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================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                 ---------------
                                    FORM 10-K

     (MARK ONE)
        [X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934  (FEE REQUIRED)
                  FOR THE FISCAL YEAR ENDED AUGUST 31, 2001
                                                                 OR
        [ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                  THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
                  FOR THE TRANSITION PERIOD FROM _____________TO______________

                         COMMISSION FILE NUMBER 33-68412
                              --------------------
                              AVONDALE INCORPORATED
             (Exact name of registrant as specified in its charter)

                     GEORGIA                                  58-0477150
         (State or other jurisdiction of                   (I.R.S. employer
          incorporation or organization)                 identification no.)

               506 SOUTH BROAD STREET                           30655
                 MONROE, GEORGIA                              (Zip code)
   (Address of principal executive offices)

       Registrant's telephone number, including area code: (770) 267-2226

        Securities registered pursuant to Section 12(b) of the Act: NONE

        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 the Class A Common Stock held by
non-affiliates of the registrant as of November 1, 2001 (based upon the book
value per share of Class A Common Stock as of August 31, 2001) was $15,300,000.

     As of November 1, 2001, the registrant had 11,551,737 and 978,939 shares of
Class A Common Stock and Class B Common Stock outstanding, respectively.
================================================================================


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                               INDEX TO FORM 10-K

                              AVONDALE INCORPORATED


<TABLE>
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                                                                                                      PAGE
                                                                                                    REFERENCE
                                                                                                    ---------
<S>               <C>                                                                               <C>
                                                      PART I
Item  1.          Business...................................................................           2
Item  2.          Properties.................................................................          10
Item  3.          Legal Proceedings..........................................................          11
Item  4.          Submission of Matters to a Vote of Security Holders........................          12

                                                     PART II
Item  5.          Market for Registrant's Common Equity and Related Stockholder Matters......          13
Item  6.          Selected Financial Data....................................................          14
Item  7.          Management's Discussion and Analysis of Financial Condition and
                       Results of Operations.................................................          16
Item 7A.          Quantitative and Qualitative Disclosures About Market Risk.................          24
Item  8.          Financial Statements and Supplementary Data................................          25
Item  9.          Changes in and Disagreements with Accountants on Accounting
                       and Financial Disclosure..............................................          44

                                                     Part III
Item 10.          Directors and Executive Officers of the Registrant.........................          45
Item 11.          Executive Compensation.....................................................          48
Item 12.          Security Ownership of Certain Beneficial Owners and Management.............          54
Item 13.          Certain  Relationships and Related Transactions............................          57

                                                     PART IV
Item 14.          Exhibits, Financial Statement Schedules and Reports on Form 8-K............          58
</TABLE>


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                                     PART I

         Unless the context otherwise requires, references herein to the Company
refer to Avondale Incorporated and its subsidiaries and any reference to a
"fiscal" year of the Company refers to the Company's fiscal year ending on the
last Friday in August in such year.

ITEM 1.  BUSINESS

         GENERAL The Company is one of the largest domestic manufacturers of
indigo-dyed denim fabrics, cotton and cotton-blend piece-dyed fabrics, and
cotton and cotton-blend yarns. The Company operates 24 manufacturing facilities
in four southeastern states and is organized in three principal business
segments: apparel fabrics, yarns and other sales.

         The Company's predecessor was founded in 1895 by the family of G.
Stephen Felker, the Company's Chairman, President and Chief Executive Officer.
Prior to 1986, the Company's predecessor primarily manufactured and marketed
greige fabrics. In July 1986, the Company's predecessor, together with Mr.
Felker and certain other investors, acquired Avondale Mills, Inc., now a wholly
owned subsidiary of the Company ("Avondale Mills"). The acquisition of Avondale
Mills expanded the Company's product line to include yarns and finished fabrics.
In April 1996 the Company acquired the assets of the textile business of
Graniteville Company and its subsidiaries ("Graniteville"). The acquisition of
Graniteville, founded in 1845, enhanced the Company's manufacturing and
marketing of cotton and cotton-blend finished fabrics.

DESCRIPTION OF THE BUSINESS

         The Company operates principally in three segments: apparel fabrics,
yarns and other sales. Financial information relating to these segments is
presented in Note 3 to the Consolidated Financial Statements. In conjunction
with the adoption of Emerging Issues Task Force Issue No. 00-10, the Company
amended reported revenues of the segments to classify as revenues the shipping
and handling charges billed to customers. In addition, certain prior year
segment information has been reclassified to conform to the current year's
presentation.

         Products.

         Apparel fabrics. The Company's apparel fabrics consist of
cotton and cotton-blend fabrics used in the manufacture of jeans, utilitywear,
sportswear and other apparel.

         The Company is a leading manufacturer of indigo-dyed denim fabrics used
in the production of branded and private label fashion apparel, as well as
casual jeans, sportswear and outerwear. The Company develops and manufactures
new and innovative colors, textures, weaves and finishes for its customers,
which has helped make the Company's denim fabrics a leader in the branded and
private label, fashion-oriented segment of the apparel market.

         The Company is one of the largest domestic manufacturers and marketers
of fabrics used in the production of utilitywear (principally uniforms and other
occupational apparel) for the U.S. rental and retail markets. The Company's
utilitywear fabric customers require durable fabrics characterized by long wear
and easy care. The Company works closely with customers to develop fabrics with
these and other enhanced performance characteristics.


                                       2
<PAGE>

         The Company is a leading manufacturer and marketer of woven cotton
piece-dyed fabrics used in the production of sportswear, casual wear and
outerwear. Fabrics are produced for customers in a wide variety of styles,
colors, textures and weights according to individual customer specifications.
The Company's product design staff develops fabric designs that are presented to
customers and, once approved, are produced into fabrics to meet customers'
specifications.

         Apparel fabrics sales accounted for 72%, 74% and 78%, respectively, of
the Company's net sales in fiscal 1999, 2000 and 2001.

         Yarns. The Company is one of the largest domestic producers and
marketers of cotton and cotton-blend yarns, which are used internally in the
production of woven fabrics or marketed to outside customers in the knitting and
weaving industries. The Company's yarns are used in the manufacture of a broad
range of items, including apparel (primarily T-shirts, underwear, hosiery,
knitted outerwear, denim, and woven and fleece sportswear) and home furnishings.
The Company's yarn sales accounted for approximately 28%, 28% and 31%,
respectively, of the Company's net sales in fiscal 1999, 2000 and 2001.

         Other. Other sales include sales of greige and specialty fabrics and
revenues from the Company's trucking operation.

         The Company produces undyed, unfinished cotton and cotton-blend greige
fabrics that are marketed to apparel, home furnishing and industrial products
manufacturers. The Company's product design staff works with greige fabric
customers to create new fabric styles and constructions, and the Company is able
to alter its overall product mix to meet changing customer needs. The Company
also has the manufacturing flexibility to maintain high production efficiencies
by producing greige fabric for consumption within the apparel fabrics operation.

         The Company produces a variety of specialty fabrics that are marketed
to recreational, industrial and military products manufacturers. The Company's
specialty products include coated fabrics for awnings, tents, boat covers and
life vests. The Company also finishes customers' fabrics on a commission basis,
which enables customers to meet short delivery schedules while minimizing
inventories.

         The Company's other sales accounted for 9%, 10% and 10%, respectively,
of the Company's net sales in fiscal 1999, 2000 and 2001.

         Intersegment Sales. Intersegment sales represent the transfer of yarns
and greige fabrics among the three business segments. These items ultimately are
consumed in the production of finished products, and therefore are not included
in net sales. Intersegment sales accounted for (9%), (12%) and (19%),
respectively, of the Company's net sales in fiscal 1999, 2000 and 2001.

Sales and Marketing

         The Company sold apparel fabrics, greige and specialty fabrics, and
yarns to approximately 900, 400 and 500 customers, respectively, in fiscal 2001.
The Company believes it is the leading supplier of denim to V.F. Corporation
(the maker of Lee(R), Rider(R), Wrangler(R), Rustler(R), Brittania(R), Red
Kap(R), Timbercreek(R), Chic(R), and HealthTex(R)brands), with total sales of
apparel fabrics and yarns to V.F. Corporation accounting for 17% of the
Company's net sales in fiscal 2001. The Company believes that it has a strong
working relationship with V.F. Corporation. Other than V.F. Corporation, none of
the Company's customers accounted for 10% or more of the Company's net sales in
fiscal 2001.

         The Company targets customers who demand a high level of customer
service. The Company's two yarn sales offices are located geographically to be
close to customers' manufacturing facilities, and its six fabric sales offices
are generally located near the headquarters of key customers. Sales associates
visit their


                                       3
<PAGE>

customers on a regular basis and are primarily responsible for interpreting
customers' needs, processing customer orders and interacting with the Company's
production scheduling personnel. The Company's sales associates are paid a base
salary plus sales incentives to the extent certain performance targets are met.
The Company's independent sales representatives are paid on a commission basis.

Manufacturing

         The Company is a vertically integrated manufacturer of yarns and
fabrics. Through modernizing its manufacturing facilities, the Company has
sought to reduce lead times, lower costs, minimize inventory levels and maximize
flexibility to respond to changes in customer demand and market conditions.

         Manufacturing Processes. The Company's manufacturing processes involve
producing yarn, dyeing yarn, weaving yarn into fabrics and dyeing and finishing
fabrics. The Company's manufacturing plants employ computer control systems to
monitor the manufacturing process and computer product testing equipment to
measure the quality of the Company's yarns and fabrics.

         The Company's yarn manufacturing operations involve spinning raw cotton
and synthetic fibers into cotton and cotton-blend yarns. The Company uses modern
carding, drawing, combing, open-end spinning and ring spinning equipment and
offers a full line of yarns to respond to varied customer demand. Yarn produced
by the Company is either sold to outside customers or used internally in the
production of woven fabrics.

         Yarn to be used in the manufacture of apparel fabrics may be dyed using
"range" dyeing techniques. The Company weaves dyed or undyed yarn using modern,
high-speed looms to manufacture fabrics that have a variety of widths and
weaves. The woven fabrics may be piece-dyed and finished according to customer
specifications. The Company's dyeing and finishing facilities use a wide range
of technologies, including sophisticated computer monitoring and control
systems. These systems allow the Company to continuously monitor and control
each phase of the dyeing and finishing process, which helps to improve
productivity, efficiency, consistency and quality.

         Manufacturing Facilities. The Company currently operates 24
manufacturing facilities in the U.S. Of the Company's manufacturing facilities,
fifteen produce yarn, six manufacture fabrics, four are dyeing facilities and
four are engaged in fabric finishing.

         In response to the highly competitive market conditions and continued
oversupply of open-end yarns, in September and October 2001, the Company
announced the closing of two separate open-end yarn manufacturing facilities
located in North Carolina. The closing of these two facilities will allow the
Company to reduce its sales of open-end yarns which have proven to be
unprofitable in recent years and improve the capacity utilization and operating
efficiencies of its remaining yarn manufacturing facilities.

         Expansion and Modernization. The Company has expanded its operations
through acquisitions, an ongoing capital improvements program and management's
efforts to optimize the productive output of the Company's manufacturing
facilities. As part of its expansion and modernization efforts, the Company has
also redeployed capital by closing certain manufacturing facilities and, in some
cases, moving manufacturing equipment to other locations. The Company's
expansion and modernization efforts over the past six fiscal years have
included, among others, the following principal initiatives:

         -        1996 -- Replaced carding equipment in two plants with modern
                  carding and drawing systems and earlier generation winders in
                  a third plant with fully automated winders;


                                       4
<PAGE>

         -        1996 -- Acquired Graniteville, which consisted of four
                  integrated yarn and fabric weaving plants, three indigo-dyeing
                  facilities, one piece-dyeing and finishing facility, one
                  fabric coating and finishing facility, and one garment dyeing
                  facility;

         -        1996 and 1997 -- Replaced earlier generation projectile looms
                  with new, high speed air jet looms and installed two new
                  integrated finishing ranges;

         -        1997 -- Purchased additional computer controlled cleaning and
                  blending equipment for one plant, replaced earlier generation
                  open-end spinning equipment with technologically advanced
                  spinning equipment at a second plant, and replaced opening and
                  carding equipment at a third plant;

         -        1997 and 1998 -- Constructed a new denim weaving facility,
                  completed in April 1998, housing technologically advanced
                  slashing equipment and high speed air jet looms, upgraded
                  fabric finishing equipment, and executed a lease for a new
                  distribution center;

         -        1998 and 1999 -- Completed expansion of an existing weaving
                  facility in June 1999, which included the installation of
                  technologically advanced slashing equipment and high speed air
                  jet looms for the production of additional greige fabrics to
                  be piece-dyed for sportswear and utilitywear end uses;

         -        1998 and 1999 -- Completed construction of a new piece-dyeing
                  range in February 1999, and installed technologically advanced
                  fabric inspection equipment for piece-dyed fabrics;

         -        2000 -- Completed replacement of earlier generation air jet
                  looms with new, high speed air jet looms in November 1999 for
                  production of greige fabrics to be piece-dyed for sportswear
                  and utilitywear end uses;

         -        2000 -- Completed modernization of an existing ring spinning
                  facility in August 2000, including the replacement of earlier
                  generation roving, ring spinning and winding equipment with
                  technologically advanced linked ring spinning;

         -        2001 -- Completed expansion of an existing piece-dyed
                  finishing facility in January 2001, for the production of
                  additional finished piece-dyed fabrics for sportwear and
                  utilitywear end uses;

         -        2001 -- Completed expansion and modernization of an existing
                  greige weaving facility in May 2001, including the
                  construction of a new building addition and the installation
                  of modern air jet looms for the production of additional
                  greige fabrics;

         -        2001 -- Completed expansion and modernization of an existing
                  integrated denim weaving facility in May 2001, including the
                  installation of modern air jet looms for the production of
                  additional denim fabrics;

         -        2001 -- Completed expansion of linked ring spinning facility
                  which was modernized in August 2000;

         -        2001 -- Completed modernization of existing spinning operation
                  within integrated fabric weaving facility in August 2001,
                  including installation of technologically advanced linked ring
                  spinning; and


                                       5
<PAGE>

         -        2001 -- Completed construction of a new ring spinning facility
                  using existing manufacturing floor space, in August 2001,
                  including installation of technologically advanced link ring
                  spinning.

Raw Materials

         The Company believes that it is one of the largest U.S. consumers of
raw cotton, the principal raw material used in the Company's manufacturing
processes. Consequently, the Company's results of operations may be impacted
significantly due to fluctuations in the price of cotton. Since cotton is an
agricultural product, its supply and quality, which affect prevailing prices,
are subject to forces of nature. Significant increases in cotton prices due to
any material shortage or interruption in the supply or variations in the quality
of cotton by reason of weather, disease or other factors could have a material
adverse effect on the Company's results of operations.

         Because the importation of cotton into the U.S. has generally been
prohibited, historically imbalances between the domestic and world price of
cotton have occurred. In recent years, Congress has passed a series of
legislative initiatives to ensure that U.S. cotton was priced competitively with
world markets. The Food, Agriculture, Conservation and Trade Act of 1990 (the
"1990 Trade Act") and the regulations promulgated thereunder established a
three-step competitiveness program designed to make domestic cotton prices
approximate world cotton prices. This program includes a mechanism that triggers
tariff free quotas for the importation of cotton if U.S. prices exceed world
prices for an extended period of time.

         In addition, the Federal Agricultural Improvement and Reform Act of
1996 established certain support programs that, among other things, continue
through the year 2002 the three-step competitiveness program established under
the 1990 Trade Act. In fiscal 1999, the Company received compensation from the
U.S. Department of Agriculture under these support programs representing the
differential between domestic cotton prices and world cotton prices. However,
these payments ceased as of December 15, 1998 as financing for the program was
exhausted, and tariff-free quotas for the importation of cotton opened in March
1999.

         On October 22, 1999 the Fiscal 2000 Agriculture Appropriations Bill was
signed into law, restoring funding of payments effective October 1, 1999 under
the three-step competitiveness program and redefining import quota triggers.
Accordingly, during fiscal 2000 and 2001, the Company received renewed
compensation from the U.S. Department of Agriculture for the differential
between domestic cotton prices and world cotton prices for cotton consumed on or
after October 1, 1999.

         The Company closely monitors the cotton market and manages its
cotton-buying practices. The Company's Chief Executive Officer is an officer of
the National Cotton Council, a trade organization that spearheads initiatives to
implement U.S. cotton industry policy, which helps the Company stay abreast of
developments in the cotton market. The Company generally purchases cotton in
sufficient quantities to achieve planned manufacturing schedules. Such purchases
may be short of, or in excess of, the quantities needed to satisfy customers'
orders depending upon such factors as the Company's outlook for the cotton
market.

         The Company generally enters into cotton purchase contracts several
months in advance of the scheduled date of delivery. Prices for such purchases
are fixed either on the date of the contract or thereafter on a date prior to
delivery and, as a result, the Company may be favorably or adversely affected if
cotton prices fluctuate during the contract period. Periodically, the Company
also purchases cotton futures and option contracts to hedge exposure to price
fluctuations in cotton acquired from various suppliers.


                                       6
<PAGE>

         The principal man-made fiber purchased by the Company is polyester. The
Company currently purchases substantially all of the man-made fibers used in its
products from two suppliers, but such fibers are readily available from other
suppliers. The Company maintains a limited supply of such fibers in inventory.
The Company generally has no difficulty in obtaining sufficient quantities of
man-made fibers.

         The Company purchases dyes and chemicals used in its dyeing and
finishing processes, and these dyes and chemicals normally have been available
in adequate supplies through a number of suppliers. In connection with the
acquisition of Graniteville, the Company entered into an agreement (the "Supply
Agreement"), extending through March 2006, with C.H. Patrick & Co., Inc. which
was subsequently acquired by B.F. Goodrich ("Goodrich"). In 2000, Goodrich sold
the chemical portion of their business to Noveon, Inc. ("Noveon"), formerly B.F.
Goodrich PMD Group and the textile dye portion of their business to C.H. Patrick
& Co, Inc. ("Patrick"), formerly CHP Acquisition Group, Inc. On February 28,
2001, the Company executed an assignment of the Supply Agreement whereby the
Company will purchase textile dyes from Patrick and chemicals from Noveon. This
Supply Agreement generally stipulates that Patrick and Noveon ("the Suppliers")
will have the opportunity to provide certain dyes and chemicals utilized by the
Company if the Suppliers meet certain conditions, including competitive pricing
and the ability to provide the applicable dyes and chemicals in accordance with
the Company's specifications and delivery requirements. The Supply Agreement is
terminable by the Company prior to the end of the original 10-year term in the
event of a pattern of repeated, material failures by the Suppliers to satisfy
their obligations with respect to product specifications, delivery schedules or
other material terms. Under the Supply Agreement, a default by one supplier will
not constitute a default by the other supplier.

