (8.1% of net sales) for fiscal 1999.

  Home Fashions. Operating income for the home fashions segment was $43.3
million for fiscal 2000, including $0.7 million contributed by ISP, compared to
$50.9 million in fiscal 1999. Although net sales increased by $37.9 million in
fiscal 2000, less efficient manufacturing performance and a less favorable
sales mix, particularly in the fourth quarter, resulted in lower margins. This
was in part due to a sluggish retail environment that led to more promotional
sales, customer claims and chargebacks, and higher inventory reserves. In
addition, operating margins in the second half of fiscal 2000 were negatively
impacted by the increased use of outside processors and higher costs for
energy, raw materials and wages.

  Apparel Fabrics. Operating income for the apparel fabrics segment increased
to $10.9 million in fiscal 2000 from $4.4 million in fiscal 1999. Most of this
increase occurred in the first half of fiscal 2000 and was attributable to
better capacity utilization and lower raw material costs. Increases in costs of
energy, raw materials and wages negatively impacted operating margins during
the second half of fiscal 2000.

  Engineered Products. Operating income for the engineered products segment was
$2.3 million in fiscal 2000 compared to $2.7 million in fiscal 1999. Although
revenues increased by 7.3% in fiscal 2000, less efficient manufacturing
performance and higher general and administrative expenses negatively impacted
operating margins.

  Corporate Items. Amortization of goodwill was $3.1 million in fiscal 2000
compared to $2.9 million in fiscal 1999. The increase was due to amortization
of goodwill associated with the April 2000 acquisition of ISI.

  Other operating costs, net for fiscal 1999 included a $1.8 million pre-tax
gain from reversal of reserves established in fiscal 1997 in connection with
the closure of our Riverside apparel fabrics weaving facilities in Danville,
Virginia. During fiscal 1999 we donated the Long Mill, one of two mill
complexes that comprise the Riverside facilities, to a local nonprofit
historical organization for future renovation and development into a multi-use
retail and residential facility. At the time of the donation, $1.7 million
remained of a $3.1 million reserve that was established in fiscal 1997 for the
estimated cost of demolishing the mill buildings and related costs. Due to the
donation of the Long Mill, it is no longer anticipated that the remaining
Riverside property will be demolished. Accordingly, we reversed the remaining
reserve during fiscal 1999. In fiscal 1999, we also reversed $0.1 million of
the reserve established in fiscal 1997 for severance and benefit costs
associated with the Riverside closure, due to lower than anticipated actual
costs. We could potentially be reimbursed by the developer of the Long Mill
property for $1.2 million of demolition and related costs that we incurred
before the donation. Under our agreement with the developer, such reimbursement
will only occur if the developer begins receiving revenues from the development
of the Riverside property, will not commence until at least 2004, and will be
paid in installments of $10,000 per month.

  Other operating costs, net for fiscal 1999 also included a $0.5 million pre-
tax gain from reversal of a portion of the loss recorded in fiscal 1998 for
closure of our apparel fabrics weaving facility in Spindale, North Carolina.

                                       17
<PAGE>

The majority of this gain was caused by a better than anticipated recovery on
equipment that was written down in connection with the plant closure.

  Other expenses not allocated to our business segments were $1.5 million in
fiscal 2000 compared to $6.6 million in fiscal 1999 and consisted of
depreciation on the write-up of our fixed assets from our acquisition in 1989,
idle facility costs and other items not directly related to segment business.
The vast majority of the write-up was for manufacturing equipment that became
fully depreciated by the end of fiscal 1999.

Interest Expense

  Interest expense for fiscal 2000 was $32.9 million, up $4.5 million or 15.9%
from fiscal 1999. Higher debt levels accounted for approximately $2.7 million
of the increase, with the remainder caused by higher average interest rates.

Income Tax Provision

  The income tax provision was $8.2 million (43.3% of pre-tax income) for
fiscal 2000, compared to $8.3 million (35.9% of pre-tax income) for fiscal
1999. The effect of nondeductible goodwill amortization increased the
effective tax rate by 5.8% in fiscal 2000 and 4.8% in fiscal 1999. A $1.5
million combined federal and state tax benefit from the charitable donation of
the Riverside Long Mill (discussed above) decreased the effective tax rate in
fiscal 1999 by 6.5% of pre-tax income.

Net Income and Earnings Per Share

  Net income for fiscal 2000 was $10.8 million or $0.49 per share (diluted),
compared to $14.7 million or $0.63 per share (diluted) for fiscal 1999. Fiscal
1999 net income was affected by the following one-time items (discussed above)
that, together, increased net income by $2.9 million, or $0.12 per diluted
share:

  . a $1.5 million combined federal and state tax benefit from the charitable
    donation of the Riverside Long Mill;

  . a $1.8 million pre-tax gain ($1.1 million after-tax) from reversal of
    certain prior year reserves associated with the Riverside plant closure;
    and

  . a $0.5 million pre-tax gain ($0.3 million after-tax) from reversal of a
    portion of the loss recorded in fiscal 1998 for closure of the Spindale
    plant.

Comparison of 52 Weeks Ended January 1, 2000 to 52 Weeks Ended January 2, 1999
("fiscal 1998")

  Net sales for fiscal 1999 were $628.9 million, an increase of $111.5 million
or 21.5% from net sales of $517.4 million for fiscal 1998.

  Homes Fashions. Net sales of home fashions products for fiscal 1999 were
$431.8 million, up $110.0 million or 34.2% from net sales of $321.8 million
for fiscal 1998. The increase was attributable to incremental sales as a
result of our acquisition of Bibb in October 1998.

  Apparel Fabrics. Net sales of apparel fabrics for fiscal 1999 were $150.4,
down $36.1 million or 19.4% from net sales of $186.5 million for fiscal 1998.
Most of the decrease was in the segment's largest product category, shirting
products, in which sales declined $31.6 million or 28.0%. We believe that the
decrease was attributable to higher fabric and garment imports, particularly
from Asia, as a result of currency devaluations.

  Engineered Products. Net sales of engineered products were $46.7 million for
fiscal 1999. Net sales of engineered products were $9.1 million for the period
from October 14, 1998 (the date we acquired this business as a result of the
Bibb acquisition) through the end of fiscal 1998.

                                      18
<PAGE>

Selling, General and Administrative Expenses

  Selling, general and administrative expenses for fiscal 1999 were $64.5
million (10.3% of net sales), an increase of $6.1 million or 10.5% from $58.4
million (11.3% of net sales) for fiscal 1998. The increase reflected
incremental expenses resulting from the acquisition of Bibb, offset in part by
a $3.4 million decrease in incentive compensation.

Operating Income

  Total operating income for fiscal 1999 was $50.8 million (8.1% of net sales)
compared to $46.5 million (9.0% of net sales) for fiscal 1998.

  Home Fashions. Operating income for the home fashions segment was $50.9
million for fiscal 1999, compared to $33.8 million for fiscal 1998. The
increase in operating income reflected the increase in sales resulting from the
Bibb acquisition, lower raw material costs and cost savings resulting from the
integration of Bibb.

  Apparel Fabrics. Operating income for the apparel fabrics segment decreased
to $4.4 million in fiscal 1999 from $23.7 million in fiscal 1998. The decrease
was due to lower sales volume, a very competitive pricing environment, and
higher per unit manufacturing costs resulting from reduced capacity
utilization, offset somewhat by lower raw material costs. The closure of our
Spindale greige mill in the first quarter of fiscal 1999 resulted in overhead
cost savings that partially mitigated the under-absorption of fixed costs and
prevented an operating loss for this segment in fiscal 1999.

  Engineered Products. Operating income for the engineered products segment was
$2.7 million in fiscal 1999. In the 11-week period during fiscal 1998 that we
operated this business, beginning with the acquisition of Bibb in October 1998,
operating income for the segment was $0.2 million.

  Corporate Items. Amortization of goodwill, which is entirely attributable to
the October 1998 acquisition of Bibb, was $2.9 million for fiscal 1999.
Amortization for the 11-week period included in fiscal 1998 after the
acquisition was $0.6 million.

  Other operating costs, net for fiscal 1999 included a $1.8 million pre-tax
gain from reversal of reserves established in fiscal 1997 in connection with
the closure of our Riverside apparel fabrics weaving facilities in Danville,
Virginia. During fiscal 1999 we donated the Long Mill, one of two mill
complexes that comprise the Riverside facilities, to a local nonprofit
historical organization for future renovation and development into a multi-use
retail and residential facility. At the time of the donation, $1.7 million
remained of a $3.1 million reserve that was established in fiscal 1997 for the
estimated cost of demolishing the mill buildings and related costs. Due to the
donation of the Long Mill, it is no longer anticipated that the remaining
Riverside property will be demolished. Accordingly, we reversed the remaining
reserve during fiscal 1999. In fiscal 1999, we also reversed $0.1 million of
the reserve established in fiscal 1997 for severance and benefit costs
associated with the Riverside closure, due to lower than anticipated actual
costs. We could potentially be reimbursed by the developer of the Long Mill
property for $1.2 million of demolition and related costs that we incurred
before the donation. Under our agreement with the developer, such reimbursement
will only occur if the developer begins receiving revenues from the development
of the Riverside property, will not commence until at least 2004, and will be
paid in installments of $10,000 per month.

  Other operating costs, net for fiscal 1999 also included a $0.5 million pre-
tax gain from reversal of a portion of the loss recorded in fiscal 1998 for
closure of our apparel fabrics weaving facility in Spindale, North Carolina.
The majority of this gain was caused by a better than anticipated recovery on
equipment that was written down in connection with the plant closure.

  Other operating costs, net for fiscal 1998 totaled $5.3 million and consisted
of a $5.7 million charge resulting from our decision to close our apparel
fabrics weaving facility in Spindale, North Carolina, and a $0.4

                                       19
<PAGE>

million gain from the early termination of a lease. The charge for the
Spindale facility closure included a $5.4 million non-cash writedown of
assets, and $0.3 million for estimated severance and other benefits associated
with the termination of approximately 130 employees. By the end of January
1999, all production at the facility had ceased and the payout of severance
and benefit costs to terminated employees was completed by the end of fiscal
1999.

  Other expenses not allocated to our business segments totaled $6.6 million
in fiscal 1999 compared to $5.3 million in fiscal 1998 and consisted primarily
of depreciation on the write-up of our fixed assets from our acquisition in
1989.

Interest Expense

  Interest expense for fiscal 1999 was $28.4 million, up $9.7 million or 51.9%
from fiscal 1998. Higher debt
levels as a result of the Bibb acquisition resulted in a $10.7 million
increase in interest expense for fiscal 1999. This was offset somewhat by the
effect of lower average interest rates.

Income Tax Provision

  The income tax provision was $8.3 million (35.9% of pre-tax income) for
fiscal 1999, compared to $11.0 million (39.1% of pre-tax income) for fiscal
1998. The lower effective tax rate in fiscal 1999 was attributable to a $1.5
million combined federal and state tax benefit from the charitable donation of
the Riverside Long Mill (discussed above). This was partially offset by the
effect of a full year of nondeductible goodwill amortization from the Bibb
acquisition, compared to 11 weeks of amortization in fiscal 1998.

Net Income and Earnings Per Share

  Net income for fiscal 1999 was $14.7 million or $0.63 per share (diluted),
in comparison with $16.7 million or $0.83 per share (diluted) for fiscal 1998.
Fiscal 1999 net income was affected by the following one-time items (discussed
above) that, together, increased net income by $2.9 million, or $0.12 per
diluted share:

  . a $1.5 million combined federal and state tax benefit from the charitable
    donation of the Riverside Long Mill;

  . a $1.8 million pre-tax gain ($1.1 million after-tax) from reversal of
    certain prior year reserves associated with the Riverside plant closure;
    and

  . a $0.5 million pre-tax gain ($0.3 million after-tax) from reversal of a
    portion of the loss recorded in fiscal 1998 for closure of the Spindale
    plant.

  Fiscal 1998 net income included a pre-tax charge of $5.7 million ($3.5
million after-tax, or $0.18 per share) relating to closure of the Spindale
plant, and an extraordinary loss of $0.4 million ($0.02 per share) from the
refinancing of outstanding bank debt as a result of the Bibb acquisition.

Liquidity and Capital Resources

 General

  We rely on internally generated cash flow, supplemented by borrowings under
our working capital facility, to meet our working capital needs, capital
improvements and debt service requirements. Our total debt to total capital
ratio at December 30, 2000 was 57.1%.

 Working Capital

  Our operations are working capital intensive. Our 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.

                                      20
<PAGE>

  During fiscal 2000, operating working capital used $52.3 million of cash
primarily due to a buildup of inventory levels and increases in accounts
receivable. Net income plus noncash expense items (net) generated $59.7 million
in cash during the year, which provided funding for $55.2 million used by
changes in operating assets and liabilities. Those changes were the $52.3
million increase in working capital described above, an increase of $2.7
million of prepaid expenses and other assets and a $0.3 million decrease in
other liabilities. As a result, operating activities in fiscal 2000 provided
net cash of $4.5 million.

  Operating working capital generated $4.1 million of cash during fiscal 1999.
Net income plus noncash expense items (net) provided $65.7 million in cash
during the year, in addition to $5.2 million generated by changes in operating
assets and liabilities. Those changes were the $4.1 million decrease in working
capital mentioned above, an increase of $0.2 million of prepaid expenses and
other assets and a $1.3 million increase in other liabilities. As a result,
operating activities in fiscal 1999 provided net cash of $70.9 million.

  Operating working capital used $46.3 million of cash during fiscal 1998
reflecting increased sales activity and the payment of Bibb's vendors whom were
not current. Net income plus noncash expense items (net) provided $57.9 million
in cash during the year, which provided funding for $48.0 million used by
changes in operating assets and liabilities. Those changes were the $46.3
million increase in working capital mentioned above, an increase of $1.3
million in prepaid expenses and other assets, and a $0.4 million decrease in
other liabilities. As a result, net cash of $9.9 million was provided by
operating activities in fiscal 1998.

  In connection with purchasing cotton for anticipated manufacturing
requirements, we may enter into cotton futures and option contracts in order to
reduce the risk associated with future price fluctuations. We generally cover
open order requirements, which average approximately three months of
production, through direct purchase and hedging transactions, and we may
shorten or lengthen that period in accordance with our 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 December 30,
2000 were not material to our results of operations. There were no material
cotton futures or options contracts outstanding at December 30, 2000, January
1, 2000, or January 2, 1999. In fiscal 2001, we will begin accounting for
derivative instruments and hedging activities in accordance with SFAS No. 133.
The adoption of SFAS No. 133 will not have a significant effect on our
financial position or results of operations.

 Credit Facilities

  On October 14, 1998, in order to finance the Bibb acquisition, we replaced
our $90 million revolving credit facility with a new $275 million credit
facility. Under the original terms, this credit facility consisted of a $125
million amortizing term loan and a $150 million non-amortizing revolving
working capital facility.

  The credit facility was amended during fiscal 2000 to permit our planned
joint ventures in Mexico and to add $12.9 million of new debt to the term loan.
In February 2001, a subsequent amendment modified the interest coverage and
leverage covenants for the fourth quarter of fiscal 2000 and subsequent fiscal
quarters and increased the interest rate on all loans by 100 basis points.
Under the amended credit facility we are subject to additional restrictions
regarding investments in non-guarantor subsidiaries, capital expenditures,
repurchases of capital stock, and payment of dividends. In addition to the
existing security provided by our inventories and accounts receivable, we have
further secured the credit facility with our real and personal property. In
connection with these amendments to the credit facility we incurred fees of
$1.2 million.

  Borrowings under the credit facility bear interest at a base rate plus the
applicable percentage (which includes the 100 basis points described above), as
defined (9.75% as of February 26, 2001) or LIBOR plus the applicable percentage
(which includes the 100 basis points described above), as defined (7.88% as of
February 26, 2001) for periods of one, two, three or six months, at our option.
The term loan was fully borrowed at inception and has scheduled amortization
payments. In fiscal 2000, $20.0 million of scheduled amortization was paid.
With the addition of $12.9 million of new debt to the term loan in fiscal 2000,
the

                                       21
<PAGE>

required remaining principal amortization is $23.0 million, $40.0 million, and
$54.9 million in fiscal years 2001, 2002, and 2003, respectively, with a final
maturity of September 30, 2003. The working capital facility is non-amortizing
with any borrowings outstanding due at final maturity on September 30, 2003. At
December 30, 2000, we had aggregate borrowings of $115.0 million and $1.3
million in letters of credit outstanding under the working capital facility and
had $33.7 million unused and available for borrowing.

  The credit facility contains certain covenants including the maintenance of a
certain interest coverage ratio and maximum debt levels and limitations on
mergers and consolidations, affiliated transactions, incurring liens, disposing
of assets and limitations on investments. An event of default under the credit
facility includes change of control (as defined in the credit facility) as well
as non-compliance with certain other provisions.

  In addition, at December 30, 2000, we had an aggregate of $120.0 million
outstanding of our 10 1/8% senior subordinated notes due 2003. Interest on
these notes is payable semi-annually on June 15 and December 15 of each year.
The notes mature on December 15, 2003.

  The credit facility and the indenture relating to our 10 1/8% senior
subordinated notes restrict certain payments, including permitted investment in
non-guarantor subsidiaries, capital expenditures, repurchase of capital stock
and payment of dividends. At December 30, 2000, $62.9 million of our retained
earnings was restricted under either the credit facility and/or the indenture.

 Acquisitions

  On April 3, 2000, the Company acquired substantially all of the assets of ISI
for $15.4 million in cash, and the assumption of certain operating liabilities.
The assets acquired consisted principally of receivables and inventory. The
acquisition was funded with borrowings under our working capital line of
credit. ISI was an importer of home textile products, including natural fiber
doormats and bootscrapers, throws, area and accent rugs, and decorative
pillows. The operations have been incorporated into our home fashions business.
The acquisition has been accounted for as a purchase and the results of
operations of the acquired business have been included in the consolidated
financial statements since the date of acquisition. The allocation of the
purchase price of ISI to the assets acquired resulted in goodwill of $7.8
million being recorded, which is being amortized over 20 years.

  In October 1998, we purchased all of the outstanding capital stock of Bibb
(through a merger transaction) for an aggregate purchase price of $240 million.
Bibb, founded in 1876, was a leading domestic manufacturer of home fashions
products. The purchase price for the Bibb acquisition consisted of $86 million
of cash and 4.3 million shares of our Class A Common Stock. We funded the cash
portion of the purchase price with borrowings under the working capital
facility. In connection with the acquisition, we also assumed or repaid an
aggregate of $95 million of Bibb debt. The portion of Bibb debt repaid was
funded with borrowings under the working capital facility.

 Capital Improvements

  We made capital expenditures aggregating $33.7 million, $36.7 million and
$39.5 million in fiscal 2000, 1999 and 1998, respectively. During fiscal 2000
capital improvements were funded primarily through borrowings under our credit
facility. We anticipate capital expenditures in the range of $30.0 million to
$33.0 million in fiscal 2001, which will be used primarily for information
systems, sewing automation, modernization of our engineered products operation
and other various facility modernizations.

  Rental expense for fiscal 2000, 1999 and 1998 was approximately $7.8 million,
$8.3 million, and $7.7 million, respectively, net of rental income on
noncancellable leases and subleases of approximately $992,000, $1,021,000, and
$252,000, respectively. At December 30, 2000, our future minimum lease payments
due under operating leases with noncancellable terms in excess of one year were
as follows: 2001, $5.6 million; 2002, $4.9 million; 2003, $4.4 million; 2004,
$4.2 million; 2005, $3.2 million; and later, $14.9 million.

                                       22
<PAGE>

 Stock Repurchase Program

  In August 1999, our board of directors authorized the repurchase from time to
time of up to $10.0 million aggregate market value of our Class A Common Stock
in open market transactions on the NYSE. Shares repurchased pursuant to this
program are retired and constitute authorized but unissued shares. During
fiscal 2000, we repurchased 877,225 shares for $4.6 million and in fiscal 1999,
we repurchased 753,919 shares for $5.0 million. No further repurchases are
permitted under our credit facility.

Risk Management

 Interest Rate Risk

  We have exposure to floating interest rates through our borrowings under our
credit facility. Therefore, interest expense will fluctuate with changes in
LIBOR and the prime rate. At January 1, 2000, we had interest rate swap
agreements that terminated during the first quarter of fiscal 2000 which
effectively converted variable rate interest payable on $65.0 million of
existing debt to a fixed rate. No interest rate swap agreements were
implemented during fiscal 2000. As of December 30, 2000 a 10% increase in
interest rates in effect on our variable rate borrowings would increase
interest expense by $1.9 million on an annual basis.