         The Company purchases yarns and greige fabrics to supplement its
internal yarn and fabric production, and consumes these products in the
production of greige and finished fabrics for its customers. These yarns and
greige fabrics are readily available from a number of suppliers.

   Competition

         The textile industry is highly competitive, and no single company is
dominant. Management believes that the Company is one of the largest domestic
manufacturers of indigo-dyed denim, piece-dyed fabrics for utilitywear and
sportswear and cotton and cotton-blend yarns. The Company's competitors include
large, vertically integrated textile companies and numerous smaller companies.
In recent years there has been a trend toward consolidation within certain
markets of the textile industry and, within the Company's markets, increases in
manufacturing capacity. The primary competitive factors in the textile industry
are price, product styling and differentiation, quality, manufacturing
flexibility, delivery time and customer service. The importance of these factors
is determined by the needs of particular customers and the characteristics of
particular products. The failure of the Company to compete effectively with
respect to any of these key factors or to keep pace with rapidly changing
markets could have a material adverse effect on the Company's results of
operations and financial condition.

         Increases in domestic capacity and imports of foreign-made textile and
apparel products are a significant source of competition for many domestic
textile manufacturers. The U.S. government attempts to regulate the growth of
certain textile and apparel imports by establishing quotas and tariffs on
imports from countries that historically account for significant shares of U.S.
imports. Although imported apparel represents a significant portion of the U.S.
apparel market, in recent years, a significant portion of import growth has been
attributable to imports of apparel products manufactured outside the U.S. of (or
using) domestic textile components. During fiscal 2000 and 2001, imports of
certain textile products into the U.S. increased primarily as a result of
declines in consumer demand within Asia, heightened liquidity requirements of
Asian textile producers and significant devaluation of Asian currencies
vis-a-vis the U.S. dollar.


                                       7
<PAGE>

         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 and foreign considerations. In
January 1995, a new multilateral trade organization, the World Trade
Organization (the "WTO"), was formed by the members of the General Agreement on
Tariffs and Trade ("GATT") to replace GATT. This new body has set forth the
mechanisms by which world trade in textiles and clothing will be progressively
liberalized with the elimination of quotas and the reduction of duties. The
implementation began in January 1995 with the phasing-out of quotas and the
reduction of duties to take place over a 10-year period. 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: yarns, fabrics, made-up textiles and
apparel. As it implements the WTO mechanisms, the U.S. government is negotiating
bilateral trade agreements with developing countries (which generally are
exporters of textile products) that are members of the WTO for the purpose of
reducing their tariffs on imports of textiles and apparel. The elimination of
quotas and reduction of tariffs under the WTO may result in increased imports of
certain textile products and apparel into North America. These factors could
make the Company's products less competitive against low cost imports from third
world countries.

         The North American Free Trade Agreement ("NAFTA") among the United
States, Canada and Mexico, which became effective on January 1, 1994, 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. 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. Based on experience to date, NAFTA has had
a favorable impact on the Company's business.

         On May 2, 2000, the United States passed the Caribbean Basin Initiative
("CBI")/Sub-Saharan Africa Trade Bill. Under the bill, apparel manufactured in
the Caribbean and Sub-Saharan regions using yarns or fabrics produced in the
United States may be imported to the U.S. duty and quota-free. In effect, this
legislation extends the favorable trade terms afforded to Mexico under NAFTA to
the Caribbean and Sub-Saharan countries. Management believes that NAFTA parity
for the CBI region will have a favorable effect on the Company by providing
access to lower cost labor for apparel assembly, making the U.S. a more
attractive location for textile sourcing.

         The tragic events of September 11, 2001 and the events occurring since
that time have created tremendous uncertainty within the U.S. marketplace.
Retail sales, already suffering the impact of economic slowdown and rising
unemployment, could slip further if this uncertainty adversely impacts consumer
spending. Additionally, trade concessions granted by the U.S. government to
textile exporting countries, such as Pakistan, in response to those countries'
support of U.S. actions could make the products of the domestic textile industry
less competitive against low cost imports from such countries. On the other
hand, the disruption of shipping and distribution channels throughout the world
could place a premium on the ability of the U.S. textile industry to quickly
respond to replenishment orders from U.S. retailers and apparel manufacturers.
The Company is unable to predict at this time how these recent events will
impact its business.

                                       8
<PAGE>

 Backlog

         The Company's order backlog was approximately $278 million at August
31, 2001, as compared to approximately $400 million at August 25, 2000,
primarily reflecting weakened demand for denim and other bottom-weight fabrics.
Orders on hand are not necessarily indicative of total future sales.
Substantially all of the orders outstanding at August 31, 2001 are expected to
be filled by the end of fiscal 2002.

   Governmental Regulation

         The Company is subject to various federal, state and local
environmental laws and regulations limiting the discharge, storage, handling and
disposal of a variety of substances and wastes used in or resulting from its
operations and potential remediation obligations thereunder, particularly the
Federal Water Pollution Control Act, the Clean Air Act, the Resource
Conservation and Recovery Act ("RCRA") (including amendments relating to
underground storage tanks) and the Comprehensive Environmental Response,
Compensation and Liability Act, commonly referred to as "Superfund" or "CERCLA".
The Company has obtained, and is in compliance in all material respects with,
all material permits required to be issued by federal, state or local law in
connection with the operation of the Company's business as described herein.

         The Company's operations are also 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 and noise standards, and regulate
the use of hazardous chemicals in the workplace. The Company uses resins
containing formaldehyde in processing some of its products. Although the Company
does not use asbestos in the manufacture of its products, some of its facilities
contain some structural asbestos that management believes is properly contained.

         Many of the Company's manufacturing facilities have been in operation
for several decades. Historical waste disposal and hazardous substance releases
and storage practices may have resulted in on-site and off-site remediation
liability for which the Company may be responsible. In addition, certain
wastewater treatment facilities and air emission sources may have to be upgraded
to meet more stringent environmental requirements in the future. The Company
cannot with certainty assess at this time the impact of future emission
standards or enforcement practices under the foregoing environmental laws and
regulations and, in particular, under the 1990 Clean Air Act, upon its
operations or capital expenditure requirements. The Company believes it is
currently in compliance in all material respects with the foregoing
environmental and health and safety laws and regulations.

         In 1987, Graniteville Company was notified by the South Carolina
Department of Health and Environmental Control ("DHEC") that it had discovered
certain contamination of a pond near Graniteville, South Carolina and that
Graniteville may be one of the responsible parties. In 1990 and 1991,
Graniteville provided reports to DHEC summarizing its required study and
investigation of the alleged pollution and its sources which concluded that pond
sediments should be left undisturbed and that other remediation alternatives
either provided no significant benefit or themselves involved adverse effects.
In 1995, Graniteville submitted a proposal regarding periodic monitoring of the
site, to which DHEC responded with a request for additional information.
Graniteville provided such information to DHEC in February 1996. The Company is
unable to predict at this time whether any further actions will be required with
respect to the site or what the cost thereof may be. The Company has provided a
reserve for management's estimate of the cost of monitoring the site and
believes the ultimate outcome of this matter will not have a material adverse
effect on its results of operations or financial condition.

         As a result of the acquisition of Graniteville, the Company owns a nine
acre site in Aiken County, South Carolina, which was operated jointly by
Graniteville and Aiken County as a landfill from


                                       9
<PAGE>

approximately 1950 through 1973. DHEC conducted a site screening investigation
in 1990. The United States Environmental Protection Agency conducted a site
investigation in 1991 and an Expanded Site Inspection in January 1994.
Graniteville conducted a groundwater quality investigation in 1992 and a
supplemental site assessment in 1994. Based on these investigations, DHEC
requested that Graniteville enter into a consent agreement providing for
comprehensive assessment of the nature and extent of soil and groundwater
contamination at the site, if any, and an evaluation of appropriate remedial
alternatives. DHEC and the Company entered into a consent agreement in December
1997. The cost of the comprehensive assessment required by the consent agreement
is estimated to be between $200,000 and $400,000. Because this investigation has
not concluded, the Company is currently unable to predict what further actions,
if any, will be necessary to address the landfill. The Company has provided a
reserve for management's estimate of the cost of investigating and remediating
the site and believes the ultimate outcome of this matter will not have a
material adverse effect on its results of operations or financial condition.

          The Company is currently defending two environmentally related
lawsuits, described under Item 3, Legal Proceedings.

Associates

         At August 31, 2001, the Company had approximately 5,800 associates.
None of the Company's associates is covered by a collective bargaining
agreement, and management believes that the Company's relations with its
associates are good.

         While the Company has associates working and traveling in New York City
and throughout the country, fortunately none of its associates were injured in
the September 11th tragedy. Those associates traveling on routine business
matters on Tuesday, September 11, 2001, although temporarily stranded due to
disruption in some modes of transportation, were able to return to their homes
by Friday night. For this, management is most grateful.

ITEM 2.  PROPERTIES

         The Company currently operates 24 manufacturing facilities in the U.S.,
of which nine are located in Alabama, three are located in North Carolina, three
are located in Georgia and nine are located in South Carolina. The Company owns
23 of these facilities and leases one facility in connection with its issuance
of industrial revenue bonds. Of the Company's manufacturing facilities, fifteen
of the Company's manufacturing facilities produce yarn, six manufacture fabrics,
four are dyeing facilities and four are engaged in fabric finishing.
Additionally, the Company operates six warehouses.

         In September and October 2001, the Company announced the closing of two
separate open-end yarn manufacturing facilities located in North Carolina which
will allow the Company to reduce its sales of unprofitable open-end yarns and
improve capacity utilization and operating efficiencies at its remaining yarn
manufacturing facilities.

         The Company's plants generally operate 24 hours a day, seven days a
week throughout the year. The Company considers its plants and equipment to be
in good condition and adequate for its current operations. The Company's
principal executive offices are located in Monroe, Georgia in a building owned
by the Company. The Company also has executive offices in Sylacauga, Alabama,
and Graniteville, South Carolina, which are located in buildings owned by the
Company. All of the Company's sales offices are leased from unrelated third
parties.



                                       10
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

         On March 3, 1993, a case was filed in the Circuit Court of Jefferson
County, Alabama by Joe and Darnell Sullivan and Tommy and Stella Fay Gould and
other parties against the Alabama Power Company, Russell Corporation, the
Company and certain other parties ("Sullivan"). The complaint alleged that the
Company and such other parties negligently or willfully discharged industrial
wastewater containing hazardous materials, which allegedly damaged the
plaintiffs' real properties and caused mental anguish to the plaintiffs. The
complaint sought an award of compensatory and punitive damages. After two years
and eleven months of litigation, the plaintiffs amended their complaint to
include class action claims and treatment. Although the Trial Court granted
class certification, the Supreme Court of Alabama reversed the class
certification order, and the case proceeded as to the individual claims of the
five plaintiffs.

         On November 17, 1998, the trial court handed down a verdict of $155,200
in compensatory damages and $52,398,000 in punitive damages against the Alabama
Power Company, Russell Corporation and the Company, on a joint and several
basis, in favor of the plaintiffs. This case was appealed to the Supreme Court
of Alabama. Oral argument was held in January 2000, and on August 4, 2000, the
Alabama Supreme Court issued a 6-3 opinion reversing and ordering a judgment to
be entered in favor of the defendants because of plaintiff's failure of proof.
The plaintiffs filed an Application for Rehearing on August 18, 2000, and the
Company filed its response on September 1, 2000. On November 16, 2000, the
Supreme Court of Alabama heard oral arguments on the application from all
parties except the Alabama Power Company. On January 12, 2001, the Alabama
Supreme Court issued a 6-3 final order, denying rehearing and reversing and
rendering the case in favor of the defendants.

         On February 28, 1999, a case was filed in the Circuit Court of
Jefferson County, Alabama by Chris and Regina Christian against Russell
Corporation, Russell Lands, Inc., Alabama Power, the Company and certain other
parties. The complaint alleged that the Company, among others, negligently
and/or wantonly caused or permitted the discharge and disposal of sewage sludge
and contaminants into the lake adjacent to the plaintiffs' property, which
allegedly interfered with the plaintiffs' use of the property. As a result of
these alleged actions, the plaintiffs claimed that the value of their property
had been diminished and that they suffered mental anguish, bodily injury and
other pecuniary loss. Subsequent to the final decision by the Alabama Supreme
Court in the Sullivan case, the plaintiffs in this complaint elected to
voluntarily dismiss their case. Consequently, on February 1, 2001, the Circuit
Court entered an order dismissing the complaint with prejudice.

         On January 13, 2000, a case was filed in the Circuit Court of Jefferson
County, Alabama by Larry and Cynthia Locke and the owners of fourteen other
residences in the Raintree subdivision located on Lake Martin near Alexander
City, Alabama, against Russell Corporation, Alabama Power and the Company.
Sixteen individuals were dismissed from the case in August and September 2001,
leaving eight remaining individual plaintiffs. The complaint, which must be
tried under provisions of the Alabama tort reform legislation enacted in 1999 to
limit punitive damages, alleges that the Company, among others, negligently
and/or wantonly caused or permitted the discharge and disposal of sewage sludge
and contaminants into the lake adjacent to the plaintiffs' property, which
allegedly interfered with the plaintiffs' use of the property. As a result of
these alleged actions, the plaintiffs claim that the value of their property has
been diminished and that they suffered other damages. The complaint seeks
compensatory and punitive damages in an undisclosed amount. After an initial
series of actions, the case was stayed by the trial court pending resolution of
the appeal in the Sullivan case. Subsequent to the Alabama Supreme Court's
actions with regard to the Sullivan case, plaintiff's counsel, which includes
attorneys who acted as co-plaintiff's counsel on the Sullivan case, presented
arguments in a hearing before the trial judge on May 4, 2001 based on certain
narrow legal theories that the damages claimed in this action are sufficiently
different from the Sullivan Case, and therefore, that this case should be
allowed to proceed in spite of the fact that the Sullivan case was ultimately
decided in favor of the defendants. The trial court judge has allowed the case
to proceed to the discovery phase, issuing a deadline of November, 2001 to
complete discovery. The Company intends to vigorously defend this case and
believes that it has a number of defenses available to it. While the outcome of
this case cannot be predicted with certainty, based upon currently available
information, the


                                       11
<PAGE>

Company does not believe that it will have a material adverse effect on the
Company's financial condition or results of operations.

         The Company, along with Russell Corporation and the municipality of
Alexander City, Alabama, was named during fiscal 1998 in two almost identical
citizen suits. The first suit, filed on May 18, 1998, was brought pursuant to
the federal Clean Water Act ("CWA"). The second suit, filed on August 28, 1998,
was brought pursuant to both the CWA and the RCRA. In both lawsuits, the
plaintiff has alleged that the Company's permitted discharges of wastewater from
its facility in Alexander City into the waste water treatment plant of Alexander
City have indirectly caused the wastewater treatment plant to exceed the
effluent limitation imposed upon the treatment plant's discharges into a local
body of water, thereby violating the CWA. The plaintiff repeated that claim in
the second lawsuit, but also alleged that the Company also violated RCRA by
contributing to the disposal of a hazardous waste in such a manner as to
endanger human health or the environment. In September 1998, the cases were
consolidated, and the first case filed was designated the "lead case". In each
of these cases, the Company filed motions to dismiss and for summary judgment
which it believed to be meritorious. However, prior to the court's ruling on the
Company's motions, the plaintiff moved the court to dismiss the suits. On
September 30, 1999, pursuant to the plaintiff's motion, the court dismissed the
lead case and terminated the remaining case. The dismissal of these cases was
"without prejudice". Concurrent with this litigation, the United States
Environmental Protection Agency ("EPA") initiated an investigation of possible
CWA violations at the Company's facility. This investigation has been concluded,
and the Company has entered into an oral agreement with the EPA to settle the
investigation for payment of $25,750, with no admission of liability.

         The Company is also a party to other litigation incidental to its
business from time to time. The Company is not currently a party to any
litigation that management believes, if determined adversely to the Company,
would have a material adverse effect on the Company.

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

         Not applicable.


                                       12
<PAGE>

                                     PART II

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

         There is no established public trading market for the Company's Class A
Common Stock or Class B Common Stock (collectively, "Common Stock"). As of
August 31, 2001 there were 130 and one holders of record of Class A Common Stock
and Class B Common Stock, respectively. The Company paid dividends aggregating
$5.1 million and $5.0 million in respect of its outstanding Common Stock during
fiscal 2000 and 2001, respectively.

         The Company has issued and outstanding $125 million aggregate principal
amount of 10 1/4% Senior Subordinated Notes due 2006 (the "Notes") under an
Indenture dated as of April 23, 1996 among the Company, Avondale Mills and The
Bank of New York, as trustee (the "Indenture"). The Indenture contains certain
covenants that could indirectly restrict the Company's ability to pay dividends.
As amended effective August 30, 2001, the Company maintains a $125 million
revolving credit facility under a loan agreement among Avondale Mills and a
syndicate of banks (the "Credit Facility"). The Credit Facility contains certain
covenants that could indirectly restrict the Company's ability to pay dividends.