 Commodity Price Risk

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

  We enter into contracts to purchase cotton under the Southern Mill Rules
ratified and adopted by the American Textile Manufacturers Institute, Inc. and
American Cotton Shippers Association. Under these contracts and rules,
nonperformance by either the buyer or seller may result in a net cash
settlement of the difference between the current market price of cotton and the
contract price. If we had a net cash settlement of our open firm commitment
cotton contracts at December 30, 2000, and market prices of contracted cotton
decreased by 10%, we would be required to pay a net settlement provision of
approximately $2.9 million.

Forward-Looking Statements

  This Annual Report contains forward-looking statements within the meaning of
the Securities Act and the Exchange Act. These statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those included in such forward-looking statements. The words
"believes," "expects," "intends," "estimates," or "anticipates" and similar
expressions, as well as future or conditional verbs such as "will," "should,"
"would," and "could," are intended to identify forward-looking statements.
Specific forward-looking statements contained in this Annual Report include,
among others:

  . expected increased demand for our products during fiscal 2001,
  . the timing and costs associated with building manufacturing facilities in
    Mexico,
  . estimated capital expenditures for fiscal 2001,
  . expected expenditures for environmental, health and safety law
    compliance, and
  . the anticipated outcome of pending environmental matters and litigation.

  With respect to forward-looking statements contained in this Annual Report,
management has made assumptions regarding, among other things, our ability to
integrate acquired companies, expected construction costs for new facilities in
Mexico, expected labor costs in Mexico, the level of customer demand for our
products, the amount and timing of expected capital expenditures, the estimated
cost of compliance with environmental, health and safety laws and the expected
resolution of various pending environmental matters and litigation. There can
be no assurance that the assumptions made by us are correct.

                                       23
<PAGE>

  The forward-looking statements in this Annual Report are also subject to
certain risks and uncertainties including, among others, that our performance
in future periods may be adversely impacted by:

  .  the cyclical nature of the textile industry,
  .  adverse changes in domestic or international economic conditions
     generally,
  .  intense domestic and international competition within the textile
     industry,
  .  fluctuations in the price and availability of cotton and other raw
     materials,
  .  the termination of license agreements,
  .  our inability to make capital improvements necessary to maintain
     competitiveness,
  .  possible adverse changes in governmental regulation regarding the import
     of cotton and textile products,
  .  difficulties in integrating acquired businesses and achieving cost
     savings,
  .  changes in environmental regulations,
  .  deterioration of relationships with or the loss of material customers,
  .  conditions in Mexico affecting our new Mexican manufacturing operations,
  .  our inability or the inability of our customers to compete effectively
     with imported textile products, and
  .  adverse changes in general market and industry conditions.

  We believe that the forward-looking statements in this Annual Report are
reasonable; however, such statements are based on current expectations and
undue reliance should not be placed on such statements. We undertake no
obligation to update publicly any forward-looking statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  Not Applicable

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                                       24
<PAGE>

                          CONSOLIDATED BALANCE SHEETS

                     December 30, 2000 and January 1, 2000

<TABLE>
<CAPTION>
                                                                2000     1999
                                                              -------- --------
                                                               (in thousands,
                                                                   except
                                                               per share data)
<S>                                                           <C>      <C>
                           Assets
Current assets:
  Cash and cash equivalents.................................. $  3,675 $  2,084
  Accounts receivable (less allowance of $14,011 and
   $9,693)...................................................   84,726   77,009
  Inventories................................................  206,227  168,487
  Prepaid expenses and other current assets..................    6,254    2,132
  Deferred income taxes......................................   16,656   15,381
                                                              -------- --------
    Total current assets.....................................  317,538  265,093
Property, plant and equipment:
  Land.......................................................   10,193   10,113
  Building and improvements..................................   96,556   87,706
  Machinery and equipment....................................  393,398  369,410
  Construction in progress...................................    8,351    9,209
                                                              -------- --------
                                                               508,498  476,438
  Less accumulated depreciation and amortization.............  216,035  179,705
                                                              -------- --------
    Net property, plant and equipment........................  292,463  296,733
Goodwill.....................................................  115,011  110,384
Other assets.................................................   20,461   12,372
                                                              -------- --------
                                                              $745,473 $684,582
                                                              ======== ========
            Liabilities and Shareholders' Equity
Current Liabilities:
  Current maturities of long-term debt....................... $ 25,872 $ 22,368
  Accounts payable...........................................   27,622   33,464
  Accrued compensation and related benefits..................   20,437   22,411
  Other accrued expenses.....................................   11,233   12,485
                                                              -------- --------
    Total current liabilities................................   85,164   90,728
Long-term debt...............................................  343,399  292,416
Deferred income taxes........................................   28,583   19,555
Other liabilities............................................   11,135   10,931

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 19,703,439
   shares (20,574,020 shares at January 1, 2000).............      197      206
  Common stock, Class B, $.01 par value; authorized
   35,000,000 shares; issued and outstanding 2,062,070
   shares....................................................       21       21
  Common stock, Class C, $.01 par value; authorized 5,000,000
   shares; no shares outstanding.............................      --       --
  Additional paid-in capital.................................  209,096  213,620
  Retained earnings..........................................   67,878   57,105
                                                              -------- --------
    Total shareholders' equity...............................  277,192  270,952
                                                              -------- --------
                                                              $745,473 $684,582
                                                              ======== ========
</TABLE>

                            See accompanying notes.

                                       25
<PAGE>

                       CONSOLIDATED STATEMENTS OF INCOME

       Years ended December 30, 2000, January 1, 2000 and January 2, 1999

<TABLE>
<CAPTION>
                                                   2000      1999      1998
                                                 --------  --------  --------
                                                 (in thousands, except per
                                                        share data)
<S>                                              <C>       <C>       <C>
Net sales....................................... $663,467  $628,899  $517,443
Costs and expenses:
  Cost of sales.................................  541,063   512,977   406,619
  Selling, general and administrative expenses..   67,335    64,547    58,410
  Amortization of goodwill......................    3,137     2,859       589
  Other operating costs, net....................      --     (2,267)    5,347
                                                 --------  --------  --------
Operating income................................   51,932    50,783    46,478
Other income, net...............................      226       603       334
Equity in loss of joint venture.................     (226)      --        --
Interest expense................................  (32,931)  (28,416)  (18,713)
                                                 --------  --------  --------
Income before income taxes and extraordinary
 item...........................................   19,001    22,970    28,099
Provision for income taxes......................    8,228     8,255    10,998
                                                 --------  --------  --------
Income before extraordinary item................   10,773    14,715    17,101
Extraordinary item, net of income taxes:
  Loss on early extinguished of debt............      --        --       (405)
                                                 --------  --------  --------
Net income...................................... $ 10,773  $ 14,715  $ 16,696
                                                 ========  ========  ========
Earnings per share--basic:
  Income before extraordinary item.............. $   0.49  $   0.64  $   0.86
  Extraordinary item............................      --        --      (0.02)
                                                 --------  --------  --------
  Net income per share--basic................... $   0.49  $   0.64  $   0.84
                                                 ========  ========  ========
Earnings per share--diluted:
  Income before extraordinary item.............. $   0.49  $   0.63  $   0.85
  Extraordinary item............................      --        --      (0.02)
                                                 --------  --------  --------
  Net income per share--diluted................. $   0.49  $   0.63  $   0.83
                                                 ========  ========  ========
</TABLE>



                            See accompanying notes.

                                       26
<PAGE>

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                  Class  Class
                                    A      B    Additional
                                  Common Common  Paid-in   Retained
                                  Stock  Stock   Capital   Earnings   Total
                                  ------ ------ ---------- --------  --------
<S>                               <C>    <C>    <C>        <C>       <C>
Balance at January 3, 1998.......  $168   $21    $139,140  $26,501   $165,830
Net income and comprehensive
 income..........................   --    --          --    16,696     16,696
Stock issued for acquisition.....    44   --       75,394      --      75,438
Exercise of stock options........   --    --          544      --         544
Tax effect of stock options
 exercised.......................   --    --          828      --         828
Retirement of common stock.......   --    --          --      (562)      (562)
                                   ----   ---    --------  -------   --------
Balance at January 2, 1999.......   212    21     215,906   42,635    258,774
Net income and comprehensive
 income..........................   --    --          --    14,715     14,715
Exercise of stock options........     2   --        1,919      --       1,921
Tax effect of stock options
 exercised.......................   --    --          787      --         787
Retirement of common stock.......   --    --          --      (245)      (245)
Repurchase of common stock.......    (8)  --       (4,992)     --      (5,000)
                                   ----   ---    --------  -------   --------
Balance at January 1, 2000.......   206    21     213,620   57,105    270,952
Net income and comprehensive
 income..........................   --    --          --    10,773     10,773
Exercise of stock options........   --    --           66      --          66
Repurchase of common stock.......    (9)  --       (4,590)     --      (4,599)
                                   ----   ---    --------  -------   --------
Balance at December 30, 2000.....  $197   $21    $209,096  $67,878   $277,192
                                   ====   ===    ========  =======   ========
</TABLE>




                            See accompanying notes.