                                       13
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

         The following table sets forth selected consolidated statement of
income data and selected consolidated balance sheet data of the Company for each
of the five fiscal years in the period ended August 31, 2001. Such data were
derived from the audited Consolidated Financial Statements of the Company. The
audited Consolidated Financial Statements and Notes thereto of the Company for
each of the three fiscal years in the period ended August 31, 2001 are included
elsewhere in this Annual Report. The selected consolidated financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto of the Company included elsewhere in this
Annual Report.
<TABLE>
<CAPTION>
                                                                                         FISCAL YEAR
                                                             ------------------------------------------------------------------
                                                                1997           1998           1999        2000           2001
                                                             ---------      ---------      --------      --------      --------
                                                                       (IN MILLIONS, EXCEPT PER SHARE DATA AND RATIOS)
<S>                                                          <C>            <C>            <C>           <C>           <C>
Statement of Income Data:
    Net sales .........................................      $ 1,057.4      $ 1,064.3      $  890.9      $  836.5      $  772.8
    Gross profit ......................................          126.2          137.3          89.7         116.3          60.9
    Facility restructuring ............................             --            2.7           6.2            --            --
    Operating income ..................................           79.0           86.6          45.3          77.9          27.9
    Interest expense, net .............................           26.2           23.3          23.0          20.2          20.4
    Discount and expenses on sale of receivables ......            6.6            7.3           5.6           5.6           4.9
    Loss attributable to investment in Oneita .........            7.5             --            --            --            --
    Other  expense, net ...............................            0.8            0.5           0.5           0.5           0.8
    Income before income taxes ........................           37.9           55.4          16.3          51.6           1.8
    Provision for income taxes ........................           15.0           21.1           6.3          18.6           0.5
    Net income ........................................           22.9           34.3          10.0          33.0           1.3

Per Share Data:
    Net income - basic ................................      $    1.73      $    2.62      $   0.79      $   2.61      $   0.10
    Net income - diluted ..............................           1.70           2.58          0.77          2.57          0.10
    Dividends declared ................................           0.28           0.40          0.40          0.40          0.40
    Weighted average number of shares outstanding -
       basic ..........................................           13.3           13.0          12.7          12.7          12.5
    Weighted average number of shares outstanding -
       diluted ........................................           13.5           13.3          12.9          12.8          12.7

Balance Sheet Data (at period end):
    Total assets ......................................      $   461.2      $   463.6      $  439.7      $  438.7      $  454.8
    Long-term debt, including current portion .........          251.3          246.8         219.5         187.7         230.1
    Shareholders' equity ..............................           86.4          100.0         105.0         130.5         126.0

Other Data:
    Capital expenditures ..............................      $    32.0      $    66.3      $   50.1      $   30.5      $   91.1
    Depreciation and amortization .....................           40.8           39.9          42.8          42.8          46.4
    EBITDA(1) .........................................          113.3          126.6          93.9         115.5          75.5
    Ratio of EBITDA to interest expense, net and
       discount and expenses on sale of receivables ...            3.5x           4.1x          3.3x          4.5x          3.0x
    Ratio of earnings to fixed charges(2) .............            2.1x           2.8x          1.5x          2.9x          1.1x
</TABLE>

----------
(1)      EBITDA is defined as net income plus (i) provision for income taxes,
         (ii) interest expense, net, (iii) discount and expenses on sale of
         receivables, (iv) depreciation and amortization, (v) loss attributable
         to investment in Oneita, (vi) facility restructuring charges and (vii)
         plus or minus, as the case may be, adjustments to cost of goods sold
         made under the LIFO inventory valuation method. EBITDA is presented not
         as an alternative measure of operating results or cash flow from
         operations (as determined in accordance with generally accepted
         accounting principles), but because it is a widely accepted financial
         indicator of a company's ability to incur and service debt. EBITDA as
         calculated by the Company is not necessarily comparable with
         similarly-titled measures proposed by other companies.


                                       14
<PAGE>

(2)      The ratio of earnings to fixed charges is computed by dividing earnings
         by fixed charges. For this purpose, "earnings" include income before
         income taxes plus fixed charges. Fixed charges include interest,
         whether expensed or capitalized, amortization of deferred financing
         costs, discount and expenses on sale of receivables and the portion of
         capital lease payments that is representative of interest or financing
         charges.


                                       15
<PAGE>

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

         The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and Notes thereto of the Company
included elsewhere in this Annual Report.

RESULTS OF OPERATIONS

         The Company operates principally in three segments: apparel fabrics,
yarns and other sales. In conjunction with the adoption of Emerging Issues Task
Force Issue No. 00-10, the Company amended reported revenues of the segments to
classify as revenues the shipping and handling charges billed to customers. In
addition, certain prior year segment information has been reclassified to
conform to the current year's presentation.

         The table below sets forth for the periods indicated statement of
income data expressed as a percentage of net sales:

<TABLE>
<CAPTION>
                                                                    Fiscal Year
                                                         ----------------------------------
                                                          1999          2000          2001
                                                         ------        ------        ------

<S>                                                      <C>           <C>           <C>
Net sales ........................................       100.0%        100.0%        100.0%
    Apparel fabric sales .........................        72.0          73.7          78.2
    Yarn sales ...................................        28.1          27.7          30.7
    Other sales ..................................         9.1          10.3          10.1
    Intersegment sales ...........................        (9.2)        (11.7)        (19.0)
Cost of goods sold:
    Raw materials ................................        43.8          37.5          39.9
    Conversion costs .............................        41.4          43.5          46.3
        Total ....................................        85.2          81.0          86.2
Depreciation .....................................         4.7           5.1           5.9
Selling and administrative expenses ..............         4.3           4.6           4.3
Facility restructuring ...........................         0.7            --            --
Operating income .................................         5.1           9.3           3.6
Interest expense, net ............................         2.6           2.4           2.6
Discount and expenses on sale of receivables .....         0.6           0.6           0.6
Provision for income taxes .......................         0.7           2.2           0.1
Net income .......................................         1.1           4.0           0.2
</TABLE>

Fiscal 2001 Compared to Fiscal 2000

         Net Sales. Net sales decreased 7.6% to $772.8 million for fiscal 2001
from $836.5 million for fiscal 2000, as the Company experienced intensely
competitive conditions in its markets. Retail sales of apparel slowed
considerably during the second half of the fiscal year, reducing demand for
apparel fabrics and yarns as retailers and apparel producers exercised tighter
management of their supply chains. In addition, the strength of the U.S. dollar
in comparison to the currencies of many Asian countries promoted the importation
of goods from those countries by U.S. retailers, exacerbating the already highly
competitive market conditions resulting from the imbalance of global supply and
demand for textile and apparel products. The Company expects these conditions to
continue, adversely impacting sales during fiscal 2002.

Operating Income. Operating income decreased 64.2% to $27.9 million for fiscal
2001 from $77.9 million for fiscal 2000, reflecting higher costs of raw
materials, dyes and chemicals, and energy, in addition to generally lower
average selling prices. Plant disruption during construction and equipment
installation in addition to the reduced unit volumes of the period also impeded
the realization of benefits to be derived from the significant capital
expenditure projects as well as negatively impacted overall unit cost


                                       16
<PAGE>

RESULTS OF OPERATIONS (CONTINUED)

absorption. In response to these intensely competitively conditions, the Company
significantly increased its consumption of internally produced yarns and greige
fabrics in the production of finished apparel fabrics and thereby improved
capacity utilization and sales rationalization. Cost of goods sold decreased
1.7% to $666.2 million for fiscal 2001 from $678.0 million for fiscal 2000,
reflecting the reduction in unit sales. Cost of goods sold as a percentage of
net sales increased to 86.2% for fiscal 2001 from 81.0% for fiscal 2000.

         Selling and administrative expenses decreased 14.3% to $33.0 million
for fiscal 2001 from $38.5 million for fiscal 2000, primarily reflecting
reductions in certain associate benefits and performance based incentives
corresponding to the decline in operating income for the fiscal year. Selling
and administrative expenses as a percentage of net sales decreased to 4.3% for
fiscal 2001 from 4.6% for fiscal 2000.

         Segment Performance. Apparel fabric sales decreased 2.0% to $604.2
million for fiscal 2001 from $616.4 million for fiscal 2000. The decline in
sales reflected a 1.7% decrease in yards sold and a 0.3% decrease in average
selling prices, as demand for denim and other bottom-weight fabrics weakened in
the second half of the fiscal year. Operating income for apparel fabrics
decreased 45.3% to $47.0 million for fiscal 2001 from $85.9 million for fiscal
2000, primarily due to reduced unit volume and higher costs of raw materials,
dyes and chemicals, and energy.

         Yarn sales, including intracompany sales to the apparel fabric
operations, increased 2.2% to $236.8 million for fiscal 2001 from $231.7 million
for fiscal 2000, reflecting a 1.2% increase in pounds sold and a 1.0% increase
in average selling prices. Market pricing for sales yarns remained very
competitive, reflecting continued excess production capacity within the domestic
industry and continued imports of yarns and knitted apparel from Asia. Operating
income for yarns decreased to a loss of $0.4 million for fiscal 2001 from income
of $7.9 million for fiscal 2000, primarily as a result of higher raw material
costs.

         Other sales, which include sales of greige and specialty fabrics and
revenue from the Company's trucking operation, decreased 8.7% to $78.6 million
for fiscal 2001 from $86.1 million for fiscal 2000. The decrease in sales
reflected a 2.3% increase in units sold and a 10.8% decrease in average selling
prices, primarily reflecting weakened demand in the greige and specialty fabrics
markets. Operating income for other sales decreased 66.3% to $3.4 million for
fiscal 2001 from $10.1 million for fiscal 2000, reflecting lower unit sales
volume and higher raw material costs.

         Intersegment sales increased 50.2% percent to $146.8 million for fiscal
2001 from $97.7 million for fiscal 2000, primarily reflecting the significant
increase in consumption of internally produced yarns and greige fabrics within
the Company's apparel fabrics operation.

         Interest Expense, Net. Interest expense, net increased 0.7% to $20.4
million for fiscal 2001 from $20.2 million for fiscal 2000. This increase
reflected higher average outstanding borrowings during fiscal 2001, partially
offset by a decline in market interest rates applicable to those borrowings.

         Discount and Expenses on Sale of Receivables. Discount and expenses on
sale of receivables were $4.9 million for fiscal 2001 compared to $5.6 million
for fiscal 2000. This decrease was attributable to a net decrease in the amount
of accounts receivable sold under the facility, reflecting the overall decline
in net sales of the Company, and to lower market interest rates and the
resulting decline in discounts incurred on the receivables sold.


                                       17
<PAGE>

RESULTS OF OPERATIONS (CONTINUED)

         Provision for Income Taxes. Provision for income taxes decreased to
$0.5 million for fiscal 2001 from $18.6 million for fiscal 2000, reflecting the
decrease in income before income taxes. The Company's effective tax rate
declined to 30.1% for fiscal 2001, compared to 36.0% for fiscal 2000.

Fiscal 2000 Compared to Fiscal 1999

         Net Sales. Net sales decreased 6.1% to $836.5 million for fiscal 2000
from $891.0 million for fiscal 1999, as the Company experienced intensely
competitive conditions in its markets. Global supply of textile and apparel
products continued to exceed demand, creating highly competitive market
conditions worldwide. As a result, weak foreign economies continued to offer
their textile and apparel production to the U.S. market, driving prices down in
the Company's principal distribution channels

         Operating Income. Operating income increased 71.8% to $77.9 million for
fiscal 2000 from $45.3 million for fiscal 1999. In response to the intensely
competitive market conditions, the Company significantly increased its
consumption of internally produced yarns and greige fabrics in the production of
finished apparel fabrics and thereby improved capacity utilization and sales
rationalization. This improvement in capacity utilization, more favorable raw
material costs and unit cost reductions achieved through plant management
programs and capital expenditure projects resulted in a 10.7% decline in cost of
goods sold to $678.0 million for fiscal 2000 from $759.0 million for fiscal
1999. Cost of goods sold as a percentage of net sales decreased to 81.0% for
fiscal 2000 from 85.2% for fiscal 1999.

         Selling and administrative expenses increased 1.0% to $38.5 million for
fiscal 2000 from $38.1 million for fiscal 1999, primarily reflecting increased
accrual of certain associate benefits and performance based incentives
corresponding to the improvement in operating income for the period. Selling and
administrative expenses as a percentage of net sales increased to 4.6% for
fiscal 2000 from 4.3% for fiscal 1999.

         Segment Performance. Apparel fabric sales decreased 3.9% to $616.4
million for fiscal 2000 from $641.3 million for fiscal 1999. The decline in
sales reflected a 1.2% increase in yards sold and a 5.0% decrease in average
selling prices. Declines in average selling prices were experienced across the
board. The slight improvement in unit shipments reflected improvement in demand
for denim and other bottomweight fabrics. Operating income for apparel fabrics
increased 19.4% to $85.9 million for fiscal 2000 from $71.9 million for fiscal
1999. The improvement in operating income was largely due to more favorable raw
material costs and lower unit costs achieved through improved capacity
utilization, plant management programs and capital expenditure projects.

         Yarn sales decreased 7.4% to $231.7 million for fiscal 2000 from $250.3
million for fiscal 1999, reflecting a 5.1% increase in pounds sold and a 11.9%
decrease in average selling prices. Although the Company's decision to
significantly increase its consumption of internally produced yarns within its
fabrics operations resulted in a decline in outside yarn sales, the improvement
in capacity utilization generated the improvement in overall yarn volume. Market
pricing for sales yarns remained very competitive, reflecting continued excess
production capacity within the domestic industry and continued imports of yarns
and knitted apparel from Asia. Operating income for yarns increased to $7.9
million for fiscal 2000 from an income of $0.9 million for fiscal 1999.
Operating income was positively impacted by lower raw material costs and unit
cost reductions related to the improved capacity utilization.

RESULTS OF OPERATIONS (CONTINUED)


                                       18
<PAGE>

         Other sales, which include sales of greige and specialty fabrics and
revenues from the Company's trucking operation, increased 6.2% to $86.1 million
for fiscal 2000 from $81.0 million for fiscal 1999. The increase in sales
reflected a 12.3% increase in units sold and a 5.4% decrease in average selling
prices. Unit sales of specialty fabrics experienced significant improvement
during fiscal 2000 while capacity utilization within the greige fabrics
operation benefited from increased production of yarns for consumption within
the apparel fabrics operation. Operating income for greige and specialty fabrics
increased 43.0% to $10.1 million for fiscal 2000 from $7.1 million for fiscal
1999, reflecting higher unit sales, lower raw material costs and continued
reduction of manufacturing costs.

         Intersegment sales increased 19.6% percent to $97.7 million for fiscal
2000 from $81.7 million for fiscal 1999, primarily reflecting the significant
increase in consumption of internally produced yarns within the Company's
fabrics operations.

         Interest Expense, Net. Interest expense, net decreased 12.0% to $20.2
million for fiscal 2000 from $23.0 million for fiscal 1999. This decrease
reflected lower average outstanding borrowings during fiscal 2000.

         Discount and Expenses on Sale of Receivables. Discount and expenses on
sale of receivables were $5.6 million for fiscal 2000 and fiscal 1999.

         Provision for Income Taxes. Provision for income taxes increased to
$18.6 million for fiscal 2000 from $6.3 million for fiscal 1999, reflecting the
increase in income before income taxes. The Company's effective tax declined to
36.0% for fiscal 2000, due to state incentive program credits related to the
Company's investments in its manufacturing facilities, compared to 38.5% for
fiscal 1999.

SUBSEQUENT EVENTS

         In response to the highly competitive market conditions and continued
oversupply of open-end yarns, in September and October 2001, the Company
announced the closing of two separate open-end yarn manufacturing facilities
located in North Carolina. Additionally, the Company implemented a program in
September 2001 to reduce certain manufacturing overhead costs and selling,
general and administrative expenses. In connection with these actions, the
Company anticipates recording facility restructuring charges, severance and
other non-operating costs of approximately $5.5 million during the first quarter
of fiscal 2002.

         Consumption of the cotton purchased for the two yarn manufacturing
facilities being closed will be shifted to the Company's remaining manufacturing
facilities, delaying the Company's ability to fully realize the historically low
cotton costs provided by the current marketplace.


                                       19
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

General

         The Company has funded its working capital requirements and capital
expenditures with cash generated from operations, borrowings under its Revolving
Credit Facility, proceeds received in connection with sales of trade receivables
and proceeds received in connection with the issuance of equity and debt
securities. At August 31, 2001, the Company had borrowings of $102.7 million
outstanding under the Revolving Credit Facility and $22.3 million of borrowing
availability thereunder. Such borrowings bore interest at a weighted average
rate of 6.9% per annum at August 31, 2001. In addition, at August 31, 2001, $125
million aggregate principal amount of the Notes (which are fully and
unconditionally guaranteed by the Company) issued by Avondale Mills during
fiscal 1996 were outstanding.

Revolving Credit Facility

         The Revolving Credit Facility, consisting of a twenty-nine month
secured revolving line of credit of up to $125 million, was amended effective
August 30, 2001 to revise certain financial covenants and adjust interest rate
pricing. Borrowings under the Revolving Credit Facility include revolving loans
to be provided by the lenders ("Revolving Loans") and up to $12.5 million of
revolving swing loans ("Revolving Swing Loans") to be provided by Wachovia Bank,
N.A. ("Wachovia"). Interest accrues on Revolving Loans at the Company's option
at either LIBOR (adjusted for reserves) plus a specified number of basis points
or the base rate, which is the higher of Wachovia's prime rate or the overnight
federal funds rate plus 1.25%. Interest accrues on Revolving Swing Loans at the
Company's option at either the base rate or at the "set" rate, which shall be an
interest rate agreed to by the Company and Wachovia at the time such loan is
made. In addition, the Company is required to pay certain structuring,
administration and funding fees under the Revolving Credit Facility. The
Revolving Credit Facility is secured by substantially all of the Company's
assets. The Revolving Credit Facility contains customary covenants, including
requirements to maintain certain financial ratios.

Swap Agreements

         The Company has used interest rate swap agreements to effectively fix
the interest rate with respect to a portion of the borrowings outstanding under
the Credit Facility, which otherwise bear interest at floating rates. Such
agreements involve the receipt of floating rate amounts in exchange for fixed
rate interest payments during the term of such agreements without an exchange of
the underlying principal amounts. The differential to be paid or received is
accrued as interest rates change and recognized as an adjustment to interest
expense related to the borrowings outstanding under the Credit Facility. The
related amount payable to or receivable from counterparties is included in other
liabilities or assets. At August 31, 2001, the Company had swap agreements with
notional amounts aggregating $35 million, providing an effective weighted
average interest rate of 5.3% on that equivalent portion of the outstanding
Revolver Loans.