                                       27
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

       Years ended December 30, 2000, January 1, 2000 and January 2, 1999

<TABLE>
<CAPTION>
                                                    2000      1999      1998
                                                  --------  --------  ---------
                                                        (in thousands)
<S>                                               <C>       <C>       <C>
Cash flows from operating activities:
 Net income.....................................  $ 10,773  $ 14,715  $  16,696
 Adjustments to reconcile net income to net cash
  provided by operating activities:
  Noncash interest expense......................       808       753        772
  Depreciation and amortization of property,
   plant and equipment..........................    37,210    38,912     30,220
  Amortization of goodwill......................     3,137     2,859        589
  Deferred income taxes.........................     7,752    10,756      3,463
  Writedown/disposal of assets..................      (206)      (25)       164
  Equity in loss of joint venture...............       226       --         --
  Other operating costs, net....................       --     (2,267)     5,347
  Extraordinary loss on extinguishment of debt..       --        --         659
 Changes in operating assets and liabilities,
  excluding effects of business acquired:
    Accounts receivable.........................   (11,351)   17,209     13,704
    Inventories.................................   (31,927)    3,399    (27,391)
    Prepaid expenses and other assets...........    (2,712)     (187)    (1,291)
    Accounts payable and accrued expenses.......    (8,974)  (16,557)   (32,653)
    Other liabilities...........................      (255)    1,334       (374)
                                                  --------  --------  ---------
      Net cash provided by operating
       activities...............................     4,481    70,901      9,905
                                                  --------  --------  ---------
Cash flows from investing activities:
 Capital expenditures...........................   (33,743)  (36,729)   (39,454)
 Proceeds from sale of assets...................       481     7,801      2,803
 Acquisition of business........................   (15,424)      --    (164,605)
 Investment in joint ventures...................    (3,762)      --         --
                                                  --------  --------  ---------
      Net cash used by investing activities.....   (52,448)  (28,928)  (201,256)
                                                  --------  --------  ---------
Cash flows from financing activities:
 Payments of long-term debt.....................   (22,424)   (2,327)   (41,054)
 Net proceeds from issuance of long-term debt...    16,045       --     207,458
 Net borrowings (payments)--working capital
  facility......................................    60,500   (37,000)    26,000
 Proceeds from exercise of stock options........        36     1,082        544
 Repurchase of common stock.....................    (4,599)   (5,000)       --
                                                  --------  --------  ---------
      Net cash provided (used) by financing
       activities...............................    49,558   (43,245)   192,948
                                                  --------  --------  ---------
Net increase (decrease) in cash and cash
 equivalents....................................     1,591    (1,272)     1,597
Cash and cash equivalents at beginning of year..     2,084     3,356      1,759
                                                  --------  --------  ---------
Cash and cash equivalents at end of year........  $  3,675  $  2,084  $   3,356
                                                  ========  ========  =========
</TABLE>

                            See accompanying notes.

                                       28
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

             December 30, 2000, January 1, 2000 and January 2, 1999

NOTE 1. Significant Accounting Policies and Other Matters

Basis of presentation

  The consolidated financial statements include the accounts of Dan River Inc.
and its wholly owned subsidiaries (collectively, the "Company"). All
significant intercompany items have been eliminated in consolidation. The
Company's investment in Zadar, S. de R.L. de C.V., a joint venture, is
accounted for by the equity method.

Fiscal year

  The Company's fiscal year ends on the Saturday nearest to December 31. All
references to fiscal 2000, 1999 and 1998 mean the 52 weeks ended December 30,
2000, January 1, 2000 and January 2, 1999, 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.

Inventories

  Inventories are stated at the lower of cost or market, with cost determined
under the first-in, first-out method. Inventories at December 30, 2000 and
January 1, 2000, respectively, by component are as follows:

<TABLE>
<CAPTION>
                                                                 2000     1999
                                                               -------- --------
                                                                (in thousands)
     <S>                                                       <C>      <C>
     Finished goods........................................... $ 78,597 $ 55,710
     Work in process..........................................  110,591   92,707
     Raw materials............................................    3,215    8,475
     Supplies.................................................   13,824   11,595
                                                               -------- --------
     Total inventories........................................ $206,227 $168,487
                                                               ======== ========
</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.

Goodwill

  Goodwill represents the excess of the purchase price over the fair value of
net assets acquired in connection with the acquisitions of The Bibb Company on
October 14, 1998 and Import Specialists, Inc. on April 3, 2000 (Note 2).
Goodwill is being amortized on the straight-line method over forty years for
the Bibb

                                       29
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

acquisition and over 20 years for the Import Specialists acquisition.
Accumulated amortization at December 30, 2000 and January 1, 2000 was
$6,585,000 and $3,448,000, respectively. Goodwill is reviewed for impairment
whenever events or circumstances indicate that the carrying amount may not be
recoverable. The Company evaluates the recoverability of goodwill by comparing
its carrying amount to estimated future undiscounted cash flows. The Company
believes that no material impairment of goodwill existed at December 30, 2000.

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, at which time sales are final.

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.

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 December 30, 2000 were not material.

Recent accounting pronouncements

  In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This standard,
as amended by SFAS No. 138, requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. Under SFAS No.
133, gains or losses resulting from changes in the values of derivatives are to
be reported in the statement of income or as a deferred item, depending on the
use of the derivatives and whether they qualify for hedge accounting. The
Company is required to adopt SFAS No. 133 in the first quarter of fiscal 2001.
Due to the Company's minimal use of derivatives, adoption of the new standard
will not have a significant effect on the Company's financial position or
results of operations.

NOTE 2. Acquisitions

  On April 3, 2000, the Company acquired substantially all of the assets of
Import Specialists, Inc. ("ISI") for $15,424,000 in cash, and the assumption of
certain operating liabilities. The assets acquired consisted

                                       30
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

principally of receivables and inventory. The acquisition was funded with
borrowings under our working capital line of credit. ISI was an importer of
home textile products, including natural fiber doormats and bootscrapers,
throws, area and accent rugs, and decorative pillows. The operations have been
incorporated into the home fashions division as the "Import Specialty Products
Group." The acquisition has been accounted for as a purchase and the results of
operations of the acquired business have been included in the consolidated
financial statements since the date of acquisition. The allocation of the
purchase price of ISI to the assets acquired resulted in goodwill of $7,764,000
being recorded.

  On October 14, 1998, the Company acquired all of the capital stock of The
Bibb Company ("Bibb") for $86,497,000 in cash, including transaction costs, and
the issuance of approximately 4,257,000 shares of the Company's Class A common
stock. In connection with the acquisition, the Company also retired $78,612,000
of Bibb indebtedness, and paid $2,025,000 in cash and issued 104,000 shares of
Class A common stock in cancellation of nonqualified Bibb stock options. The
cash portion of the acquisition was funded at closing from borrowings under a
new credit agreement (Note 4). Bibb was a manufacturer and marketer of:
consumer products for the home, principally sheets, bedding and bedding
accessories; textile products for the hospitality and healthcare industries;
and specialty engineered textile products used in making high-pressure hoses
and other industrial products.

  The acquisition of Bibb has been accounted for as a purchase, and the results
of operations of the acquired business have been included in the consolidated
financial statements since the date of acquisition. Assets acquired and
liabilities assumed have been recorded at their estimated fair values. A
summary of the assets acquired, liabilities assumed and consideration paid
follows:

<TABLE>
<CAPTION>
                                                                  (in thousands)
   <S>                                                            <C>
   Accounts receivable...........................................    $ 37,230
   Inventories...................................................      52,279
   Other current assets..........................................      20,805
   Property, plant and equipment.................................      84,605
   Goodwill......................................................     113,832
   Other assets..................................................      10,636
   Accounts payable..............................................     (35,054)
   Other current liabilities.....................................     (28,629)
   Noncurrent liabilities........................................     (15,661)
                                                                     --------
   Total.........................................................     240,043
   Issuance of 4,361 shares of Class A common stock..............     (75,438)
                                                                     --------
   Cash paid, net of $2,529 in cash acquired.....................    $164,605
                                                                     ========
</TABLE>

NOTE 3. Shareholders' Equity

  All Class B common stock outstanding as of December 30, 2000 is held by
certain members of the Company's senior management (and certain of their family
members). With limited exceptions, owners of Class B common stock are entitled
to 4.39 votes per share on matters brought before the Company's shareholders,
whereas owners of Class A common stock are entitled to one vote per share.

  The Company has the option until September 2001 to purchase the common shares
held 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.

                                       31
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  In August 1999, the Board of Directors approved a share repurchase program
authorizing the Company to utilize up to $10,000,000 to repurchase shares of
Class A common stock. Shares repurchased pursuant to this program are retired
and constitute authorized but unissued shares. As of December 30, 2000 the
Company had repurchased 1,631,144 shares for $9,599,000. No further repurchases
are permitted under our credit facility.

NOTE 4. Long-Term Debt

  Long-term debt at December 30, 2000 and January 1, 2000, consists of the
following:

<TABLE>
<CAPTION>
                                                                2000     1999
                                                              -------- --------
                                                               (in thousands)
   <S>                                                        <C>      <C>
   Senior subordinated notes................................. $120,000 $120,000
   Working capital facility..................................  115,000   54,500
   Term loan.................................................  117,910  125,000
   Capital leases............................................    8,880   11,029
   Other borrowings with various rates and maturities........    7,481    4,255
                                                              -------- --------
                                                               369,271  314,784
   Less current maturities...................................   25,872   22,368
                                                              -------- --------
   Total long-term debt...................................... $343,399 $292,416
                                                              ======== ========
</TABLE>

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

  On October 14, 1998, in order to finance the Bibb acquisition, we replaced
our $90 million revolving credit facility with a new $275 million credit
facility. Under the original terms, this credit facility consisted of a $125
million amortizing term loan, and a $150 million non-amortizing revolving
working capital credit line.

  The credit facility was amended during fiscal 2000 to permit our planned
joint ventures in Mexico and to add $12,900,000 of new debt to the term loan.
In February 2001, a subsequent amendment modified the interest coverage and
leverage covenants for the fourth quarter of fiscal 2000 and subsequent fiscal
quarters and increased the interest rate on all loans by 100 basis points. The
amendment also places restrictions on the permitted investment in non-guarantor
subsidiaries, capital expenditures, repurchase of capital stock, and payment of
dividends. In addition to the existing security provided by our inventories and
accounts receivable, we have further secured the credit facility with our real
and personal property. In connection with these amendments, we incurred fees of
$1,184,300.

  At December 30, 2000, the weighted average interest rate of the borrowings
under the working capital facility was 8.23%. The Company pays a commitment fee
on the unused portion of the $150,000,000 working capital line of credit. The
working capital facility also provides for the issuance of letters of credit up
to $10,000,000 outstanding of which $1,299,000 was outstanding at December 30,
2000.

  The weighted average interest rate of the borrowings under the $117,910,000
term loan facility outstanding at December 30, 2000 was 8.10%. Scheduled
principal payments by fiscal year are: 2001, $23,000,000; 2002, $40,000,000;
2003, $54,910,000. The final payment is due September 30, 2003.

  The credit facility and the Notes contain certain restrictive covenants
which, among other things, require the Company to meet earnings ratios, impose
limitation on debt incurrence and restrict certain payments, including capital
expenditures, dividends and payments for the repurchase of capital stock. At
December 30, 2000, $62,878,000 of the Company's retained earnings was so
restricted.

                                       32
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The Company entered into interest rate swap agreements in fiscal 1999 to
manage its exposure to interest rate changes. The swaps involve the exchange of
fixed and variable interest rate payments without exchanging the notional
principal amount. At January 1, 2000, the Company had outstanding interest rate
swap agreements maturing in the first quarter of 2000 against existing
outstanding debt of $65,000,000. There were no interest rate swaps implemented
in fiscal 2000.