Receivables Securitization Facility

         Pursuant to an agreement between Avondale Mills and Bank One, as
amended effective April 25, 2001, Bank One has provided to the Company, through
a special purpose vehicle administered by it, a securitization facility
("Receivables Securitization Facility") of up to $100 million for the
securitization of certain trade receivables (the "Receivables") originated by
the Company. The Company acts as the servicer for the Receivables.


                                       20
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

         Under the Receivables Securitization Facility, the Company transfers
Receivables to a wholly owned, limited-purpose subsidiary of the Company (the
"Receivables Company"), which sells the Receivables to a trust (the "Trust").
The Trust issues variable funding certificates to lending or financial
institutions or other investors evidencing undivided interests in the assets of
the Trust (the "Certificates"). The Receivables Securitization Facility permits
draws and repayments on a revolving basis prior to November 15, 2002 or such
earlier time as certain events occur (the "Amortization Commencement Date"). The
Certificates, which represent beneficial interests in the Trust, entitle the
holders thereof to (i) receipt of collections from the Receivables, (ii) all
rights of the Company or the Receivables Company in goods, the sale of which
gave rise to the Receivables, (iii) all collateral and other arrangements
supporting the Receivables, (iv) all rights to proceeds of any of the foregoing
held in lock-boxes and bank accounts of the Company or the Receivables Company,
(v) rights and interests of the Receivables Company under the documents for the
Receivables Securitization Facility and (vi) all collections and other proceeds
of the assets described above. The Certificates represent beneficial interests
in the Trust only, and do not represent obligations of, or interests in, and are
not guaranteed or insured by, the Receivables Company or the Company. At August
31, 2001, certificates of $66 million were outstanding.

         The rate of interest on the Receivables Securitization Facility is tied
to the Eurodollar rate (adjusted for any reserves) or Bank One's alternate base
rate. The final maturity of the Certificates is expected to occur six months
after the Amortization Commencement Date. All collections attributable to the
Certificates will be set aside commencing on the Amortization Commencement Date
to repay the Certificates in full. Amounts set aside will be applied on a
monthly basis to repay the Certificates in full.

         The Receivables Securitization Facility contains covenants,
representations and warranties customary for such facilities and consistent with
those that Bank One reasonably believes are required to obtain an "A" rating
from the rating agencies. Financial covenants are not included in the provisions
of the Receivables Securitization Facility. The Facility includes provisions
relating to cross defaults to other debt obligations of the Company.

Capital Expenditures and Cash Flows Analysis

         The Company's capital expenditures aggregated $91 million for fiscal
2001. These expenditures were primarily to complete the modernization of a
fabric finishing facility in South Carolina, construct a new building addition
and install new air jet looms at an existing greige weaving facility, replace
older projectile looms with new air jet looms at an existing integrated denim
facility, install new linked ring spinning equipment at three yarn production
facilities and purchase other equipment. Management estimates that capital
expenditures for fiscal 2002 will be approximately $25 million, and that such
amounts will be used primarily for general facility and equipment upgrades.

         Net cash provided by operating activities was $48.1 million in fiscal
2001. Principal working capital changes included a $28.0 million decrease in
accounts receivable and corresponding $20.0 million decrease in accounts
receivable sold under the securitization facility, a $6.3 million decrease in
inventories, a $14.7 million decrease in other assets, primarily deposits on
equipment orders, a $23.1 million decrease in accounts payable and accrued
expenses, and a $9.1 million decrease in income taxes payable. The Company's
investing activities were primarily the capital improvements described above.
Net cash provided by financing activities aggregated $37.3 million, including
$5.0 million used to pay dividends on Common Stock, and a net increase in the
Revolving Credit facility and other long term debt of $42.5 million.

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)


                                       21
<PAGE>

         Net cash provided by operating activities was $67.7 million in fiscal
2000. Principal working capital changes included a $2.4 million decrease in
accounts receivable, a $7.0 million decrease in accounts receivable sold under
the securitization facility, a $7.0 million increase in other assets, primarily
deposits on equipment orders, and a $4.7 million increase in accounts payable
and accrued expenses. The Company's investing activities were primarily capital
improvements of $30.5 million. Net cash used in financing activities aggregated
$39.3 million, including $5.1 million used to pay dividends on Common Stock, and
a net reduction in the Revolving Credit Facility and other long term debt of
$31.9 million.

         Net cash provided by operating activities was $80.4 million in fiscal
1999. Principal working capital changes included a $31.5 million decrease in
accounts receivable, a $19.0 million decrease in accounts receivable sold under
the securitization facility, an $8.1 million decrease in inventories, and a $7.0
million decrease in accounts payable and accrued expenses. The Company's
investing activities were primarily capital improvements of $50.1 million. Net
cash used in financing activities aggregated $32.4 million, including $5.1
million used to pay dividends on Common Stock, and a net reduction in the
Revolving Credit Facility and other long term debt of $27.3 million.

         Management believes that cash generated from operations, together with
borrowings available under the Revolving Credit Facility and proceeds received
in connection with sales of trade receivables, will be sufficient to meet the
Company's working capital and capital expenditure needs in the foreseeable
future. The Company will also continue to consider other options available to it
in connection with future working capital and capital expenditure needs,
including the issuance of additional debt and equity securities.

SEASONALITY

         The Company's sales are broadly distributed over markets with staggered
seasonality and, therefore, generally do not exhibit significant seasonal
trends.

NEW ACCOUNTING STANDARDS

         In June 2001, The Financial Accounting Standards Board issued Statement
No. 141, "Business Combinations," and Statement No. 142, "Goodwill and other
Intangible Assets". Statement No. 141 prohibits the pooling of interest method
of accounting for business combinations initiated after June 2001. Statement No.
142 specifies that goodwill and some intangible assets will no longer be
amortized but instead will be subject to testing for impairment on an annual
basis, or as events occur that would reduce the fair value of such asset below
its carrying value. The Company plans to adopt Statement No. 142 in the first
quarter of fiscal 2003. Management does not believe the adoption of these
statements will have a material effect on the Consolidated Financial Statements
of the Company.

         In June 2001, The Financial Accounting Standards Board issued Statement
No. 143, "Accounting for Asset Retirement Obligations," which addresses
accounting and reporting for asset retirement costs of long lived assets
resulting from legal obligations associated with acquisition, construction or
development transactions. The Company plans to adopt Statement No. 143 in the
first quarter of fiscal 2003. Management has determined the adoption of this
statement will not have a material effect on the Consolidated Financial
Statements of the Company.

         In August 2001, The Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which clarifies accounting and reporting for assets held for sale,
scheduled for abandonment or other disposal, and recognition of impairment loss
related to the carrying value of long-lived assets. The Company plans to adopt
Statement


                                       22
<PAGE>

No. 144 in the first quarter of fiscal 2003. Management does not believe the
adoption of this statement will have a material effect on the Consolidated
Financial Statements of the Company.

FORWARD LOOKING STATEMENTS.

         Statements herein regarding the Company's anticipated capital
expenditures and anticipated performance in future periods constitute forward
looking statements within the meaning of the Securities Act of 1933 and
Securities Act of 1934. Such statements are subject to certain risks and
uncertainties that could cause actual amounts to differ materially from those
projected. With respect to anticipated capital expenditures, management has made
certain assumptions regarding, among other things, maintenance of existing
facilities and equipment, availability and desirability of new, technologically
advanced equipment, installation and start up times, cost estimates and
continued availability of financial resources. The estimated amount of capital
expenditures is subject to certain risks, including, among other things, the
risk that unexpected capital expenditures will be required and unexpected costs
and expenses will be incurred. Further, statements herein regarding the
Company's performance in future periods are subject to risks relating to, among
other things, the cyclical and competitive nature of the textile industry in
general, pressures on selling prices due to competitive and economic conditions,
deterioration of relationships with, or loss of, significant customers,
availability, sourcing and pricing of cotton and other raw materials,
technological advancements, employee relations, continued availability of
financial resources, difficulties integrating acquired businesses and possible
changes in governmental policies affecting raw material costs. In addition,
governmental trade policies, including establishment of textile quotas and
tariffs, may be changed in response to terrorist attacks and related military
action and the Company's performance in future periods is subject to other risks
associated with possible future terrorist activity or the governmental or the
military response thereto. Management believes these forward looking statements
are reasonable; however, undue reliance should not be placed on such forward
looking statements, which are based on current expectations.


                                       23
<PAGE>

OTHER DATA

         EBITDA, which is presented not as an alternative measure of operating
results or cash flow from operations (as determined in accordance with generally
accepted accounting principles) but because it is a widely accepted financial
indicator of the ability to incur and service debt, is calculated by the Company
as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                                            FISCAL YEAR
                                                          ----------------------------------------------
                                                             1999             2000                2001
                                                          ---------        ----------         ----------

<S>                                                       <C>              <C>                <C>
Net income .......................................        $  10,023        $   33,003         $    1,257
Interest expense .................................           22,998            20,249             20,396
Discount and expenses on
    sale of receivables ..........................            5,590             5,578              4,935
Provision for income taxes .......................            6,270            18,580                540
Depreciation and amortization ....................           42,801            42,838             46,399
Facility restructuring ...........................            6,240                --                 --
Net change in allowance to reduce carrying
    value of inventory to LIFO basis .............               --            (4,700)             1,950
                                                          ---------        ----------         ----------

EBITDA ...........................................        $  93,922        $ 115,548          $   75,477
                                                          =========        ==========         ==========
</TABLE>

      EBITDA as calculated by the Company is not necessarily comparable with
similarly-titled measures presented by other companies.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Upward or downward changes in market interest rates and their impact on
the reported interest expense of the Company's variable rate borrowings may
affect the Company's earnings. However, the Company's use of interest rate swap
agreements will limit the negative impact of higher interest rates. Assuming the
revolving credit facility and interest rate swap agreements at August 31, 2001
remain in effect throughout fiscal 2002, a 10% change in the effective average
interest rate would not have a material effect on the Company's pretax earnings
for fiscal 2002. In addition, a 10% change in interest rates would not have a
material effect on the fair value of the Company's interest rate swap agreements
and senior subordinated notes.

         Increases or decreases in the market price of cotton may affect the
valuation of the Company's inventories and fixed purchase commitments and,
accordingly, the Company's earnings. The potential decline in fair value of
these inventories and fixed purchase commitments resulting from a 10% decline in
market prices is estimated to be approximately $14 to $16 million.


                                       24
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              AVONDALE INCORPORATED

                        CONSOLIDATED FINANCIAL STATEMENTS
                                 AUGUST 31, 2001

<TABLE>
<CAPTION>
                                                                                                  PAGE
                                                                                                  ----
<S>                                                                                               <C>
Report of Independent Public Accountants.............................................              26

Consolidated Balance Sheets..........................................................              27

Consolidated Statements of Income....................................................              28

Consolidated Statements of Shareholders' Equity......................................              29

Consolidated Statements of Cash Flows................................................              30

Notes to Consolidated Financial Statements...........................................              31
</TABLE>


                                       25
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Avondale Incorporated:

         We have audited the accompanying consolidated balance sheets of
Avondale Incorporated as of August 25, 2000 and August 31, 2001, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended August 31, 2001. These financial
statements and the schedule referred to below 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
Avondale Incorporated as of August 25, 2000 and August 31, 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 2001 in conformity with accounting
principles generally accepted in the United States.

         Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index at Item
14 (a) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.


ARTHUR ANDERSEN LLP

Atlanta, Georgia
October 9, 2001


                                       26
<PAGE>

                              AVONDALE INCORPORATED

                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

                              AUGUST 25, AUGUST 31,

<TABLE>
<CAPTION>
                                                                                            2000                 2001
                                                                                        -----------         -----------
<S>                                                                                     <C>                 <C>
                                   ASSETS
Current assets
  Cash .........................................................................        $     7,867         $     2,969
  Accounts receivable, less allowance for doubtful accounts of
     $2,989 in 2000 and $2,616 in 2001 .........................................             54,531              46,573
  Inventories ..................................................................            105,965              99,671
  Prepaid expenses .............................................................              2,100               1,409
  Income taxes refundable ......................................................                 --               6,721
                                                                                        -----------         -----------
          Total current assets .................................................            170,463             157,343
Property, plant and equipment
  Land .........................................................................              8,400               8,400
  Buildings ....................................................................             85,907              91,383
  Machinery and equipment ......................................................            494,590             566,279
                                                                                        -----------         -----------
                                                                                            588,897             666,062
  Less accumulated depreciation ................................................           (346,006)           (379,228)
                                                                                        -----------         -----------
                                                                                            242,891             286,834
Other assets ...................................................................             25,354              10,641
                                                                                        -----------         -----------
                                                                                        $   438,708         $   454,818
                                                                                        ===========         ===========
                    LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
  Accounts payable .............................................................        $    32,358         $    24,147
  Accrued compensation, benefits and related expenses ..........................             23,277              10,194
  Accrued interest .............................................................              4,808               4,595
  Other accrued expenses .......................................................             15,810              14,248
  Long-term debt due in one year ...............................................              2,500                 500
  Income taxes payable .........................................................              2,375                  --
                                                                                        -----------         -----------
          Total current liabilities ............................................             81,128              53,684
Long-term debt .................................................................            185,175             229,650
Deferred income taxes and other long-term liabilities ..........................             41,900              45,483
Commitments and contingencies
Shareholders' equity
  Preferred stock
     $.01 par value; 10,000 shares authorized ..................................                 --                  --
  Common stock
     Class A, $.01 par value; 100,000 shares authorized; issued and
       outstanding -- 11,565 shares in 2000 and 11,552 shares in 2001 ..........                115                 115
     Class B, $.01 par value; 5,000 shares authorized; issued and
       outstanding -- 979 shares in 2000 and 2001 ..............................                 10                  10
  Capital in excess of par value ...............................................             39,696              39,669
  Accumulated other comprehensive loss ..........................................                 --               (561)
  Retained earnings ............................................................             90,684              86,768
                                                                                        -----------         -----------
          Total shareholders' equity ...........................................            130,505             126,001
                                                                                        -----------         -----------
                                                                                        $   438,708         $   454,818
                                                                                        ===========         ===========
</TABLE>

                   The accompanying notes are an integral part
                  of these consolidated financial statements.


                                       27
<PAGE>

                              AVONDALE INCORPORATED

                        CONSOLIDATED STATEMENTS OF INCOME
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                        FISCAL YEAR ENDED
                                                          ----------------------------------------------
                                                          AUGUST 27,        AUGUST 25,        AUGUST 31,
                                                             1999               2000              2001
                                                          ----------        ----------        ----------
<S>                                                       <C>               <C>               <C>
Net sales ........................................        $  890,948        $  836,544        $  772,768
Operating costs and expenses
   Cost of goods sold ............................           759,003           677,952           666,205
   Depreciation ..................................            42,271            42,250            45,681
   Selling and administrative expenses ...........            38,096            38,474            32,989
   Facility restructuring charges ................             6,240                --                --
                                                          ----------        ----------        ----------
          Operating income .......................            45,338            77,868            27,893
Interest expense .................................            22,998            20,249            20,396
Discounts and expenses on sales of receivables ...             5,590             5,578             4,935
Other expenses, net ..............................               457               458               765
                                                          ----------        ----------        ----------
   Income before income taxes ....................            16,293            51,583             1,797
Provision for income taxes .......................             6,270            18,580               540
                                                          ----------        ----------        ----------
          Net income .............................        $   10,023        $   33,003        $    1,257
                                                          ==========        ==========        ==========
Per share data
          Net income - basic .....................        $      .79        $     2.61        $      .10
                                                          ==========        ==========        ==========
          Net income - diluted ...................        $      .77        $     2.57        $      .10
                                                          ==========        ==========        ==========
</TABLE>

                   The accompanying notes are an integral part
                  of these consolidated financial statements.


                                       28
<PAGE>

                              AVONDALE INCORPORATED

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                        ACCUMULATED
                                                        COMMON STOCK       CAPITAL IN     OTHER                         TOTAL
                                                                ISSUED      EXCESS OF  COMPREHENSIVE  RETAINED      SHAREHOLDERS
                                                   SHARES       AMOUNT      PARVALUE       LOSS        EARNINGS         EQUITY
                                                  -------       ------     ----------  -------------  ----------    ------------
<S>                                               <C>           <C>        <C>         <C>            <C>           <C>
Balance at August 28, 1998 .................       12,677       $ 127       $ 39,835       $  --       $ 60,082       $ 100,044
  Net income ...............................           --          --             --          --         10,023          10,023
  Cash dividends ($0.40 per share) .........           --          --             --          --         (5,071)         (5,071)
                                                  -------       -----       --------       -----       --------       ---------
Balance at August 27, 1999 .................       12,677         127         39,835          --         65,034         104,996
  Net income ...............................           --          --             --          --         33,003          33,003
  Cash dividends ($0.40 per share) .........           --          --             --          --         (5,062)         (5,062)
  Common stock issued ......................           22          --            349          --             --             349
  Purchase and retirement of treasury
   stock ...................................         (155)         (2)          (488)         --         (2,291)         (2,783)
                                                  -------       -----       --------       -----       --------       ---------
Balance at August 25, 2000 .................       12,544         125         39,696          --         90,684         130,505
  Comprehensive income:
    Net income .............................           --          --             --          --          1,257           1,257
    Cumulative effect of adoption of
      Statement No. 133, net of
      income taxes .........................           --          --             --         427             --             427
    Change in fair value of interest rate
      Swaps, net of income taxes ...........           --          --             --        (988)            --            (988)
                                                  -------       -----       --------       -----       --------       ---------
         Other comprehensive income ........           --          --             --        (561)         1,257             696
  Cash dividends ($0.40 per share) .........           --          --             --          --         (5,015)         (5,015)
  Common stock issued ......................            1          --             20          --             --              20
  Purchase and retirement of treasury
    stock ..................................          (14)         --            (47)         --           (158)           (205)
                                                  -------       -----       --------       -----       --------       ---------
Balance at August 31, 2001 .................       12,531       $ 125       $ 39,669       $(561)      $ 86,768       $ 126,001
                                                  =======       =====       ========       =====       ========       =========
</TABLE>

                   The accompanying notes are an integral part
                  of these consolidated financial statements.