  In fiscal 1998 the early retirement of debt obligations with proceeds from
the credit facility resulted in an extraordinary loss of $659,000 less related
income taxes of $254,000.

  The aggregate annual scheduled principal repayments of long-term debt for
2001, 2002, 2003, 2004 and 2005 are $25,872,000, $41,375,000, $291,230,000
(which includes $115,000,000 under the working capital facility and
$120,000,000 under the Notes), $2,243,000 and $3,122,000 respectively.

  Cash payments of interest on debt were $30,912,000, $28,706,000 and
$15,199,000 in fiscal 2000, 1999 and 1998, respectively.

NOTE 5. Income Taxes

  The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
                                                         2000   1999     1998
                                                        ------ -------  -------
                                                            (in thousands)
   <S>                                                  <C>    <C>      <C>
   Current:
     Federal........................................... $  426 $(2,336) $ 5,770
     State.............................................     50    (793)   1,765
                                                        ------ -------  -------
                                                           476  (3,129)   7,535
                                                        ------ -------  -------
   Deferred:
     Federal...........................................  6,787   9,484    3,568
     State.............................................    965   1,900     (105)
                                                        ------ -------  -------
                                                         7,752  11,384    3,463
                                                        ------ -------  -------
   Provision for income taxes.......................... $8,228 $ 8,255  $10,998
                                                        ====== =======  =======
</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>
                                                         2000    1999    1998
                                                        ------  ------  -------
                                                           (in thousands)
   <S>                                                  <C>     <C>     <C>
   Amount computed using the statutory rate............ $6,650  $8,040  $ 9,835
   Increase (decrease) in taxes resulting from:
     State taxes.......................................    660     719    1,079
     Amortization of goodwill..........................    996   1,001      206
     Donation of real estate...........................    --   (1,400)     --
     Other, net........................................    (78)   (105)    (122)
                                                        ------  ------  -------
   Provision for income taxes.......................... $8,228  $8,255  $10,998
                                                        ======  ======  =======
</TABLE>

                                       33
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  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 December 30, 2000 and
January 1, 2000 are as follows:

<TABLE>
<CAPTION>
                                                              2000     1999
                                                            --------  -------
                                                             (in thousands)
   <S>                                                      <C>       <C>
   Deferred tax assets:
     Net operating loss and credit carryforwards........... $ 14,299  $18,944
     Accrued compensation and benefits.....................    7,708    7,856
     Inventory valuation and reserves......................    8,163    4,924
     Accounts receivable allowances........................    2,044    1,779
     Other nondeductible reserves and accruals.............    1,742    3,598
     Other.................................................    1,558    1,724
                                                            --------  -------
       Total deferred tax assets...........................   35,514   38,825
                                                            --------  -------
   Deferred tax liabilities:
     Book carrying value in excess of tax basis of
      property, plant and equipment........................   42,570   38,696
     Other.................................................    4,871    4,303
                                                            --------  -------
       Total deferred tax liabilities......................   47,441   42,999
                                                            --------  -------
       Net deferred tax liability.......................... $(11,927) $(4,174)
                                                            ========  =======
</TABLE>

  At December 30, 2000 the Company had available federal net operating loss
carryforwards of $14,800,000 which may be used to offset future taxable income.
These carryforwards expire beginning in fiscal 2017. In addition, the Company
had available a minimum tax credit carryforward of $8,700,000 which may be used
to reduce future federal regular income taxes over an indefinite period.

  Most of the net operating loss carryforwards were generated by The Bibb
Company prior to its acquisition by the Company in fiscal 1998 (Note 2), and
the related tax benefit has been credited to goodwill. Because the acquisition
constituted a "change in ownership" under Section 382 of the Internal Revenue
Code, the annual utilization of these carryforwards is subject to certain
restrictions. However, such restrictions are not expected to cause any of the
carryforwards to expire.

  The federal income tax returns of the Company for fiscal 1996 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 fiscal 1996
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 received $429,000 and $260,000 in income tax refunds during
fiscal 2000 and 1999, respectively, and made income tax payments of $6,200,000
during fiscal 1998.

                                       34
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 6. Benefit Plans

Retirement plans

  The Company sponsors qualified noncontributory defined benefit pension plans
that cover the majority of its full-time employees. The following tables set
forth the changes in benefit obligations and plan assets of the plans for
fiscal 2000 and 1999, and the funded status of the plans as of December 30,
2000 and January 1, 2000.

<TABLE>
<CAPTION>
                                                              2000     1999
                                                             -------  -------
                                                             (in thousands)
   <S>                                                       <C>      <C>
   Change in benefit obligations:
     Benefit obligations at beginning of year............... $33,536  $34,641
     Service cost...........................................   2,148    2,449
     Interest cost..........................................   2,827    2,567
     Actuarial loss (gain)..................................   1,642   (4,553)
     Benefits paid..........................................  (1,735)  (1,568)
                                                             -------  -------
     Benefit obligations at end of year.....................  38,418   33,536
                                                             -------  -------
   Change in plan assets:
     Fair value of plan assets at beginning of year.........  37,246   33,175
     Actual return on plan assets...........................   1,360    4,032
     Company contributions..................................   2,409    1,607
     Benefits paid..........................................  (1,735)  (1,568)
                                                             -------  -------
     Plan assets at end of year.............................  39,280   37,246
                                                             -------  -------
   Funded status............................................     862    3,710
   Unrecognized actuarial loss..............................  (1,607)  (5,640)
   Unrecognized prior service cost..........................      (6)      (5)
                                                             -------  -------
   Net amount recognized at end of year..................... $  (751) $(1,935)
                                                             =======  =======
   Amounts recognized in the consolidated statement of
    financial position consist of:
     Prepaid pension cost................................... $ 1,014  $   935
     Accrued pension cost...................................  (1,765)  (2,870)
                                                             -------  -------
     Net amount recognized at end of year................... $  (751) $(1,935)
                                                             =======  =======
</TABLE>

  The projected benefit obligations and fair value of plan assets for the
pension plans with projected benefit obligations in excess of plan assets were
$15,625,000 and $14,202,000, respectively, as of December 30, 2000; and
$13,479,000 and $13,122,000, respectively, as of January 1, 2000.

  Weighted average assumptions used in measuring benefit obligations as of
year-end are as follows:

<TABLE>
<CAPTION>
                                                                       2000 1999
                                                                       ---- ----
     <S>                                                               <C>  <C>
     Discount rate.................................................... 7.7% 8.0%
     Expected return on plan assets................................... 9.5% 9.5%
     Rate of compensation increase.................................... 4.0% 5.0%
</TABLE>

                                       35
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Net periodic benefit cost included the following components:

<TABLE>
<CAPTION>
                                                          2000    1999    1998
                                                         ------  ------  ------
                                                            (in thousands)
   <S>                                                   <C>     <C>     <C>
   Service cost......................................... $2,148  $2,449  $1,787
   Interest cost........................................  2,827   2,567   1,829
   Expected return on assets............................ (3,569) (3,170) (2,214)
   Actuarial gain.......................................   (181)    --      --
                                                         ------  ------  ------
   Net periodic benefit cost............................ $1,225  $1,846  $1,402
                                                         ======  ======  ======
</TABLE>

  The Company also sponsors 401(k) plans for salary paid employees and certain
hourly paid employees not covered under defined benefit plans. Company matching
contributions amounted to $694,000, $557,000 and $292,000, respectively, for
fiscal 2000, 1999 and 1998.

Supplemental retirement plan

  The Company maintains 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 benefit
obligations of $2,388,000 and $2,492,000 at December 30, 2000 and January 1,
2000, 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

  The Company maintains stock incentive plans adopted in fiscal 1997 and fiscal
2000 that allow for the grant of stock options, restricted stock, stock
appreciation rights and other stock-based awards to key employees and non-
employee directors. Through fiscal 2000 all grants pursuant to these plans were
for nonqualified options to purchase Class A common stock at a price equal to
the fair market value of the stock on the date of grant. The options generally
vest ratably over periods ranging from three to four years, and expire at the
end of 10 years. As of December 30, 2000, 1,493,900 shares were available for
future grants under the fiscal 2000 plan. No further grants are permitted under
the fiscal 1997 plans.

  The Company also maintains a nonqualified stock option plan pursuant to which
options to purchase Class A common stock were granted prior to fiscal 1997. All
options to purchase unissued shares granted under this plan have an exercise
price of $6.85 per share, generally vested 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 either exercised or forfeited by December 31, 1999.

  In connection with the acquisition of Bibb (Note 2), outstanding incentive
stock options ("ISO's") held by Bibb employees were converted into fully vested
and exercisable options to purchase Class A common stock of the Company. The
ISO's expire in 2007.

                                       36
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The Company has applied APB 25 in accounting for stock options and,
accordingly, no compensation expense has been recorded in fiscal 2000, 1999 or
1998. If the Company had determined compensation expense based on 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>
                                                          2000    1999    1998
                                                         ------- ------- -------
                                                          (in thousands, except
                                                             per share data)
   <S>                                                   <C>     <C>     <C>
   Net income:
     As reported........................................ $10,773 $14,715 $16,696
     Pro forma..........................................   9,631  13,817  16,033
   Per share:
     As reported--
       Basic............................................    0.49    0.64    0.84
       Diluted..........................................    0.49    0.63    0.83
     Pro forma--
       Basic............................................    0.44    0.60    0.81
       Diluted..........................................    0.44    0.59    0.80
</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
fiscal 1994. The weighted average fair value of options granted in fiscal 2000,
1999 and 1998, was estimated to be $2.81, $2.62 and $3.82, respectively. The
fair value of each option grant was estimated on the date of grant using a
Black-Scholes option pricing model, assuming no expected dividends.

  The following weighted average assumptions were used in the valuation of
options:

<TABLE>
<CAPTION>
                                                            2000   1999   1998
                                                            -----  -----  -----
   <S>                                                      <C>    <C>    <C>
   Expected option life in years...........................   6.0    6.0    6.0
   Risk-free interest rate.................................  6.51%  6.13%  4.73%
   Expected stock price volatility......................... 50.00% 40.00% 37.00%
</TABLE>

                                       37
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following is a summary of stock option activity:

<TABLE>
<CAPTION>
                                                          Options Exercisable
                               Options Exercisable         Against Principal
                             Against Unissued Shares           Shareholder
                             ---------------------------  ---------------------
                                            Weighted --             Weighted --
                                              Average      Number     Average
                             Number of        Exercise       of      Exercise
                               Shares          Price       Shares      Price
                             -------------  ------------  --------  -----------
<S>                          <C>            <C>           <C>       <C>
Outstanding at January 3,
 1998......................      1,182,450    $    10.98   399,500     $0.57
Conversion of Bibb ISO's...        347,586          5.46       --        --
Granted....................        502,500          8.66       --        --
Exercised..................        (63,799)         6.08  (178,450)     0.57
Forfeited..................         (3,500)        15.00       --        --
                             -------------    ----------  --------     -----
Outstanding at January 2,
 1999......................      1,965,237          9.56   221,050      0.57
Granted....................        521,100          5.37       --        --
Exercised..................       (197,492)         5.51  (221,050)     0.57
Forfeited..................       (102,103)         8.09       --        --
                             -------------    ----------  --------     -----
Outstanding at January 1,
 2000......................      2,186,742          9.00       --        --
Granted....................        525,600          5.02       --        --
Exercised..................         (6,644)         5.46       --        --
Forfeited..................        (64,261)         7.48       --        --
                             -------------    ----------  --------     -----
Outstanding at December 30,
 2000......................      2,641,437    $     8.26       --      $  --
                             =============    ==========  ========     =====
Options exercisable at
 January 2, 1999...........        758,986    $     6.38   221,050     $0.57
                             =============    ==========  ========     =====
Options exercisable at
 January 1, 2000...........        964,934    $     8.66       --      $ --
                             =============    ==========  ========     =====
Options exercisable at
 December 30, 2000.........        919,843    $     8.70       --      $ --
                             =============    ==========  ========     =====
</TABLE>

  A summary of stock options outstanding against unissued shares at December
30, 2000 follows:

<TABLE>
<CAPTION>
                                 Options outstanding        Options exercisable
                          --------------------------------- --------------------
                                        Weighted   Weighted             Weighted
                                        average    average              average
Range of                    Number     remaining   exercise   Number    exercise
exercise prices           Outstanding life (years)  price   exercisable  price
---------------           ----------- ------------ -------- ----------- --------
<S>                       <C>         <C>          <C>      <C>         <C>
$2.19 -- $6.85...........  1,609,487      6.3       $ 5.75    607,037    $ 6.66
$7.19 -- $9.81...........    446,625      7.9       $ 8.36    114,364    $ 8.38
$15.00 -- $20.13.........    585,325      6.9       $15.09    198,442    $15.10
</TABLE>

NOTE 7. Other Operating Costs, Net

  Other operating costs, net for fiscal 1999 includes a $1,764,000 pre-tax gain
from reversal of reserves established in fiscal 1997 in connection with the
closure of the Company's Riverside apparel fabrics weaving facilities in
Danville, Virginia. During fiscal 1999 the Company donated the Long Mill, one
of two mill complexes which make up the Riverside facilities, to a local
nonprofit historical organization for future renovation and development into a
multi-use retail and residential facility. At the time of the donation,
$1,662,000 remained of a $3,106,000 reserve that was established in fiscal 1997
for the estimated cost of demolishing the mill buildings and related costs. Due
to the donation of the Long Mill, it is no longer anticipated that the
remaining Riverside property will be demolished. Accordingly, the Company
reversed the remaining reserve. In fiscal 1999, the Company also reversed
$102,000 of the reserve established in fiscal 1997 for severance and benefit
costs associated with Riverside closure, due to lower-than-anticipated actual
costs.

                                       38
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company could potentially be reimbursed by the developer of the Long Mill
property for $1,200,000 of demolition and related costs that the Company
incurred before the donation. Under the Company's agreement with the developer,
such reimbursement will only occur if the developer begins receiving revenues
from the development of the Riverside property, will not commence until at
least 2004, and will be paid in installments of $10,000 per month.

  Other operating costs, net for fiscal 1999 also includes a $503,000 pre-tax
gain from reversal of a portion of the loss recorded in fiscal 1998 for closure
of the Company's apparel fabrics weaving facility in Spindale, North Carolina.
Included in this amount is a $467,000 gain caused by better-than-anticipated
proceeds on the sale of equipment that was written down in connection with the
plant closure. The remainder of the gain ($36,000) is from reversal of a
portion of the reserve established for severance and benefit costs.

  Other operating costs, net for fiscal 1998 included a $5,747,000 charge
resulting from the Company's decision to close its apparel fabrics weaving
facility in Spindale, North Carolina, and a $400,000 gain from the early
termination of a lease. The charge for the Spindale facility closure included a
$5,446,000 non-cash write-down of assets, and $301,000 for estimated severance
and other benefits associated with the termination of approximately 130
employees. By the end of January 1999, all production at the facility had
ceased. The payout of severance and benefit costs to terminated employees was
completed by the end of fiscal 1999.

  At December 30, 2000, $570,000 remained in a reserve established in fiscal
1995 for removal of asbestos and equipment from an idle building which is
located in the same historic district as the Riverside facilities discussed
above. Work on this project was suspended for a period of time while the
Virginia Department of Transportation considered various sites for relocating a
bridge, one of which would have resulted in the condemnation of the property.
The asbestos and equipment removal is currently on hold pending other decisions
concerning the historic district.

  Following is a summary of the reserve account activity during the three
fiscal years ended December 30, 2000 related to Other Operating Costs, Net:

<TABLE>
<CAPTION>
                                                           2000  1999     1998
                                                           ---- -------  ------
                                                             (in thousands)
   <S>                                                     <C>  <C>      <C>
   Balance at beginning of year........................... $570 $ 3,609  $3,933
   Expense accrued........................................  --      --      301
   Expenditures...........................................  --   (1,239)   (625)
   Change in estimate.....................................  --   (1,800)    --
                                                           ---- -------  ------
   Balance at end of year................................. $570 $   570  $3,609
                                                           ==== =======  ======
</TABLE>

                                       39
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 8. Earnings Per Share

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

<TABLE>
<CAPTION>
                                                  2000       1999       1998
                                               ---------- ---------- ----------
                                                (in thousands except per share
                                                            data)
<S>                                            <C>        <C>        <C>
Numerator for basic and diluted earnings per
 share--income before extraordinary item...... $   10,773 $   14,715 $   17,101
                                               ========== ========== ==========
Denominator:
  Denominator for basic earnings per share--
   weighted-average shares.................... 22,023,830 23,145,636 19,802,684
  Effect of dilutive securities:
  Employee stock options......................        --      90,234    232,632
                                               ---------- ---------- ----------
  Denominator for diluted earnings per share--
   weighted average shares adjusted for
   dilutive securities........................ 22,023,830 23,235,870 20,035,316
                                               ========== ========== ==========
Basic earnings per share...................... $     0.49 $     0.64 $     0.86
                                               ========== ========== ==========
Diluted earnings per share.................... $     0.49 $     0.63 $     0.85
                                               ========== ========== ==========
</TABLE>

NOTE 9. Leases

  The Company leases certain manufacturing equipment, warehouses and office
facilities under operating leases that expire at various dates through 2014.
Rental expense for fiscal 2000, 1999 and 1998 amounted to approximately
$7,806,000, $8,344,000 and $7,730,000, respectively, net of rental income on
noncancelable leases and subleases of approximately $992,000, $1,021,000 and
$252,000, respectively.

  The Company also leases certain manufacturing equipment and a manufacturing
facility under arrangements treated as capital leases. The manufacturing
equipment leases expire at various dates through 2005, and the manufacturing
facility lease expires in 2018.

  Assets under capital leases included in property, plant and equipment at
December 30, 2000 and January 1, 2000 are as follows:

<TABLE>
<CAPTION>
                                                                 2000    1999
                                                                ------- -------
                                                                (in thousands)
   <S>                                                          <C>     <C>
   Land........................................................ $   609 $   609
   Buildings and improvements..................................   2,281   2,281
   Machinery and equipment.....................................  14,820  14,820
                                                                ------- -------
                                                                 17,710  17,710
   Less accumulated depreciation...............................   3,349   1,908
                                                                ------- -------
   Net assets under capital leases............................. $14,361 $15,802
                                                                ======= =======
</TABLE>

                                       40
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The future minimum lease payments due under leases that have initial or
remaining noncancelable lease terms in excess of one year at December 30, 2000,
are as follows:

<TABLE>
<CAPTION>
                                                               Capital Operating
                                                               Leases   Leases
                                                               ------- ---------
                                                                (in thousands)
   <S>                                                         <C>     <C>
   2001....................................................... $ 3,169  $ 5,638
   2002.......................................................   1,482    4,864
   2003.......................................................   1,321    4,402
   2004.......................................................   2,131    4,151
   2005.......................................................   2,645    3,152
   Later......................................................     195   14,894
                                                               -------  -------
   Total minimum lease payments...............................  10,943  $37,101
                                                                        =======
   Less: amount representing interest.........................   2,063
                                                               -------
   Present value of minimum lease payments.................... $ 8,880
                                                               =======
</TABLE>

NOTE 10. Contingencies

  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.

NOTE 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 December 30, 2000,
January 1, 2000 or January 2, 1999. See Note 1 for information on the Company's
accounting policy with respect to cotton futures and option contracts.

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 $93,600,000 and $120,000,000 at December 30, 2000
and January 1, 2000, 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 December
30, 2000 and January 1, 2000.

                                       41
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


NOTE 12. Segment Information

  The Company operates in three major segments within the textile industry:
home fashions, apparel fabrics, and engineered products. Each segment has a
separate management team, and although certain aspects of the manufacturing
process are similar, each segment can be differentiated by the products it
sells and the nature of its customers. Home fashions products consist mostly of
packaged bedroom furnishings, which are sold to domestic retailers, and bedding
products for the hospitality and healthcare industries. Apparel fabrics
products include a broad range of woven cotton and cotton-blend fabrics, and
are distributed primarily to clothing manufacturers. The Company began
operating the engineered products business upon completing the acquisition of
Bibb on October 14, 1998. The engineered products segment produces specially-
treated engineered yarns and fabrics for industrial uses, including high-
pressure hoses and conveyer belts, which are sold primarily to automobile and
tire manufacturers.