                                       29
<PAGE>

                              AVONDALE INCORPORATED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                           FISCAL YEAR ENDED
                                                                           ------------------------------------------------
                                                                            AUGUST 27,        AUGUST 25,         AUGUST 31,
                                                                              1999               2000               2001
                                                                           ----------         ----------         ----------
<S>                                                                        <C>                <C>                <C>
Operating activities
  Net income ......................................................        $   10,023         $   33,003         $    1,257
  Adjustments to reconcile net income to net cash
    provided by operating activities
     Depreciation and amortization ................................            42,801             42,838             46,399
     Provision for (benefit of) deferred income taxes .............            (1,852)             2,181              6,543
     Loss (gain) on sale of equipment .............................             4,183                (99)               640
     Sales of accounts receivable, net ............................           (19,000)            (7,000)           (20,000)
     Changes in operating assets and liabilities
       Accounts receivable ........................................            31,549              2,417             27,958
       Inventories ................................................             8,125                594              6,294
       Prepaid expenses ...........................................              (328)            (1,030)               691
       Other assets and liabilities, net ..........................             9,767             (8,878)            10,474
       Accounts payable and accrued expenses ......................            (6,957)             4,736            (23,069)
       Income taxes payable .......................................             2,066             (1,035)            (9,096)
                                                                           ----------         ----------         ----------
          Net cash provided by operating activities ...............            80,377             67,727             48,091
Investing activities
    Purchase of property, plant and equipment .....................           (50,143)           (30,477)           (91,139)
    Proceeds from sale of property, plant and equipment ...........             1,423              1,416                875
                                                                           ----------         ----------         ----------
          Net cash used in investing activities ...................           (48,720)           (29,061)           (90,264)
Financing activities
  Payments on long-term debt ......................................            (2,250)            (3,250)           (10,000)
  Advances (payments) on revolving line of credit, net ............           (25,050)           (36,100)            52,475
  Issuance of long-term debt ......................................                --              7,500                 --
  Issuance of common stock ........................................                --                349                 20
  Purchase and retirement of treasury stock .......................                --             (2,781)              (205)
  Dividends paid ..................................................            (5,071)            (5,062)            (5,015)
                                                                           ----------         ----------         ----------
          Net cash provided by (used in) financing activities .....           (32,371)           (39,344)            37,275
                                                                           ----------         ----------         ----------
Decrease in cash ..................................................              (714)              (678)            (4,898)
Cash and cash equivalents at beginning of year ....................             9,259             8,545              7,867
                                                                           ----------         ----------         ----------
          Cash and cash equivalents at end of year ................        $    8,545         $    7,867         $    2,969
                                                                           ==========         ==========         ==========
</TABLE>

                   The accompanying notes are an integral part
                   of these consolidated financial statements.


                                       30
<PAGE>

                              AVONDALE INCORPORATED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 AUGUST 31, 2001

         1. Basis of Presentation: The accompanying consolidated financial
statements include the accounts of Avondale Incorporated and its wholly owned
subsidiaries, Avondale Mills, Inc. ("Avondale Mills") and Avondale Receivables
Company (collectively, the "Company"). All significant intercompany accounts and
transactions have been eliminated. Certain prior year financial statement
amounts have been reclassified to conform with the current year's presentation.
Unless otherwise stated, all references to years relate to the Company's fiscal
year, which ends on the last Friday in August, rather than calendar years.

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

         Avondale Incorporated is a holding company and has no operations,
liabilities or assets other than those related to its investment in Avondale
Mills, Inc.

         Cash and Cash Equivalents: The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.

         Inventories: Inventories are stated at the lower of cost or market
value. Except for certain supply inventories valued on an average cost basis,
cost is determined on a last-in, first-out ("LIFO") basis.

         Property, Plant and Equipment: Property, plant and equipment is stated
at cost and depreciated over the estimated useful lives of the related assets,
which range from three to thirty years. Depreciation is calculated primarily
using the straight-line method. Capital lease amortization is included with
depreciation expense in the consolidated financial statements.

         Long-Lived Assets: The Company periodically reviews the values assigned
to long-lived assets, such as property, plant and equipment and goodwill. The
associated depreciation and amortization periods are reviewed on an annual
basis. Recoverability is measured based on the anticipated undiscounted cash
flows from operations. Management believes that long-lived assets included in
the accompanying balance sheets are appropriately valued.

         Associate Benefit Plans: The Company has a discretionary profit sharing
plan covering substantially all associates. Annual contributions by the Company
are made to the plan in amounts determined by the board of directors. In
addition, the plan has 401(k) savings options that are available to all
associates. The Company matches 25% of the first 3% of compensation contributed
by each associate. The Company also has a deferred compensation plan for certain
key personnel. The related expense for these profit sharing and deferred
compensation plans is charged to operations currently and totaled $3.5 million,
$7.3 million and $0.1 million for fiscal 1999, 2000 and 2001, respectively.

         Self-insurance Programs: The Company maintains self-insurance programs
which provide workers' compensation benefits, long-term disability benefits for
claims incurred prior to January 1, 2001, and medical and dental benefits for
its associates. Workers' compensation insurance is purchased to provide coverage
up to statutory limits, in excess of a self-insurance retention of $350,000 per
occurrence. Long-term disability benefits for claims incurred subsequent to
January 1, 2001 are covered by a purchased insurance policy.


                                       31
<PAGE>

         Self-insurance reserves for workers' compensation benefits are recorded
based on actuarial estimates. Self-insurance reserves for long-term disability
benefits relating to claims incurred prior to January 1, 2001 and medical and
dental benefits are recorded based on the estimates of management taking into
consideration claims payment experience and current conditions which may affect
future experience. Actual experience may differ from those estimates.

         Other Assets and Other Long-Term Liabilities: Other assets consist
primarily of unamortized loan fees, goodwill, cash surrender value of life
insurance, and deposits on machinery and equipment purchases. Loan fees are
amortized on a straight line basis over the outstanding term of the related
debt. Goodwill is amortized on a straight line basis over 20 years. Other
long-term liabilities consist of accrued postretirement and workers'
compensation benefits and deferred compensation for certain key management
personnel.

         Fair Value of Financial Instruments: The carrying values of cash,
accounts receivable, certain other assets, accounts payable and accrued expenses
approximate reasonable estimates of their fair values at August 25, 2000 and
August 31, 2001. See Notes 5 and 9 for disclosures related to the fair values of
interest rate swap agreements and long-term debt.

         Earnings Per Share: Earnings per share is calculated by dividing the
reported net income for the period by the appropriate weighted average number of
shares of common stock outstanding, as shown below (in thousands):

<TABLE>
<CAPTION>
                                                            1999            2000             2001
                                                          --------        --------        --------
<S>                                                       <C>             <C>             <C>
Weighted average shares outstanding -
      Basic ......................................          12,677          12,652          12,536
Effect of employee and director stock options ....             257             174             128
                                                          --------        --------        --------
Weighted average shares outstanding -
      Diluted ....................................          12,934          12,826          12,664
                                                          ========        ========        ========
</TABLE>

         Stock Based Compensation: The Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee and director stock
options and adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("FAS
123"). The Company grants stock options for a fixed number of shares to
employees and directors with an exercise price equal to the fair value of the
shares at the date of grant and, accordingly, recognizes no compensation expense
for the stock option grants.

         Recent Accounting Pronouncements: In June 2001, The Financial
Accounting Standards Board issued Statement No. 141, "Business Combinations,"
and Statement No. 142, "Goodwill and other Intangible Assets". Statement No. 141
prohibits the pooling of interest method of accounting for business combinations
initiated after June 2001. Statement No. 142 specifies that goodwill and some
intangible assets will no longer be amortized but instead will be subject to
testing for impairment on an annual basis, or as events occur that would reduce
the fair value of such asset below its carrying value. The Company plans to
adopt Statement No. 142 in the first quarter of fiscal 2003. Management does not
believe the adoption of these statements will have a material effect on the
Consolidated Financial Statements of the Company.

         In June 2001, The Financial Accounting Standards Board issued Statement
No. 143, "Accounting for Asset Retirement Obligations," which addresses
accounting and reporting for asset retirement costs of long lived assets
resulting from legal obligations associated with acquisition, construction or
development


                                       32
<PAGE>

transactions. The Company plans to adopt Statement No. 143 in the first quarter
of fiscal 2003. Management has determined the adoption of this statement will
not have a material effect on the Consolidated Financial Statements of the
Company.

         In August 2001, the Financial Accounting Standards Board issued
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which clarifies accounting and reporting for assets held for sale,
scheduled for abandonment or other disposal, and recognition of impairment loss
related to the carrying value of long-lived assets. The Company plans to adopt
Statement No. 144 in the first quarter of fiscal 2003. Management does not
believe the adoption of this statement will have a material effect on the
Consolidated Financial Statements of the Company.

         Revenue Recognition: The Company records revenues principally when
products are shipped to customers. Consistent with recognized practice in the
textile industry, the Company also records revenues to a lesser extent
throughout the year (9%, 7% and 7% of total revenues in fiscal 1999, 2000 and
2001, respectively) on a bill and hold basis, invoicing goods that have been
produced, packaged and made ready for shipment. These goods are effectively
segregated from inventory which is available for sale, the risks of ownership of
the goods have passed to the customer, and the remittance terms and collection
experience on the related invoicing is consistent with all other sales by the
Company.

         The credit status of each customer is approved and monitored by the
Company. Sales to V.F. Corporation and its affiliates represented 16% of net
sales for fiscal 1999, 15% of net sales for fiscal 2000 and 17% of net sales for
fiscal 2001.

         In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101, "Revenue Recognition", to establish guidelines for
revenue recognition and enhance revenue recognition disclosure requirements. The
Bulletin clarifies basic criteria for the culmination of the earnings process
and was effective during fiscal year 2001. The adoption of Staff Accounting
Bulletin 101 did not have a material effect on the Consolidated Financial
Statements of the Company.

         In September 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board finalized Issue No. 00-10, "Accounting for Shipping
and Handling Fees and Costs", requiring amounts billed to a customer in a sales
transaction for shipping and handling be classified as revenues. The Company
adopted this accounting treatment during the first quarter of fiscal 2001 and
reclassified prior years to conform to the current year presentation. As a
result, sales and cost of goods sold increased by $10.1 million for fiscal 1999,
$10.0 million for fiscal 2000 and $7.0 million for fiscal 2001.

         2. Facility Restructuring: During the fourth quarter of fiscal 1999,
the Company recorded pretax charges of $6.2 million to consolidate manufacturing
facilities and dispose of certain inefficient equipment in its Graniteville,
South Carolina and Augusta, Georgia operations.


                                       33
<PAGE>

         3. Segment Information: The Company operates principally in three
segments: apparel fabrics, yarns and other sales. Apparel fabrics manufactures
and markets cotton and cotton-blend fabrics used in the manufacture of jeans,
sportswear and utilitywear. Yarns manufactures and markets cotton and
cotton-blend yarns to customers in the knitting and weaving industries. Other
sales include the manufacturing and marketing of a variety of greige and
specialty fabrics to apparel, home furnishings, industrial, military and
recreational product manufacturers, and revenues from the Company's trucking
operation. The unallocated amounts reflect expenses, assets and capital
expenditures for centralized transportation, warehouse and administrative
services (in thousands).

         In conjunction with the adoption of Emerging Issues Task Force issue
No. 00-10, the Company amended reported revenues of the segments to classify as
revenues the shipping and handling charges billed to customers. In addition,
certain prior year segment information has been reclassified to conform to the
current year's presentation.

<TABLE>
<CAPTION>
                                                                  1999               2000               2001
                                                               ----------         ----------         ----------
<S>                                                            <C>                <C>                <C>
     Revenues:
          Apparel fabrics .............................        $  641,341         $  616,436         $  604,168
          Yarns .......................................           250,284            231,748            236,842
          Other .......................................            81,042             86,091             78,570
                                                               ----------         ----------         ----------
                                                                  972,667            934,275            919,580
           Less intersegment sales ....................            81,719             97,731            146,812
                                                               ----------         ----------         ----------
             Total ....................................        $  890,948         $  836,544         $  772,768
                                                               ==========         ==========         ==========

     Income:
          Apparel fabrics .............................        $   71,914         $   85,887         $   46,953
          Yarns .......................................               861              7,942               (357)
          Other .......................................             7,064             10,100              3,390
          Unallocated .................................           (34,501)           (26,061)           (22,093)
                                                               ----------         ----------         ----------
             Total operating income ...................            45,338             77,868             27,893

          Interest expense ............................            22,998             20,249             20,396
          Discounts and expenses on sales of
               receivables ............................             5,590              5,578              4,935
          Other expenses, net .........................               457                458                765
                                                               ----------         ----------         ----------
             Income before income taxes ...............        $   16,293         $   51,583         $    1,797
                                                               ==========         ==========         ==========

     Identifiable Assets:
          Apparel fabrics .............................        $  305,533         $  308,306         $  298,399
          Yarns .......................................            73,843             73,658             92,972
          Other .......................................            27,373             27,653             23,022
          Unallocated .................................            32,983             29,091             40,425
                                                               ----------         ----------         ----------
             Total ....................................        $  439,732         $  438,708         $  454,818
                                                               ==========         ==========         ==========

     Depreciation and Amortization:
          Apparel fabrics .............................        $   26,143         $   26,653         $   31,396
          Yarns .......................................            10,324             10,162              8,968
          Other .......................................             3,634              3,924              3,937
          Unallocated .................................             2,700              2,099              2,098
                                                               ----------         ----------         ----------
             Total ....................................        $   42,801         $   42,838         $   46,399
                                                               ==========         ==========         ==========
</TABLE>


                                       34
<PAGE>

<TABLE>
<CAPTION>
                                                                  1999               2000               2001
                                                               ----------         ----------         ----------
     <S>                                                       <C>                <C>                <C>
     Capital Expenditures:
          Apparel fabrics .............................        $   34,104         $   18,698         $   46,302
          Yarns .......................................            12,560              8,377             41,855
          Other .......................................             1,485              2,564              1,994
          Unallocated .................................             1,994                838                988
                                                               ----------         ----------         ----------
             Total ....................................        $   50,143         $   30,477         $   91,139
                                                               ==========         ==========         ==========

     Geographic Sales Information:
          United States ...............................        $  830,367         $  753,445         $  661,647
          All Other ...................................            60,581             83,099            111,121
                                                               ----------         ----------         ----------
             Total ....................................        $  890,948         $  836,544         $  772,768
                                                               ==========         ==========         ==========
</TABLE>

         4. Comprehensive Income: Comprehensive income includes unrealized gains
and losses in the fair value of certain derivative instruments which qualify for
hedge accounting. A reconciliation of net income to comprehensive income is as
follows:

<TABLE>
<CAPTION>
                                                                            2000             2001
                                                                         ---------        ---------
          <S>                                                            <C>              <C>
          Net income                                                     $  33,003        $   1,257
          Cumulative effect of adoption of Statement of
          Financial Accounting Standards No. 133,
             net of income taxes                                                --              427
          Change in fair value of interest rate swaps, net of
             income taxes                                                       --             (988)
                                                                         ---------        ---------
          Comprehensive income                                           $  33,003        $     696
                                                                         =========        =========
</TABLE>

         5. Derivatives: The Company has adopted Financial Accounting Standards
Board Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, which requires that derivative instruments be recorded
in the balance sheet as either assets or liabilities measured at fair value, and
that changes in the fair value of the derivative instruments be recorded as
unrealized gains or losses in either net income or other comprehensive income
depending on whether specific hedge accounting criteria are met.

         Upon adoption of Statement No. 133, the Company recorded the fair value
of the interest rate swap agreements, approximately $427,000 net of income
taxes, in other assets and accumulated other comprehensive income at the
beginning of fiscal 2001. For the fiscal year ended August 31, 2001, a decline
in fair value of approximately $988,000, net of income taxes, was recorded as an
unrealized loss in other comprehensive income.

         6. Receivables Securitization Facility: Under an agreement with a bank
(the "Agreement"), as amended April 25, 2001, and which expires November 15,
2002, the Company may sell an undivided interest in a defined pool of revolving
trade accounts receivable (the "Receivables") held by Avondale Receivables
Company. The Receivables are transferred to a trust at a discount, and the trust
then sells variable funding certificates to lending institutions or other
investors representing undivided ownership interests in a defined portion of the
Receivables. Such certificates do not represent obligations of, or interests in,
and are not guaranteed or insured by, the Company. The proceeds from the
issuance of the certificates are remitted to the Company.


                                       35
<PAGE>

         The Company retains a residual interest in the Receivables in an amount
equal to the excess of the Receivables over the certificates sold. Such residual
interest is included in accounts receivable in the Consolidated Balance Sheets.
The carrying value of the residual interest approximates fair value due to the
short period of time required to collect the underlying receivables. All losses,
credits or other adjustments relating to the Receivables constitute deductions
applicable to the Company's residual interest in the Receivables. Accordingly,
the Company maintains an allowance for such deductions based upon the expected
collectibility of the Receivables. At August 25, 2000 and August 31, 2001, an
allowance of $4.8 million and $4.6 million, respectively, related to the
Receivables is included in other accrued expenses in the Consolidated Balance
Sheets.

         The Agreement requires the Company to maintain sufficient levels of
Receivables to collateralize the outstanding certificates. The Agreement also
contains various covenants, representations and warranties customary to the
operation of such securitization programs, but does not include financial
covenants. The Agreement contains cross defaults to other debt obligations of
the Company. The Company, as agent for the trust, is responsible for the
collection and administrative processing of the Receivables. No servicing asset
or liability has been recorded since the cost to service the receivables
approximates the servicing income.

         Under the amended Agreement, the trust may issue certificates of up to
$100.0 million. Certificates of $86.0 million and $66.0 million, respectively,
were outstanding at August 25, 2000 and August 31, 2001. Accounts receivable in
the Consolidated Balance Sheets have been reduced by approximately $87.1 million
and $67.2 million, respectively, representing the face amount of the outstanding
receivables sold at those dates. During fiscal 2001, the Company received
approximately $802.0 million from the sale of receivables under the facility.

         For the fiscal years ended August 27, 1999, August 25, 2000 and August
31, 2001, discounts of $5.6 million, $5.6 million and $4.9 million,
respectively, on sales of Receivables have been included in discounts and
expenses on sales of receivables in the Consolidated Statements of Income. The
Company sells the Receivables as an alternative to incurring additional debt.
Viewed on this basis, the Company's ongoing cost of the facility at August 31,
2001 is equal to the Eurodollar rate (adjusted for any reserves) plus 0.40% or
the bank's base rate of interest.

         7. Inventories: Components of inventories are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                                         AUGUST 25,       AUGUST 31,
                                                                         2000   998        2001
                                                                         ----------       ----------
          <S>                                                            <C>              <C>
          Finished goods ..........................................      $  34,179        $  33,955
          Work in process .........................................         39,462           39,470
          Raw materials ...........................................         15,088           11,713
          Dyes and chemicals ......................................          5,872            5,058
                                                                         ---------        ---------
                                                                            94,601           90,196
          Premium (net of market adjustment) to adjust ............
            Carrying value to LIFO basis ..........................          4,700            2,750
                                                                         ---------        ---------
                                                                            99,301           92,946
          Supplies at average cost ................................          6,664            6,725
                                                                         ---------        ---------
                                                                         $ 105,965        $  99,671
                                                                         =========        =========
</TABLE>


                                       36
<PAGE>

         8. Income Taxes: Provision for income taxes is composed of the
following (in thousands):


<TABLE>
<CAPTION>
                                                                       1999              2000             2001
                                                                    ---------         ---------         --------
          <S>                                                       <C>               <C>               <C>
          Current:
            Federal ........................................        $   7,029         $  14,193         $ (5,195)
            State ..........................................            1,093             2,206             (808)
                                                                    ---------         ---------         --------
                                                                        8,122            16,399           (6,003)
          Deferred:
            Federal ........................................           (1,603)            1,888            5,662
            State ..........................................             (249)              293              881
                                                                    ---------         ---------         --------
                                                                       (1,852)            2,181            6,543
                                                                    ---------         ---------         --------
                                                                    $   6,270         $  18,580         $    540
                                                                    =========         =========         ========
</TABLE>

         The following table shows the reconciliation of federal income tax
expense at the statutory rate on income before income taxes to reported income
tax expense (in thousands):



<TABLE>
<CAPTION>
                                                                      1999            2000            2001
                                                                    --------        --------         ------
     <S>                                                            <C>             <C>              <C>
     Federal income taxes ..................................        $  5,702        $ 18,055         $  629
     State income taxes, net of federal tax benefit ........             492           1,344            (54)
     Other .................................................              76            (819)           (35)
                                                                    --------        --------         ------
                                                                    $  6,270        $ 18,580         $  540
                                                                    ========        ========         ======
</TABLE>

         At August 31, 2001, income taxes refundable represents the portion of
estimated income taxes paid during the first half of fiscal 2001 which became
refundable as a result of the decline in earnings experienced in the second half
of the fiscal year. The Company expects to receive approximately $5.0 million of
the refund in early fiscal 2002.

         The Company made income tax payments of $4.6 million, $17.3 million and
$6.1 million during fiscal 1999, 2000 and 2001, respectively.


                                       37
<PAGE>

         Deferred income taxes are provided for temporary differences in
financial and income tax reporting. Significant components of the Company's
year-end deferred tax liabilities and assets are as follows (in thousands):


<TABLE>
<CAPTION>
                                                                         AUGUST 25,       AUGUST 31,
                                                                            2000             2001
                                                                         ----------       ----------
          <S>                                                            <C>              <C>
          Deferred tax liabilities:
            Depreciation .........................................       $  25,710        $  28,523
            Inventory valuation ..................................           7,576            7,752
            Goodwill .............................................           2,214            2,072
            Other ................................................           3,320            2,380
                                                                         ---------        ---------
                                                                            38,820           40,727
          Deferred tax assets:
            Employee benefit programs ............................           8,948            7,911
            Receivable reserves ..................................           3,155            2,910
            Other ................................................           3,369               15
                                                                         ---------        ---------
                                                                            15,472           10,836
                                                                         ---------        ---------
          Net deferred tax liabilities ...........................       $  23,348        $  29,891
                                                                         =========        =========
</TABLE>

         9. Long-Term Debt: Long-term debt consists of the following (in
thousands):


<TABLE>
<CAPTION>
                                                                                   AUGUST 25,         AUGUST 31,
                                                                                      2000              2001
                                                                                   ----------         ----------
<S>                                                                                <C>                <C>
Revolving credit facility, interest tied to banks' base rate or
alternative rates, 4.75% - 9.5% in 2001, due  January 2004.................        $   50,175         $  102,650

Industrial revenue bonds, floating rate, 1.85% - 5.75% in
2001, due in various installments through 2004.............................            12,500              2,500

Senior subordinated notes, 10.25%, due may 1, 2006.........................           125,000            125,000
                                                                                   ----------         ----------
                                                                                      187,675            230,150
Less current portion.......................................................            (2,500)              (500)
                                                                                   ----------         ----------
                                                                                   $  185,175         $  229,650
                                                                                   ==========         ==========
</TABLE>

         The Company maintains a secured revolving credit facility with a group
of banks, amended effective August 30, 2001 to revise certain financial
covenants and adjust interest rate pricing, which provides aggregate borrowing
availability of a maximum of $125 million through January 2004. Under the terms
of this agreement, the Company can designate an interest rate tied to the
Eurodollar rate (adjusted for any reserves) or the banks' base rate, or at
alternative rates negotiated with the lead bank, for specified time periods. A
commitment fee is payable quarterly on the average daily unused portion of the
revolving credit commitment. The revolving credit facility is secured by
substantially all of the Company's assets. Covenants of the credit agreement
require the Company to maintain certain cash flow ratios and debt to equity
ratios, and contain restrictions on payment of dividends. Under the most
restrictive of these covenants, $20.6 million of retained earnings was available
for payment of dividends at August 31, 2001.

         The Company uses interest rate swap agreements to effectively convert a
portion of its outstanding revolving credit facility and industrial revenue
bonds to a fixed rate basis, thus reducing the impact of interest rate changes
on future income. These agreements involve the receipt of floating rate amounts
in


                                       38
<PAGE>

exchange for fixed rate interest payments over the lives of the agreements
without an exchange of the underlying principal amounts. The differential to be
paid or received is accrued as interest rates change and recognized as an
adjustment to interest expense related to the debt. The related amount payable
to or receivable from counterparties is included in other liabilities or assets.
At August 31, 2001, the Company had interest rate swap agreements with notional
amounts aggregating $35 million providing an effective weighted average interest
rate of 5.3% on that equivalent portion of the revolving credit facility. See
Note 5 for disclosures related to the fair market value of the interest rate
swap agreements at August 31, 2001.

         During fiscal 2000, the Company issued $7.5 million of floating rate,
industrial revenue bonds in connection with a linked ring spinning modernization
program at a facility in Rockford, Alabama. These bonds were repaid during
fiscal 2001 without penalty.

         The remaining industrial revenue bond represents a capital lease
obligation. This lease obligation is secured by a letter of credit agreement
with a bank. The letter of credit agreement is, in turn, secured by the
property, plant and equipment at three plant locations, which had a carrying
value of approximately $17.7 million at August 31, 2001. Covenants of the letter
of credit agreement substantially adopt the restrictive covenant provisions of
the revolving credit facility.

         Avondale Mills has $125 million of 10.25% senior subordinated notes
outstanding which mature on May 1, 2006. The notes are unsecured and the
guarantee of these notes by the Company is subordinated to all existing and
future senior indebtedness of the Company. Interest on the notes is due on May 1
and November 1 of each year. At August 25, 2000 and August 31, 2001, the market
value of the notes was approximately $119 million and $116 million,
respectively. The Company does not anticipate settlement of the notes at fair
value and currently expects the notes to remain outstanding through maturity.

         The senior subordinated notes are redeemable at the Company's option,
in whole or in part, at a scheduled redemption price of 105.125%, which declines
in intervals to 100% in 2004 and thereafter.

         The indenture under which the senior subordinated notes were issued
contains, among other things, certain restrictive covenants which apply to
Avondale Mills on issuance of additional debt, payment of dividends, retirement
of capital stock or indebtedness, purchase of investments, sales or transfers of
assets, certain consolidations or mergers and certain transactions with
affiliates.

         At August 31, 2001, the Company was in compliance with the covenants of
the revolving credit facility, subordinated note indenture and letter of credit
agreements.

         The carrying value of the Company's revolving credit facility and
industrial revenue bonds approximates fair value.

         Aggregate maturities of long-term debt are as follows (in thousands):

<TABLE>
         <S>                                                                                <C>
         2002    ..............................................................             $    500
         2003    ..............................................................                1,000
         2004    ..............................................................              103,650
         2005    ..............................................................                   --
         2006  ................................................................              125,000
         Thereafter through 2010...............................................                   --
                                                                                            --------
                                                                                            $230,150
                                                                                            ========
</TABLE>


                                       39
<PAGE>

         In connection with the Company's borrowings, no interest has been
capitalized. The Company paid interest on revolving credit, long-term debt and
interest rate swap agreements of approximately $21.9 million , $19.3 million and
$19.6 million in fiscal 1999, 2000 and 2001, respectively.

         10. Postretirement Benefits: The estimated cost of postretirement
benefits is recorded ratably over the service lives of the associates expected
to receive such benefits. The Company provides certain life and medical
insurance benefits granted in 1964 to a closed group of associates, the majority
of whom have retired, who were in designated positions of management and met
certain age requirements at the time of grant. Certain medical benefits are also
provided to two closed groups of early retirees as a result of the acquisition
of the textile business of Graniteville Company in fiscal 1996. In addition,
current associates (and their covered dependents) that retire on or after age 55
with at least 15 years of service are eligible for continued medical coverage
through age 65. Benefits are paid from the general assets of the company.

         Changes in the accumulated postretirement benefit obligation were as
follows (in thousands):


<TABLE>
<CAPTION>
                                                                            2000            2001
                                                                         ---------        ---------
          <S>                                                            <C>              <C>
          Beginning balance......................................        $   7,356        $   7,901
            Service cost.........................................               95               95
            Interest cost........................................              677              576
            Amortization of prior service cost...................              332              332
            Benefits paid........................................             (516)            (486)
            Actuarial gain.......................................              (43)            (204)
                                                                         ---------        ---------
          Ending balance.........................................        $   7,901        $   8,214
                                                                         =========        =========
</TABLE>

         Components of the accrued postretirement benefit obligation included in
other long-term liabilities in the accompanying Consolidated Balance Sheets were
as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         AUGUST 25,       AUGUST 31,
                                                                            2000            2001
                                                                         ----------       ----------
          <S>                                                            <C>              <C>
          Accumulated post retirement
            benefit obligation......................................     $  (7,438)       $  (7,623)
          Unrecognized prior service cost...........................         2,324            1,992
          Unrecognized net gain.....................................        (2,787)          (2,583)
                                                                         ---------        ---------
          Accrued postretirement benefit liability..................     $  (7,901)       $  (8,214)
                                                                         =========        =========
</TABLE>

         The Company records postretirement benefit costs based on actuarial
calculations using a weighted average discount rate of 8% for all years
presented. Net postretirement benefit costs include the following components (in
thousands):


<TABLE>
<CAPTION>
                                                            1999             2000            2001
                                                          --------        ---------         -------
          <S>                                             <C>             <C>               <C>
          Service cost ...........................        $    116        $      95         $    95
          Interest cost ..........................             624              677             576
          Net amortization .......................             332              332             332
          Recognized actuarial gain ..............              --              (43)           (204)
                                                          --------        ---------         -------
          Net postretirement benefit cost ........        $  1,072        $   1,061         $   799
                                                          ========        =========         =======
</TABLE>

         A weighted average annual rate of increase in the per capita cost of
covered health care benefits of 6.50% was assumed for 2001, decreasing gradually
to 5% in 2004 and thereafter. An increase of 1% in the


                                       40
<PAGE>

assumed health care cost rate of increase would not have a significant impact on
the accumulated post retirement benefit obligation or the aggregate net periodic
postretirement benefit cost.

         11. Common Stock: Each share of Class A Common Stock is entitled to one
vote and each share of Class B Common Stock is entitled to 20 votes with respect
to matters submitted to a vote of shareholders. Each share of the Class B Common
Stock is convertible at any time, at the option of its holder, into one share of
Class A Common Stock. The Class B Common Stock will convert automatically into
Class A Common Stock, and thereby lose its special voting rights, if such Class
B Common Stock is sold or otherwise transferred to any person or entity other
than certain designated transferees.

         During fiscal 2000 and 2001, the Company repurchased approximately
155,000 and 14,000 shares of Class A Common Stock, respectively, for aggregate
purchase prices of $2.8 million and $205,000, pursuant to offers to sell made by
various shareholders. All shares repurchased have been canceled and reinstated
as authorized but unissued shares of Class A Common Stock.

         The Company maintains an employee Stock Option Plan that allows for the
grant of non-qualified and incentive stock options. Under this Stock Option
Plan, options to purchase up to 1,081,250 shares of Class A Common Stock may be
granted to full-time employees, including executive officers of the Company.
Activity under the plan is summarized as follows (option shares in thousands):

<TABLE>
<CAPTION>
                                                                                      Grant Price Per Share
                                                                               ------------------------------------
                                                                               $ 12.50        $ 18.00        $19.00
                                                                               -------        -------        ------

     <S>                                                                       <C>            <C>            <C>
     Stock options outstanding at August 27, 1999 ......................           505            325            --
        Options granted ................................................            --             --           110
        Options redeemed ...............................................           (30)            --            --
                                                                                ------         ------         -----
     Stock options outstanding at August 25, 2000 ......................           475            325           110
        Options exercised ..............................................            --             (1)           --
        Options ........................................................            --            (68)           --
                                                                                ------         ------         -----
     Stock options outstanding at August 31, 2001 ......................           475            256           110
                                                                                ======         ======         =====

     Average contractural life remaining in years ......................           3.3            4.8           8.3
                                                                                ======         ======         =====

     Stock options exercisable at August 31, 2001 ......................           475            256            --
                                                                                ======         ======         =====
</TABLE>

         The exercise prices of the options granted approximated the fair market
value of the Company's Common Stock on the dates of grant. Options forfeited by
employees leaving the Company are reinstated as available for grant. All options
granted vest ratably over five years and may be exercised for a period of ten
years. At August 31, 2001, there were 114,000 stock options available for grant.

         The Company maintains a Stock Option Plan for Non-employee Directors,
under which 100,000 shares of the Company's Class A Common Stock are reserved
for issuance. Under the plan, each director will automatically be granted
annually, on the fifth day following the annual shareholders meeting, a fully
vested option to purchase 2,000 shares of Class A Common Stock, at an option
price equal to the fair market value of such stock on the date the option is
granted. Options granted are exercisable for a period of ten years, subject to
certain limitations. During fiscal 1999 and 2000, 12,000 non-qualified options
were granted in each year and during fiscal 2001, 14,000 non-qualified options
were granted. The exercise price of each grant was $22.00, $19.00 and $19.00 per
share, respectively. At August 31, 2001, 50,000 non-qualified options remain
outstanding and exercisable.


                                       41
<PAGE>

         Pro forma information regarding the effect on the Company's results of
operations, assuming employee and non-employee director stock options had been
accounted for under the fair value method of Financial Accounting Standards
Board Statement No. 123, was calculated using the "minimum value" method which
is permitted for companies with nonpublic equity. The following weighted average
assumptions were used in these calculations for options granted in fiscal 1999,
2000 and 2001:

<TABLE>
               <S>                                                             <C>
               Risk free interest rate..................................          4.2%
               Expected dividend yield..................................          2.2%
               Expected lives...........................................       8 years
</TABLE>

         The total values of the options granted during fiscal 1999, 2000 and
2001 were computed as approximately $44,000, $332,000 and $53,000, respectively,
which would be amortized over the vesting period of the options. If the Company
had accounted for these plans in accordance with Statement No. 123, the reported
net income and net income per share would have decreased by the following pro
forma amounts (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                   1999             2000            2001
                                                ---------        ---------        --------
     <S>                                        <C>              <C>              <C>
     Net income:
          As reported ..................        $  10,023        $  33,003        $  1,257
          Pro forma ....................            9,805           32,413           1,204
     Net income per share:
          Basic
              As reported ..............        $     .79        $    2.61        $    .10
              Pro forma ................              .77             2.56             .10
          Diluted
              As reported ..............        $     .77        $    2.57        $    .10
              Pro forma ................              .76             2.53             .10
</TABLE>

         Because the accounting provisions of Statement No. 123 only apply to
options granted after December 1995, the pro forma compensation cost presented
may not be representative of that to be expected in future years.

         12. Commitments and Contingencies: The Company is involved in certain
environmental matters and claims. The Company has provided reserves to cover
management's estimates of the costs of investigating, monitoring and remediating
these and other environmental conditions. If more costly remediation measures
are necessary than those believed to be probable based on current facts and
circumstances, actual costs may exceed the reserves provided. However, based on
the information currently available, management does not believe that the
outcome of these matters will have a material adverse effect on its future
results of operations or financial position.

         On March 3, 1993, a case was filed in the Circuit Court of Jefferson
County, Alabama by Joe and Darnell Sullivan and Tommy and Stella Fay Gould and
other parties against the Alabama Power Company, Russell Corporation, the
Company and certain other parties ("Sullivan"). The complaint alleged that the
Company and such other parties negligently or willfully discharged industrial
wastewater containing hazardous materials, which allegedly damaged the
plaintiffs' real properties and caused mental anguish to the plaintiffs. The
complaint sought an award of compensatory and punitive damages. After two years
and eleven months of litigation, the plaintiffs amended their complaint to
include class action claims and treatment. Although the Trial Court granted
class certification, the Supreme Court of Alabama reversed the class
certification order, and the case proceeded as to the individual claims of the
five plaintiffs.