  The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates the performance of each segment based on
operating income excluding: amortization of goodwill; plant closure charges and
other one-time items reflected on the Consolidated Statements of Income as
"Other Operating Costs, Net"; depreciation on the write-up of the Company's
fixed assets from when it was acquired in 1989; and certain other items, such
as idle facility costs. Assets attributable to the Company's operating segments
consist primarily of: accounts receivable; inventories; and property plant and
equipment, including an allocable share of shared facilities and corporate
headquarters assets. Assets not attributable to segments include: cash;
miscellaneous receivables; certain inventories of raw materials; prepaid
expenses and other current assets; deferred income taxes; book value
attributable to the write-up of the Company's fixed assets from when it was
acquired in 1989; goodwill; and other noncurrent assets.

                                       42
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Summarized information by reportable segment is shown in the following table:

<TABLE>
<CAPTION>
                                                    2000      1999      1998
                                                  --------  --------  --------
                                                        (In thousands)
<S>                                               <C>       <C>       <C>
Net sales
  Home fashions.................................. $469,758  $431,828  $321,807
  Apparel fabrics................................  143,639   150,401   186,491
  Engineered products............................   50,070    46,670     9,145
                                                  --------  --------  --------
  Consolidated net sales......................... $663,467  $628,899  $517,443
                                                  ========  ========  ========
Operating income
  Home fashions.................................. $ 43,344  $ 50,878  $ 33,848
  Apparel fabrics................................   10,930     4,358    23,656
  Engineered products............................    2,341     2,725       169
  Corporate items not allocated to segments:
    Amortization of goodwill.....................   (3,137)   (2,859)     (589)
    Other operating costs, net...................      --      2,267    (5,347)
    Depreciation.................................      154    (5,162)   (4,822)
    Other........................................   (1,700)   (1,424)     (437)
                                                  --------  --------  --------
    Consolidated operating income................ $ 51,932  $ 50,783  $ 46,478
                                                  ========  ========  ========
Depreciation and amortization of property, plant
 and equipment
  Home fashions.................................. $ 23,571  $ 20,358  $ 12,150
  Apparel fabrics................................   12,594    12,401    13,137
  Engineered products............................    1,199       991       111
  Corporate depreciation not allocated to
   segments......................................     (154)    5,162     4,822
                                                  --------  --------  --------
  Consolidated depreciation and amortization of
   property, plant and equipment................. $ 37,210  $ 38,912  $ 30,220
                                                  ========  ========  ========
Capital expenditures
  Home fashions.................................. $ 27,837  $ 25,723  $ 26,444
  Apparel fabrics................................    4,584    10,637    12,910
  Engineered products............................    1,322       369       100
                                                  --------  --------  --------
  Consolidated capital expenditures in cash...... $ 33,743  $ 36,729  $ 39,454
                                                  ========  ========  ========
Assets at end of year
  Home fashions.................................. $425,704  $368,956  $385,040
  Apparel fabrics................................  123,605   138,540   149,813
  Engineered products............................   21,957    21,226    12,849
  Corporate assets not allocated to segments:....  174,207   155,860   172,508
                                                  --------  --------  --------
  Consolidated assets............................ $745,473  $684,582  $720,210
                                                  ========  ========  ========
</TABLE>

  In fiscal years 2000, 1999 and 1998, sales to one customer, principally by
the home fashions segment, accounted for approximately 12%, 13% and 15%,
respectively, of consolidated net sales. In fiscal 2000 sales to another
customer, solely by the home fashions segment, accounted for approximately 12%
of net sales. Sales to customers outside of the United States amounted to less
than 4% of consolidated net sales in fiscal 2000, 1999 and 1998. Assets located
outside of the United States are not significant.


                                       43
<PAGE>

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

NOTE 13. Quarterly Financial Data (unaudited)

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

<TABLE>
<CAPTION>
                                               Year ended December 30, 2000
                                            -----------------------------------
                                             First    Second   Third    Fourth
                                            Quarter  Quarter  Quarter  Quarter
                                            -------- -------- -------- --------
<S>                                         <C>      <C>      <C>      <C>
Net sales.................................. $164,949 $157,232 $175,458 $165,828
Gross Profit...............................   30,898   31,854   36,299   23,353
Net income (loss)..........................    4,073    2,959    5,993   (2,252)
Per share:
  Net income (loss) --
    Basic..................................     0.18     0.13     0.28    (0.10)
    Diluted................................     0.18     0.13     0.28    (0.10)
<CAPTION>
                                                Year ended January 1, 2000
                                            -----------------------------------
                                             First    Second   Third    Fourth
                                            Quarter  Quarter  Quarter  Quarter
                                            -------- -------- -------- --------
<S>                                         <C>      <C>      <C>      <C>
Net sales.................................. $169,536 $154,104 $155,766 $149,493
Gross Profit...............................   27,895   28,847   32,765   26,415
Net income ................................    1,550    2,927    8,246    1,992
Per share:
  Net income --
    Basic..................................     0.07     0.13     0.36     0.09
    Diluted................................     0.07     0.12     0.36     0.09
</TABLE>

  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 third quarter of fiscal 1999 include; a tax benefit of
$1,524,000 from the charitable donation of the Company's Riverside Long Mill; a
pre-tax gain of $1,764,000 ($1,084,000 after tax, or $0.05 per share)
associated with reversal of reserves established in prior years for the
demolition of the Riverside property; and a pre-tax gain of $503,000 ($309,000
after tax, or $0.01 per share) due to better than anticipated recovery on
equipment written down in fiscal 1998 in connection with closure of the
Company's apparel fabrics weaving facility in Spindale, North Carolina.

NOTE 14. Subsequent Events

  On February 22, 2001, the Company and Grupo Industrial Zaga, S.A. de C.V.
("Zaga") entered into agreements to terminate their previously announced joint
ventures for the manufacture of textiles and apparel in Mexico. Pursuant to the
agreements, the Company acquired Zaga's interest in Zadar S. de R.L. de C.V.
("Zadar") through a $3,160,000 cash payment and, subject to certain
contingencies (discussed below), the transfer of the Company's interest in the
textile joint venture to Zaga. As a result, Zadar is now an indirect wholly
owned subsidiary of Dan River Inc. and will own and operate a shirt
manufacturing plant the parties have constructed in Jilotepec, State of Mexico.
The textile joint venture, Danza, was also terminated pursuant to the
agreement. However, the Company and Zaga each continue to own a 50% interest in
Danza pending the satisfaction of certain contingencies relating to a water
well being constructed at the Zadar location. If the well contingencies are
satisfied, the Company has agreed to transfer its interest in Danza to Zaga.
Danza's sole material asset is a parcel of land located in the State of
Hidalgo, Mexico which is valued at approximately $1,500,000. If the
contingencies are not satisfied, the Company expects that either Zaga will
purchase Dan River's interest in Danza, or the land will be sold and Danza
liquidated.

                                       44
<PAGE>

                         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 December 30, 2000 and January 1, 2000, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 30, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

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

  In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Dan River Inc. at
December 30, 2000 and January 1, 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 30, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

                                          /s/ Ernst & Young LLP

Greensboro, North Carolina
February 6, 2001
except for the third paragraph of note 4 and note 14, as to which the date is
February 22, 2001

                                       45
<PAGE>

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

  None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The sections under the heading "Election of Directors" entitled "What is the
background of this year's nominees?," "Who are the directors continuing in
office until 2002?," and "Who are the directors continuing in office until
2003?" in the Proxy Statement for the Annual Meeting of Shareholders to be held
April 19, 2001 are incorporated herein by reference for information on the
directors of the Registrant. See Item X in Part I hereof for information
regarding the executive officers of the Registrant.

ITEM 11. EXECUTIVE COMPENSATION

  The section under heading "Election of Directors" entitled "Compensation of
Directors" and the sections under the heading "Executive Compensation" entitled
"Summary Compensation Table," "Option Grants Table," "Aggregated Options Table"
and "Retirement Plans" in the Proxy Statement for the Annual Meeting of
Shareholders to be held April 19, 2001 are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Proxy Statement for the Annual Meeting of
Shareholders to be held April 19, 2001 is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information under the heading "Certain Relationships and Related
Transactions" in the Proxy Statement for the Annual Meeting of Shareholders to
be held April 19, 2001 is incorporated by reference.

                                       46
<PAGE>

                                    PART IV

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

 (a) 1. Financial Statements

  The following financial statements are filed under Item 8 of this Report:

  Consolidated Balance Sheets as of December 30, 2000 and January 1, 2000.

  Consolidated Statements of Income for the fiscal years ended December 30,
  2000, January 1, 2000 and January 2, 1999.

  Consolidated Statements of Shareholders' Equity for the fiscal years ended
  December 30, 2000, January 1, 2000 and January 2, 1999.

  Consolidated Statements of Cash Flows for the fiscal years ended December
  30, 2000, January 1, 2000 and January 2, 1999.

  Notes to Consolidated Financial Statements for the fiscal years ended
  December 30, 2000, January 1, 2000 and January 2, 1999.

  Report of Independent Auditors.

  2. The following Financial Statement Schedule is filed as part of this
  Report:

  Schedule II--Valuation and Qualifying Accounts

  All other schedules are omitted because they are not applicable or not
  required.

  3. Exhibits

  The exhibits listed on the accompanying Exhibit Index are filed as part of
  this Annual Report.

 (b) Reports on Form 8-K

  We filed a Report on Form 8-K dated October 12, 2000, in which we announced
an adjustment to inventory that, among other things, would reduce nine months
year-to-date pre-tax profits by $7.2 million ($4.4 million after-tax or $0.20
per share).

                                       47
<PAGE>

                                   SIGNATURES

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

                                          DAN RIVER INC.

                                                 /s/ Joseph L. Lanier, Jr.
                                          By: _________________________________
                                                   Joseph L. Lanier, Jr.
                                               Chairman and Chief Executive
                                                          Officer

                                          Date: March 9, 2001

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

<TABLE>
<S>                                    <C>                           <C>
       /s/ Donald J. Keller            Director                         March 9, 2001
______________________________________
           Donald J. Keller

    /s/ Joseph L. Lanier, Jr.          Chairman, Chief Executive        March 9, 2001
______________________________________  Officer and Director
        Joseph L. Lanier, Jr.           (Principal Executive
                                        Officer)

        /s/ Edward J. Lill             Director                         March 9, 2001
______________________________________
            Edward J. Lill

       /s/ John F. Maypole             Director                         March 9, 2001
______________________________________
           John F. Maypole

        /s/ Barry F. Shea              Executive Vice President--       March 9, 2001
______________________________________  Chief Financial Officer
            Barry F. Shea               (Principal Financial and
                                        Accounting Officer)

     /s/ Richard L. Williams           President and Chief              March 9, 2001
______________________________________  Operating Officer and
         Richard L. Williams            Director
</TABLE>


                                       48
<PAGE>

                                                                     SCHEDULE II

                                 DAN RIVER INC.

                       VALUATION AND QUALIFYING ACCOUNTS

       Years ended December 30, 2000, January 1, 2000 and January 2, 1999

<TABLE>
<CAPTION>
                                            Additions
                          Balance at -----------------------
                          Beginning  Charged to Costs                         Balance at
      Description          of Year     and Expenses   Other     Deductions(B) End of Year
      -----------         ---------- ---------------- ------    ------------- -----------
                                                 (in thousands)
<S>                       <C>        <C>              <C>       <C>           <C>
Allowance for
 uncollectible accounts,
 discounts and claims
 (deducted from accounts
 receivable):
Year Ended December 30,
 2000...................   $ 9,693       $21,651      $  316(A)    $17,649      $14,011
                           =======       =======      ======       =======      =======
Year Ended January 1,
 2000...................   $10,020       $15,761      $   --       $16,088      $ 9,693
                           =======       =======      ======       =======      =======
Year ended January 2,
 1999...................   $ 6,230       $11,980      $3,244(A)    $11,434      $10,020
                           =======       =======      ======       =======      =======
</TABLE>
--------
(A) Allowance related to receivables acquired through business combination.

(B) Includes writeoff of receivables (net of recoveries) and claims allowed.
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit                                                            Sequential
 Number                   Description of Exhibit                     Page No.
 -------                  ----------------------                    ----------
 <C>     <S>                                                        <C>
  2.1    Agreement and Plan of Merger, dated as of June 28, 1998,
          as amended August 14, 1998, by and between Dan River
          Inc. and The Bibb Company (incorporated by reference to
          Annex A to the Joint Proxy Statements/Prospectus
          forming a part of Registration Statement on Form S-4,
          Amendment No. 1 (File No. 333-58855))

  2.2    Second Amendment to Agreement and Plan of Merger, dated
          as of September 3, 1998, among Dan River Inc., DR
          Acquisition Corp. and The Bibb Company (incorporated by
          reference to Annex S-A to the Supplement to Joint Proxy
          Statement/Prospectus forming a part of Registration
          Statement on Form S-4, Post-Effective Amendment No. 1
          (File No. 333-58855))

  3.1    Amended and Restated Articles of Incorporation of Dan
          River Inc. (incorporated by reference to Exhibit 3.1 in
          Amendment No. 1 to Dan River's Registration Statement
          on Form S-1 (File No. 333-36479))

  3.2    Bylaws of Dan River Inc. (incorporated by reference to
          Exhibit 3.2 in Amendment No. 1 to Dan River's
          Registration Statement on Form S-1 (File No. 333-36479))

  4.1    Form of Indenture between Dan River Inc. and Marine
          Midland Bank, N.A., as Trustee (including Form of Note)
          (incorporated by reference to Exhibit 4.1 in Dan
          River's Annual Report on Form 10-K for the fiscal year
          ended January 1, 2000)

 10.1    Credit Agreement among Dan River Inc. and certain of its
          subsidiaries, the several lenders parties thereto and
          First Union National Bank as Agent dated as of October
          14, 1998 (incorporated by reference to Exhibit 10.1 in
          Dan River's Annual Report on Form 10-K for the fiscal
          year ended January 2, 1999)

 10.2    First Amendment to the Credit Agreement dated as of May
          21, 1999 to the Credit Agreement among Dan River Inc.
          and certain of its subsidiaries, the several lenders
          parties thereto and First Union National Bank as Agent
          dated as of October 14, 1998 (incorporated by reference
          to Exhibit 10 in Dan River's Quarterly Report on Form
          10-Q filed August 6, 1999)

 10.3    Second Amendment to the Credit Agreement dated as of
          December 29, 1999 to the Credit Agreement among Dan
          River Inc. and certain of its subsidiaries, the several
          lenders parties thereto and First Union National Bank
          as Agent dated as of October 14, 1998 (incorporated by
          reference to Exhibit 10.3 in Dan River's Annual Report
          on Form 10-K for the fiscal year ended January 1, 2000)

 10.4    Third Amendement to the Credit Agreement dated as of
          June 26, 2000 to the Credit Agreement among Dan River
          Inc. and certain of its subsidiaries, the several
          lenders parties thereto and First Union National Bank
          as Agent dated as of October 14, 1998 (incorporated by
          reference to Exhibit 10 in Dan River's Quarterly Report
          on Form 10-Q for the quarterly period ended July 1,
          2000)

 10.5*   Fourth Amendment to the Credit Agreement dated as of
          February 14, 2001 to the Credit Agreement among Dan
          River Inc. and certain of its subsidiaries, the several
          lenders parties thereto and First Union National Bank
          as Agent dated as of October 14, 1998

 10.6    Registration Rights Agreement, dated as of September 3,
          1991, among Dan River Inc. and the parties named
          therein (incorporated by reference to Exhibit 10.4 in
          Dan River's Registration Statement on Form S-1 (File
          No. 33-70442) filed on October 15, 1993)

</TABLE>

                                       1
<PAGE>

<TABLE>
<CAPTION>
 Exhibit                                                            Sequential
 Number                   Description of Exhibit                     Page No.
 -------                  ----------------------                    ----------
 <C>     <S>                                                        <C>
 10.7    Amendment to Registration Rights Agreement dated as of
          October 27, 1997, (incorporated by reference to Exhibit
          10.4.1 in Dan River's Annual Report on Form 10-K for
          the fiscal year ended January 3, 1998)

 10.8    Voting Agreement among Joseph L. Lanier, Jr., Richard L.
          Williams and Barry F. Shea and certain members of their
          families (incorporated by reference to Exhibit 10.5 in
          Amendment No. 2 to Dan River's Registration Statement
          on Form S-1 (File No. 333-36479))

 10.9    Amendment to Voting Agreement among Joseph L. Lanier,
          Jr., Richard L. Williams and Barry F. Shea and certain
          members of their families (incorporated by reference to
          Exhibit 10.7 in Dan River's Annual Report on Form 10-K
          for the fiscal year ended January 1, 2000)

 10.10   Employment Agreement, dated as of October 29, 1997,
          between Dan River Inc. and Joseph L. Lanier, Jr.
          (incorporated by reference to Exhibit No. 10.7 in
          Amendment No. 2 to Dan River's Registration Statement
          on Form S-1 (File No. 333-36479))

 10.11   Employment Agreement, dated as of October 29, 1997,
          between Dan River Inc. and Richard L. Williams
          (incorporated by reference to Exhibit No. 10.8 in
          Amendment No. 2 to Dan River's Registration Statement
          on Form S-1 (File No. 333-36479))

 10.12   Employment Agreement, dated as of October 29, 1997,
          between Dan River Inc. and Barry F. Shea (incorporated
          by reference to Exhibit No. 10.9 in Amendment No. 2 to
          Dan River's Registration Statement on Form S-1 (File
          No. 333-36479))

 10.13   Form of Post-employment Letter Agreement between the Dan
          River Inc. and certain of its officers, including
          Messrs. Boozer and Goodrich (incorporated by reference
          to Exhibit No. 10.10 in Dan River's Registration
          Statement on Form S-1 (File No. 33-70442) filed on
          October 15, 1993)

 10.14   Dan River Inc. Amended and Restated Stock Option Plan
          and form of Option Agreement in effect prior to
          December 30, 1994 (incorporated by reference to Exhibit
          No. 10.14 in Dan River's Registration Statement on Form
          S-1 (File No. 33-70442) filed on October 15, 1993)

 10.15   Dan River Inc. Amended and Restated Stock Option Plan
          and form of Option Agreement as amended as of December
          30, 1994 (incorporated by reference to Exhibit 10.13 in
          Dan River's Annual Report on Form 10-K for the fiscal
          year ended January 1, 2000)

 10.16   Form of Dan River Inc. 1997 Stock Incentive Plan
          (incorporated by reference to Exhibit No. 10.16 in Dan
          River's Registration Statement on Form S-1 (File No.
          333-36479))

 10.17   Form of Dan River Inc. 1997 Stock Plan for Outside
          Directors (incorporated by reference to Exhibit No.
          10.19 in Dan River's Registration Statement on Form S-1
          (File No. 333-36479))

 10.18   Dan River Inc. Management Incentive Plan (incorporated
          by reference to Exhibit 10.16 in Dan River's Annual
          Report on Form 10-K for the fiscal year ended January
          1, 2000)

 10.19   Dan River Inc. 2000 Long-Term Incentive Plan
          (incorporated by reference to Exhibit 10.17 in Dan
          River's Annual Report on Form 10-K for the fiscal year
          ended January 1, 2000)

 10.20*  Dan River Inc. Non-qualified 401 (k) and Deferred
          Compensation Plan for Highly Compensated Employees and
          Directors

 10.21*  Dan River Inc. Supplemental Executive Retirement Plan

</TABLE>

                                       2
<PAGE>

<TABLE>
<CAPTION>
 Exhibit                                                            Sequential
 Number                   Description of Exhibit                     Page No.
 -------                  ----------------------                    ----------
 <C>     <S>                                                        <C>
 10.22*  Dan River Inc. Restricted Supplemental Executive
         Retirement Plan

 10.23   Members Agreement dated as of January 5, 2000 between
         Dan River International Ltd. and Grupo Industrial Zaga,
         S.A. de C.V. (regarding Danza Textil, S. de. R.L. de
         C.V.) (incorporated by reference to Exhibit 10.18 in Dan
         River's Annual Report on Form 10-K for the fiscal year
         ended January 1, 2000)

 10.24   Members Agreement dated as of January 5, 2000 between
         Dan River International Ltd. and Grupo Industrial Zaga,
         S.A. de C.V. (regarding Zadar S. de R.L. de C.V.)
         (incorporated by reference to Exhibit 10.19 in Dan
         River's Annual Report on Form 10-K for the fiscal year
         ended January 1, 2000)

 11      Statement regarding Computation of Earnings per share
         (incorporated by reference to Note 8 to Dan River's
         Consolidated Financial Statements in this Annual Report
         on Form 10-K for the fiscal year ended January 1, 2000)

 21*     List of Subsidiaries

 23*     Consent of Ernst & Young LLP

 99.1*   Cautionary Statements relating to Forward Looking
         Statements
</TABLE>
--------
*filed herewith

                                       3