                                       42
<PAGE>

         On November 17, 1998, the trial court handed down a verdict of $155,200
in compensatory damages and $52,398,000 in punitive damages against the Alabama
Power Company, Russell Corporation and the Company, on a joint and several
basis, in favor of the plaintiffs. This case was appealed to the Supreme Court
of Alabama. Oral argument was held in January 2000, and on August 4, 2000, the
Alabama Supreme Court issued a 6-3 opinion reversing and ordering a judgment to
be entered in favor of the defendants because of plaintiff's failure of proof.
The plaintiffs filed an Application for Rehearing on August 18, 2000, and the
Company filed its response on September 1, 2000. On November 16, 2000, the
Supreme Court of Alabama heard oral arguments on the application from all
parties except the Alabama Power Company. On January 12, 2001, the Alabama
Supreme Court issued a 6-3 final order, denying rehearing and reversing and
rendering the case in favor of the defendants.

         On February 28, 1999, a case was filed in the Circuit Court of
Jefferson County, Alabama by Chris and Regina Christian against Russell
Corporation, Russell Lands, Inc., Alabama Power, the Company and certain other
parties. The complaint alleged that the Company, among others, negligently
and/or wantonly caused or permitted the discharge and disposal of sewage sludge
and contaminants into the lake adjacent to the plaintiffs' property, which
allegedly interfered with the plaintiffs' use of the property. As a result of
these alleged actions, the plaintiffs claimed that the value of their property
had been diminished and that they suffered mental anguish, bodily injury and
other pecuniary loss. Subsequent to the final decision by the Alabama Supreme
Court in the Sullivan case, the plaintiffs in this complaint elected to
voluntarily dismiss their case. Consequently, on February 1, 2001, the Circuit
Court entered an order dismissing the complaint with prejudice.

         On January 13, 2000, a case was filed in the Circuit Court of Jefferson
County, Alabama by Larry and Cynthia Locke and the owners of fourteen other
residences in the Raintree subdivision located on Lake Martin near Alexander
City, Alabama, against Russell Corporation, Alabama Power and the Company.
Sixteen individuals were dismissed from the case in August and September 2001,
leaving eight remaining individual plaintiffs. The complaint, which must be
tried under the provisions of the Alabama tort reform legislation enacted in
1999 which limits punitive damages, alleges that the Company, among others,
negligently and/or wantonly caused or permitted the discharge and disposal of
sewage sludge and contaminants into the lake adjacent to the plaintiffs'
property, which allegedly interfered with the plaintiffs' use of the property.
As a result of these alleged actions, the plaintiffs claim that the value of
their property has been diminished and that they suffered other damages. The
complaint seeks compensatory and punitive damages in an undisclosed amount.
After an initial series of actions, the case was stayed by the trial court
pending resolution of the appeal in the Sullivan case. Subsequent to the Alabama
Supreme Court's actions with regard to the Sullivan case, plaintiff's counsel,
which includes attorneys who acted as co-plaintiff's counsel on the Sullivan
case, presented arguments in a hearing before the trial judge on May 4, 2001
based on certain narrow legal theories that the damages claimed in this action
are sufficiently different from the Sullivan Case, and therefore, that this case
should be allowed to proceed in spite of the fact that the Sullivan case was
ultimately decided in favor of the defendants. The trial court judge has allowed
the case to proceed to the discovery phase, issuing a deadline of November, 2001
to complete discovery. The Company intends to vigorously defend this case and
believes that it has a number of defenses available to it. While the outcome of
this case cannot be predicted with certainty, based upon currently available
information, the Company does not believe that it will have a material adverse
effect on the Company's financial condition or results of operations.

         The Company is also a party to other litigation incidental to its
business from time to time. The Company is not currently a party to any
litigation that management, in consultation with legal counsel, believes, if
determined adversely to the Company, would have a material adverse effect on the
Company's financial condition or results of operations.


                                       43
<PAGE>

         The Company leases certain of its facilities and equipment, primarily a
warehouse, several sales offices and computer equipment. Future minimum rental
payments required under such leases that have lease terms in excess of one year
are as follows (in thousands):

<TABLE>
          <S>                          <C>
          2002 ...............        $  1,860
          2003 ...............           1,639
          2004 ...............           1,550
          2005 ...............           1,458
          2006 ...............             983
          Thereafter .........           1,170
                                      --------
                                      $  8,660
                                      ========
</TABLE>

         Rent expense for operating leases totaled $2.7 million, $2.3 million
and $2.6 million for fiscal 1999, 2000 and 2001, respectively.

         Commitments for future additions to plant and equipment were
approximately $5.1 million at August 31, 2001. Commitments for the purchase of
raw materials were approximately $120.0 million at August 31, 2001.

         13. Subsequent events: In response to the highly competitive market
conditions and continued oversupply of open-end yarns, in September and October
2001, the Company announced the closing of two separate open-end yarn
manufacturing facilities located in North Carolina. Additionally, the Company
implemented a program in September 2001 to reduce certain manufacturing overhead
costs and selling, general and administrative expenses. In connection with these
actions, the Company anticipates recording facility restructuring charges,
severance and other non-operating costs of approximately $5.5 million during the
first quarter of fiscal 2002.

         Consumption of the cotton purchased for the two yarn manufacturing
facilities being closed will be shifted to the Company's remaining manufacturing
facilities, delaying the Company's ability to fully realize the historically low
cotton costs provided by the current marketplace.


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

         Not Applicable.


                                       44
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers and directors of the Company and its wholly
owned subsidiary, Avondale Mills, are as follows:

<TABLE>
<CAPTION>
NAME                                            AGE    POSITIONS HELD
----                                            ---    --------------
<S>                                             <C>    <C>
G. Stephen Felker........................        49    Chairman of the Board, President and Chief
                                                          Executive Officer of the Company and
                                                          Avondale Mills
Jack R. Altherr, Jr......................        52    Vice Chairman, Chief Financial Officer, and
                                                          Director of the Company and Avondale
                                                          Mills
T. Wayne Spraggins.......................        64    Vice President of Avondale Mills and
                                                       President, Manufacturing Operations
Keith M. Hull............................        48    Vice President of Avondale Mills and
                                                          President, Marketing and Sales
Craig S. Crockard........................        59    Vice President and Assistant Secretary of the
                                                          Company and Vice President, Planning and
                                                          Development of Avondale Mills
M. Delen Boyd............................        45    Vice President, Controller and Secretary of
                                                       the Company and Avondale Mills
Sharon L. Rodgers........................        45    Vice President, Human Resources of Avondale
                                                          Mills
Dale J. Boden(1).........................        44    Director of the Company and Avondale Mills
Kenneth H. Callaway(1)...................        46    Director of the Company and Avondale Mills
Robert B. Calhoun(1)(2)(3)...............        59    Director of the Company and Avondale Mills
Harry C. Howard(2).......................        72    Director of the Company and Avondale Mills
C. Linden Longino, Jr.(2)................        65    Director of the Company and Avondale Mills
James A. Rubright (2)....................        54    Director of the Company and Avondale Mills
John P. Stevens(1).......................        72    Director of the Company and Avondale Mills
</TABLE>

----------
(1)      Member of Compensation Committee.
(2)      Member of Audit Committee.
(3)      Mr. Calhoun has been elected a director of the Company pursuant to that
certain shareholder's agreement dated as of April 29, 1996 by and among the
Company and certain shareholders of the Company.

         G. Stephen Felker has served as Chairman of the Board of the Company
since 1992, President and Chief Executive Officer of the Company since 1980, and
in various other capacities since 1974. Mr. Felker has served as Chairman of the
Board and Chief Executive Officer of Avondale Mills since 1986, when the Company
acquired Avondale Mills, and President of Avondale Mills since 1995. Mr. Felker
served as Chairman of the Georgia State Advisory Board of Wachovia Bank, N.A.
from 1989 to 2000 and is currently a director of American Fibers and Yarns, Inc.
and Rock-Tenn Company.

         Jack R. Altherr, Jr. has served as Vice Chairman of the Company and
Avondale Mills since May 1996, Chief Financial Officer and a director of the
Company since December 1989, Chief Financial Officer of Avondale Mills since
October 1988 and a director of Avondale Mills since 1993. With the exception of
fiscal 1995, he served as Secretary of the Company and Avondale Mills from
August 1993 until November 1998. Mr. Altherr has served the Company and Avondale
Mills in various other capacities since July 1982.


                                       45
<PAGE>

         T. Wayne Spraggins has served as Vice President of Avondale Mills and
President, Manufacturing Operations since May 1996. Mr. Spraggins joined
Avondale Mills as a standards engineer in August 1961 and has served Avondale
Mills in various other capacities, including Vice President, Manufacturing of
Avondale Mills, since that time.

         Keith M. Hull has served as President, Marketing and Sales, of Avondale
Mills, Inc. since August 1999, having served as President, Apparel Fabrics, the
apparel fabrics division of Avondale Mills since May 1996 and Vice President of
Avondale Mills since April 1989. He has served the Company in various other
capacities including Vice President, Marketing since 1977. Mr. Hull serves as a
director of Cherokee, Inc.

         Craig S. Crockard has served as Vice President, Planning and
Development of Avondale Mills since September 1983. Mr. Crockard has served
Avondale Mills in various other capacities, including Vice President, Corporate
Services, since September 1966.

         M. Delen Boyd has served as Vice President, Controller of Avondale
Mills since May 1996 and Secretary of the Company and Avondale Mills since
November 1998. Mr. Boyd served as Assistant Secretary of the Company and
Avondale Mills from May 1996 until November 1998. Mr. Boyd has served as
Controller of Avondale Mills since 1987. Mr. Boyd joined Avondale Mills in 1982
and has served in various capacities, including Assistant Controller and
Corporate Director of Accounting and Taxes.

         Sharon L. Rodgers has served as Vice President, Human Resources of
Avondale Mills since May 1996. Ms. Rodgers served as Vice President, Legal and
Assistant Secretary of Graniteville Company from 1993 to May 1996. Ms. Rodgers
joined Graniteville Company in 1980 and served in various other capacities at
Graniteville Company during the thirteen years ended in 1993.

         Dale J. Boden has served as a director of the Company and Avondale
Mills since November 1994. Mr. Boden has served as President and Chief Executive
Officer of B.F. Capital, Inc., a private investment company, since January 1993.

         Kenneth H. Callaway has served as a director of the Company since
November 1987 and of Avondale Mills since August 1993. Mr. Callaway has been
President of Calgati Chemical Company, a specialty chemical manufacturer, since
December 1991.

         Robert B. Calhoun has served as a director of the Company since August
1993 and of Avondale Mills since November 1991. He is presently a Managing
Director and Co-founder of Monitor Clipper Partners. Mr. Calhoun is also
President of Clipper Asset Management Corporation, the sole general partner of
The Clipper Group, L.P., a private investment firm, since January 1991, and of
Clipper Capital Corporation, the sole general partner of Clipper, an affiliated
private investment firm, since 1993. From 1975 to 1991, Mr. Calhoun was a
Managing Director of Credit Suisse First Boston Corporation, an investment
banking firm. Mr. Calhoun is also a director of Interstate Bakeries Corporation
and Lord Abbett Family of Funds.

         Harry C. Howard has served as a director of the Company since August
1993 and of Avondale Mills since July 1986. Mr. Howard retired from the law firm
of King & Spalding, where he had practiced law since 1956, as of December 31,
1992.

         C. Linden Longino, Jr. has served as a director of the Company since
November 1975 and of Avondale Mills since August 1993. Mr. Longino was a Senior
Vice President of SunTrust Bank, Atlanta from December 1978 until his retirement
in July 1996. During his 34-year career with SunTrust Bank, Atlanta, Mr. Longino
served in various management positions. He now serves in various capacities with
several community and educational organizations.


                                       46
<PAGE>

         James A. Rubright has served as a director of the Company since
November 2000. Mr. Rubright is Chairman and Chief Executive Officer of Rock-Tenn
Company, an integrated paperboard and packaging company. Before joining
Rock-Tenn Company, Mr. Rubright served as Executive Vice President of Sonat,
Inc., an energy company, and as a partner in the law firm of King & Spalding.
Mr. Rubright is also a director of Rock-Tenn Company and AGL Resources, Inc.

         John P. Stevens has served as a director of the Company since January
1970 and of Avondale Mills since July 1986. Mr. Stevens served as Executive Vice
President of Wachovia Bank, N.A. from April 1981 until his retirement in January
1994 and was responsible for managing the Government Banking and Public Finance
Department. Mr. Stevens served as a consultant to Wachovia Bank, N.A. from
February 1994 to February 1996. In addition, from February 1994 until the
present time, Mr. Stevens has been a partner in The Stevens Group, a consulting
firm specializing in providing assistance in a wide range of business and
governmental affairs.

         All executive officers of the Company are elected annually by and serve
at the discretion of the Board of Directors.

         The directors of the Company are elected annually by the shareholders
of the Company. During the fiscal year ended August 31, 2001, the Board of
Directors of the Company held four meetings.

         The Compensation Committee of the Board of Directors during fiscal 2001
consisted of John P. Stevens, Chairman of the Compensation Committee, Dale J.
Boden, Robert B. Calhoun and Kenneth H. Callaway. None of the Members of the
Compensation Committee is an employee of the Company. The Compensation
Committee's principal responsibilities consist of establishing the compensation
for the Company's Named Executive Officers and administering the Company's Stock
Option Plan. During the fiscal year ended August 31, 2001, the Compensation
Committee held one meeting. See Report on Executive Compensation.

         The Audit Committee of the Board of Directors during fiscal 2001
consisted of Harry C. Howard, Chairman of the Audit Committee, Robert B.
Calhoun, C. Linden Longino, Jr., and James A. Rubright. None of the members of
the Audit Committee is an employee of the Company. During the fiscal year ended
August 31, 2001, the Audit Committee held two meetings.

         The Audit Committee meets with the independent public accountants,
management and internal auditors to assure that all are carrying out their
respective responsibilities. The Audit Committee reviews the performance and
fees of the independent public accountants prior to recommending their
appointment, and meets with them, without management present, to discuss the
scope and results of their audit work, including the adequacy of internal
controls and the quality of financial reporting. Both the independent public
accountants and the internal auditors have full access to the Audit Committee. A
written charter for the Audit Committee was approved by the Board of Directors
effective July 13, 2000.

         During fiscal 2001, the Company paid each non-employee director a
quarterly fee of $5,250 plus reimbursement of out-of-pocket expenses.

         The Company adopted a stock option plan for its non-employee directors,
effective September 1, 1997, under which 100,000 shares of the Company's Class A
Common Stock are reserved for issuance. Under the plan, each director will
automatically be granted annually, on the fifth day following the annual
shareholders meeting, a fully vested option to purchase 2,000 shares of Class A
Common Stock, at an option price equal to the fair market value of such stock on
the date the option is granted. Options granted are exercisable for a period of
ten years, subject to certain limitations. During fiscal 1999 and 2000, 12,000
non-qualified options were granted in each respective year. During fiscal 2001,
14,000 non-qualified options were granted. At August 31, 2001, 50,000
non-qualified options remained outstanding and exercisable.



                                       47
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

         Summary Compensation Table. The table below sets forth certain
information concerning the compensation earned during fiscal 2001, 2000 and 1999
by the Company's Chief Executive Officer and its four other most highly
compensated executive officers (collectively, the "Named Executive Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                      ANNUAL COMPENSATION(1)
                                                      ---------------------------------------------------
                                                      FISCAL                                ALL OTHER
NAME AND PRINCIPAL POSITION                            YEAR    SALARY($)  BONUS($)(2)  COMPENSATION($)(3)
---------------------------                           ------   ---------  -----------  ------------------
<S>                                                   <C>      <C>        <C>          <C>
G. Stephen Felker..................................    2001      800,016           --          2,983
  Chairman of the Board, President and Chief           2000      800,016    1,015,359          7,230
  Executive Officer                                    1999      800,016      236,898          2,210

Jack R. Altherr, Jr................................    2001      353,340           --          7,577
  Vice Chairman and Chief Financial Officer            2000      342,500      236,327          9,898
                                                       1999      326,668       54,822          5,133

T. Wayne Spraggins.................................    2001      294,680           --         15,875
  Vice President and President, Manufacturing          2000      285,836      190,664         15,030
  Operations                                           1999      272,516       38,999         10,442

Keith M. Hull......................................    2001      296,360           --          5,380
  Vice  President  and  President, Marketing and       2000      285,836      195,919          8,401
Sales
                                                       1999      272,516       38,933          3,705

Craig S. Crockard..................................    2001      133,768           --          4,800
  Vice President, Planning and Development             2000      129,176       53,806          7,188
                                                       1999      123,848       10,000          3,737
</TABLE>

----------
(1)      The aggregate amount of perquisites and other personal benefits, if
         any, did not exceed the lesser of $50,000 or 10% of the total annual
         salary and bonus reported for each Named Executive Officer and has
         therefore been omitted.
(2)      Amounts shown include cash bonuses earned under the Company's
         management incentive plan, payments received in the Company's
         distribution of cash profit sharing to all eligible associates of the
         Company, payments received in lieu of profit sharing contributions
         under the Company's Associate Profit Sharing and Savings Plan on
         compensation in excess of qualified plan limits, and such other
         payments as the Compensation Committee of the Board of Directors elects
         to make based upon the Company's and respective officer's performance.
(3)      Amounts shown reflect for fiscal 1999, (i) matching 401(k)
         contributions made by the Company to the Company's Associate Profit
         Sharing and Savings Plan of $1,200 on behalf of each Named Executive
         Officer, (ii) life insurance premiums of $3,933, $9,242, $2,505 and
         $2,534 paid by the Company on behalf of Messrs. Altherr, Spraggins,
         Hull and Crockard, respectively and taxable income of $1,010 to Mr.
         Felker, in conjunction with a split dollar insurance agreement. Amounts
         shown reflect, for fiscal 2000, (i) matching 401(k) contributions made
         by the Company to the


                                       48
<PAGE>

         Company's Associate Profit Sharing and Savings Plan of $1,275 on behalf
         of Messrs. Felker, Altherr, Spraggins and Hull, respectively, and
         $1,002 on behalf of Mr. Crockard, (ii) profit sharing contributions
         made by the Company to the Company's Associate Profit Sharing and
         Savings Plan of $4,617 on behalf of Messrs. Felker, Altherr, Spraggins
         and Hull, respectively, and $3,590 on behalf of Mr. Crockard and (iii)
         life insurance premiums of $4,006, $9,138, $2,509, and $2,596 paid by
         the Company on behalf of Messrs. Altherr, Spraggins, Hull and Crockard,
         respectively, and taxable income of $1,339 to Mr. Felker in conjunction
         with a split dollar insurance agreement. Amounts shown reflect, for
         fiscal 2001, (i) matching 401(k) contributions made by the Company to
         the Company's Associate Profit Sharing and Savings Plan of $1,275 on
         behalf of Messrs. Felker, Altherr, Spraggins and Hull respectively and
         $1,003 on behalf of Mr. Crockard, and (ii) life insurance premiums of
         $6,302, $14,600, $4,105, and $3,797 paid by the Company on behalf of
         Messrs. Altherr, Spraggins, Hull and Crockard, respectively, and
         taxable income of $1,708 to Mr. Felker in conjunction with a split
         dollar insurance agreement.

         Option Grants Table. The table below sets forth certain information
relating to options granted during fiscal 2001 to each Named Executive Officer.

                               OPTION GRANTS TABLE

<TABLE>
<CAPTION>
                                              INDIVIDUAL GRANTS                            POTENTIAL
                           --------------------------------------------------------    REALIZABLE VALUE
                                                % OF TOTAL                             AT ASSUMED ANNUAL
                                                  OPTIONS                               RATES OF STOCK
                                                GRANTED TO                                   PRICE
                         NUMBER OF SECURITIES    EMPLOYEES    EXERCISE                 APPRECIATION FOR
                           UNDERLYING OPTIONS    IN FISCAL   PRICE PER   EXPIRATION       OPTION TERM
                                                                                       -----------------
                                 GRANTED           YEAR        SHARE        DATE        5%          10%
                         --------------------   ----------   ---------   ----------    ---         -----
<S>                      <C>                    <C>          <C>         <C>           <C>         <C>
G. Stephen Felker....              --               --          --          --          --          --
Jack R. Altherr, Jr..              --               --          --          --          --          --
T. Wayne Spraggins...              --               --          --          --          --          --
Keith M. Hull........              --               --          --          --          --          --
Craig S. Crockard....              --               --          --          --          --          --
</TABLE>

----------


                                       49
<PAGE>

         Aggregated Options Table. The table below sets forth certain
information with respect to options held at the end of fiscal 2001 by each Named
Executive Officer.

                            AGGREGATED OPTIONS TABLE

<TABLE>
<CAPTION>
                                             NUMBER OF
                                         SHARES UNDERLYING                     VALUE OF
                                            UNEXERCISED                      UNEXERCISED
                                            OPTIONS AT                        OPTIONS AT
                                          FISCAL YEAR END                  FISCAL YEAR END
                                           EXERCISABLE/                      EXERCISABLE/
                                          UNEXERCISABLE                   UNEXERCISABLE(1)
                                         -----------------                ----------------
<S>                                      <C>                              <C>
G. Stephen Felker...............          265,000/    0                    $960,000/  $0
Jack R. Altherr, Jr.............          125,000/    0                     400,000/   0
T. Wayne Spraggins..............           45,000/    0                      80,000/   0
Keith M. Hull...................           71,001/    0                     184,004/   0
Craig S. Crockard...............            2,000/8,000                           0/   0
</TABLE>

----------

(1)      All options are options to purchase Class A Common Stock of Avondale
         Incorporated. There is no existing public market for the Class A Common
         Stock. The values shown are based on management's estimate of the fair
         market value of the Class A Common Stock at August 31, 2001.

         Long-Term Incentive Plans. The table below sets forth certain
information with respect to phantom units held at the end of fiscal 2001 by each
Named Executive Officer. No phantom units were awarded during fiscal 2001.

           LONG-TERM INCENTIVE PLANS -- UNITS HELD AT AUGUST 31, 2001


<TABLE>
<CAPTION>
                                                    AGGREGATE                         ESTIMATED FUTURE
                                                  PHANTOM UNITS    PERIOD UNTIL        PAYOUTS FOR ALL
NAME                                                 HELD(1)      PAYOUT (YEARS)    PHANTOM UNITS HELD(2)
----                                              -------------   --------------    ---------------------
<S>                                               <C>             <C>               <C>
G. Stephen Felker.........................             150              15               $1,000,302
Jack R. Altherr, Jr.......................              90              13                  600,181
T. Wayne Spraggins........................              50               1                  333,434
Keith M. Hull.............................              90              16                  600,181
Craig S. Crockard.........................              --              --                       --
</TABLE>
----------

(1)      Each phantom unit equals 398.606 phantom shares. The value of each
         phantom share is equal to the result obtained by dividing (i) five
         times Avondale's earnings before depreciation, amortization, LIFO
         inventory adjustments, interest and income taxes for the 10 fiscal
         quarters immediately preceding such date divided by 2.5, plus (ii)
         certain "balance sheet adjustments" by the sum of (i) the aggregate
         number of outstanding phantom shares plus (ii) the aggregate number of
         outstanding shares of Class A Common Stock and Class B Common Stock of
         the Company. Phantom units vest at the rate of 5.0% per year for each
         full and uninterrupted year that the Named Executive Officer remains
         employed by the Company after August 31, 1989, and vest fully if the
         Named Executive Officer dies before his employment is terminated. The
         value of vested phantom units is payable beginning on the later of the
         date on which the Named Executive Officer reaches


                                       50
<PAGE>

         the age of 65 or the date on which the employment of such Named
         Executive Officer terminates (the "Normal Payment Date"), in 10 equal
         annual installments, with interest equal to the one-year U.S. Treasury
         Bill rate in effect on the Normal Payment Date. If the Named Executive
         Officer dies before his employment with the Company is terminated, the
         value of his phantom units on the date of death is payable to his
         beneficiary as described above. If the Named Executive Officer dies
         after his Normal Payment Date, the present value of the balance of the
         annual installments is payable in a lump sum to his beneficiary. A
         Named Executive Officer will forfeit all interest in his Phantom Stock
         Units (whether or not vested) if he violates certain non-compete
         covenants applicable during such Named Executive Officer's employment
         and for a period of five years after termination of such employment.

(2)      There are no threshold, target or maximum amounts payable with respect
         to phantom unit awards made by the Company. The amounts shown reflect
         the future value, excluding interest payable during the installment
         payment period, as of September 1, 2001, of vested and non-vested
         phantom units held at the end of fiscal 2001 based on the results of
         the Company for the 10 fiscal quarters ended August 31, 2001.


                                       51
<PAGE>

                        REPORT ON EXECUTIVE COMPENSATION

         Compensation Policy. The Company's executive compensation policy is
designed to attract, retain and motivate executive officers to maximize the
Company's performance and shareholder value by:

-        providing base salaries that are market-competitive;

-        rewarding the achievement of the Company's business plan goals and
         earnings objectives; and

-        creating stock ownership opportunities to align the interests of
         executive officers with those of shareholders.

         In light of the Company's compensation policy, the primary components
of its executive compensation program for fiscal 2001 included base salaries,
cash bonuses and stock options.

         Base Salary. Each executive officer's base salary, including the Chief
Executive Officer's base salary, is determined based upon a number of factors
including the executive officer's responsibilities, contribution to the
achievement of the Company's business plan goals, demonstrated leadership skills
and overall effectiveness, and length of service. Base salaries are also
designed to be competitive with those offered in the various markets in which
the Company competes for executive talent and are analyzed with a view towards
desired base salary levels over a three-year to five-year time period. Each
executive officer's salary is reviewed annually and although these and other
factors are considered in setting base salaries, no specific weight is given to
any one factor. During fiscal 2001, the base salary of each Named Executive
Officer other than the Chief Executive Officer was increased by 3.0% to 3.6%
over each such executive officer's fiscal 2000 base salary. Mr. Felker's base
salary has not been adjusted since November 1, 1995.

         Cash Bonuses. Each executive officer, including the Chief Executive
Officer, is eligible to receive an annual cash bonus under the management
incentive plan. The Company's management incentive plan is designed to motivate
key managers and sales people as well as executive officers and reward the
achievement of specific business plan goals. Under the Company's management
incentive plan, in fiscal 2001, certain executive officers were eligible to earn
a cash bonus in an amount from 25% up to 125% of their respective base salaries
depending on a number of factors including, without limitation, the Company's
financial performance. In addition, the executive officers may receive payments
in lieu of profit sharing contributions under the Company's Associate Profit
Sharing and Savings Plan on compensation in excess of qualified plan limits. No
cash bonuses were earned in fiscal 2001.

         Stock Options. The grant of stock options is designed to align the
interests of executive officers with those of shareholders in the Company's
long-term performance. Stock options granted have exercise prices equal to the
fair market value of the underlying shares on the date of grant so that
compensation is earned only through long-term appreciation in the fair market
value of the underlying shares. Stock options are granted from time to time if
warranted by the Company's growth and profitability and individual grants are
based on, among other things, the executive officer's responsibilities and
individual performance. To encourage an executive officer's long-term
performance, stock options generally vest over five years and terminate ten
years after the date of grant. The creation of opportunities to own stock is
considered the most significant component in an executive officer's compensation
package. During fiscal 2001, no stock options were granted.

                                            John P. Stevens
                                            Dale J. Boden
                                            Robert B. Calhoun
                                            Kenneth H. Callaway


                                       52
<PAGE>

         THE FOREGOING REPORT SHALL NOT BE DEEMED INCORPORATED BY REFERENCE BY
ANY GENERAL STATEMENT INCORPORATING BY REFERENCE THIS ANNUAL REPORT INTO ANY
FILING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES
EXCHANGE ACT OF 1934 (TOGETHER, THE "ACTS"), EXCEPT TO THE EXTENT THAT THE
COMPANY SPECIFICALLY INCORPORATES THIS INFORMATION BY REFERENCE, AND SHALL NOT
OTHERWISE BE DEEMED FILED UNDER SUCH ACTS.


                                       53
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
       MANAGEMENT

         The table below sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of November 1, 2001, by (i) each
person who is known to the Company to be the beneficial owner of more than 5% of
the outstanding Class A Common Stock or Class B Common Stock, (ii) each of the
Named Executive Officers, (iii) each of the directors of the Company and (iv)
all directors and executive officers of the Company as a group. Except as set
forth below, the shareholders named below have sole voting and investment power
with respect to all shares of Common Stock shown as being beneficially owned by
them.

<TABLE>
<CAPTION>
                                          BENEFICIAL OWNERSHIP       BENEFICIAL OWNERSHIP
                                               OF CLASS A                 OF CLASS B           PERCENTAGE
                                              COMMON STOCK               COMMON STOCK              OF
                                           NUMBER      PERCENT       NUMBER       PERCENT       COMBINED
NAME OF BENEFICIAL OWNER(1)              OF SHARES    OF CLASS     OF SHARES      OF CLASS    VOTING POWER
---------------------------              ---------    --------     ---------      --------    ------------
<S>                                      <C>          <C>          <C>            <C>         <C>
G. Stephen Felker(2)...................   4,337,689        33.9%       978,939           100%        73.1%
Jack R. Altherr, Jr.(3)................     232,199         2.0%            --            --            *
T. Wayne Spraggins(4)..................     115,000            *            --            --            *
Keith M. Hull (5)......................     121,001            *            --            --            *
Craig S. Crockard (6)..................      10,077            *            --            --            *
Dale J. Boden(7).......................     113,500            *            --            --            *
Kenneth H. Callaway(8).................      18,000            *            --            --            *
Robert B. Calhoun(10)(11)..............   2,308,823        20.0%            --            --          7.4%
Harry C. Howard(12)....................      53,000            *            --            --            *
C. Linden Longino, Jr.(13).............      33,250            *            --            --            *
James A. Rubright (14).................       6,500            *            --            --            *
John P. Stevens(15)....................     111,000            *            --            --            *
The Clipper Group(10)(16)..............   2,277,523        19.7%            --            --          7.3%
Grayward Company(17)...................   3,497,740        30.3%            --            --         11.2%
Felker Investments, Ltd.(18)...........   2,093,750        18.1%            --            --          6.7%
Avondale Mills, Inc. Associate
  Profit Sharing and Savings Plan(19)..     600,000         5.2%            --            --          1.9%
All directors and executive
  officers As a group (16 persons).....   7,501,539        57.2%       978,939           100%        82.3%
</TABLE>

----------
*        Less than 1%

(1)      Except as otherwise noted, the address of each person who is an officer
         or a director of the Company is c/o Avondale Mills, Inc., 506 South
         Broad Street, Monroe, Georgia 30655.
(2)      Includes (i) 2,093,750 shares of Class A Common Stock held of record by
         Felker Investments, Ltd., a partnership of which Mr. Felker is the
         general partner (as the general partner, Mr. Felker is deemed to
         beneficially own such shares under Rule 13d-3 under the Exchange Act),
         (ii) 978,939 shares of Class A Common Stock issuable upon conversion of
         the 978,939 shares of Class B Common Stock beneficially owned by Mr.
         Felker and (iii) 265,000 shares of Class A Common Stock issuable upon
         exercise of stock options beneficially owned by Mr. Felker, which
         shares are deemed beneficially owned by Mr. Felker under Rule 13d-3
         under the Exchange Act.
(3)      Includes 125,000 shares of Class A Common Stock issuable upon exercise
         of stock options beneficially owned by Mr. Altherr, which shares are
         deemed beneficially owned by Mr. Altherr under Rule 13d-3 under the
         Exchange Act.


                                       54
<PAGE>

(4)      Includes 45,000 shares of Class A Common Stock issuable upon exercise
         of stock options beneficially owned by Mr. Spraggins, which shares are
         deemed beneficially owned by Mr. Spraggins under Rule 13d-3 under the
         Exchange Act.
(5)      Includes 71,001 shares of Class A Common Stock issuable upon exercise
         of stock options beneficially owned by Mr. Hull, which shares are
         deemed beneficially owned by Mr. Hull under Rule 13d-3 under the
         Exchange Act.
(6)      Includes 2,000 shares of Class A Common Stock issuable upon exercise of
         stock options beneficially owned by Mr. Crockard, which shares are
         deemed beneficially owned by Mr. Crockard under Rules 13d-3 under the
         Exchange Act.
(7)      Reflects (i) 8,000 shares of Class A Common Stock issuable upon
         exercise of stock options beneficially owned by Mr. Boden, which shares
         are deemed beneficially owned by Mr. Boden under Rule 13d-3 under the
         Exchange Act, and (ii) 6,333 shares beneficially owned by Textile
         Capital Partners with respect to which Mr. Boden has shared voting and
         investment power, and (iii) 8,500 shares beneficially owned by Textile
         Capital Partners II with respect to which Mr. Boden has shared voting
         and investment power, and (iv) 90,000 shares beneficially owned by The
         Sterling Trust; Hilliard Lyons Trust Co. Trustee, with respect to which
         Mr. Boden is a beneficiary and has shared voting and investment power.
         Mr. Boden is the majority shareholder of Textile Capital Partners and,
         consequently is deemed to beneficially own under Rule 13d-3 under the
         Exchange Act all of the shares beneficially owned by these entities.
(8)      Includes 8,000 shares of Class A Common Stock issuable upon exercise of
         stock options beneficially owned by Mr. Callaway, which shares are
         deemed beneficially owned by Mr. Callaway under Rule 13d-3 under the
         Exchange Act.
(9)      The address of Mr. Calhoun is c/o Monitor Clipper Partners, Two Canal
         Park, Cambridge, MA 02141.
(10)     Includes (i) 8,000 shares of Class A Common Stock issuable upon
         exercise of stock options beneficially owned by Mr. Calhoun, which
         shares are deemed beneficially owned by Mr. Calhoun under Rule 13d-3
         under the Exchange Act, (ii) shares beneficially owned by Clipper
         Capital Associates, L.P. ("CCA"), Clipper/Merchant Partners, L.P.,
         Clipper Equity Partners I, L.P., Clipper/Merban L.P. ("Merban"),
         Clipper/European Re, L.P. and CS First Boston Merchant Investments
         1995/96, L.P. ("Merchant"), (whose address is 650 Madison Avenue, 9th
         Floor, New York, New York 10022).
(11)     CCA is the general partner of all of the Clipper Group partnerships
         other than Merchant. The general partner of CCA is Clipper Capital
         Associates, Inc. ("CCI"), and Mr. Calhoun is the sole stockholder and a
         director of CCI. Clipper, an affiliate of Mr. Calhoun, has sole voting
         and investment power with respect to the shares of Class A Common Stock
         beneficially owned by Merchant. As a result, each of Mr. Calhoun, CCA
         and CCI is deemed to beneficially own all shares of Class A Common
         Stock beneficially owned by the Clipper Group (other than Merchant),
         and Mr. Calhoun is deemed to beneficially own the shares of Class A
         Common Stock beneficially owned by Merchant. It is anticipated that
         Merban will beneficially own shares of Class A Common Stock
         representing approximately 5.9% of the outstanding Class A Common Stock
         and Clipper/Merchant Partners, L.P., will beneficially own shares of
         Class A Common Stock representing approximately 5.0% of the outstanding
         Class A Common Stock. Each of the other members of the Clipper Group
         will beneficially own less than 5.0% of the outstanding Class A Common
         Stock.
(12)     Includes 8,000 shares of Class A Common Stock issuable upon exercise of
         stock options beneficially owned by Mr. Howard, which shares are deemed
         beneficially owned by Mr. Howard under Rule 13d-3 under the Exchange
         Act.
(13)     Includes (i) 8,000 shares of Class A Common Stock issuable upon
         exercise of stock options beneficially owned by Mr. Longino, which
         shares are deemed beneficially owned by Mr. Longino under Rule 13d-3
         under the Exchange Act.


                                       55
<PAGE>

(14)     Includes 2,000 shares of Class A Common Stock issuable upon exercise of
         stock options beneficially owned by Mr. Rubright, which shares are
         deemed beneficially owned by Mr. Rubright under Rules 13d-3 under the
         Exchange Act.
(15)     Includes (i) 13,000 shares beneficially owned by Mr. Stevens' spouse,
         for which Mr. Stevens shares neither voting nor investment power, and
         (ii) 8,000 shares of Class A Common Stock issuable upon exercise of
         stock options beneficially owned by Mr. Stevens, which shares are
         deemed beneficially owned by Mr. Stevens under Rule 13d-3 under the
         Exchange Act.
(16)     Merchant Capital, Inc. ("Merchant Capital"), an affiliate of CS First
         Boston Corporation, is the general partner of Merchant and the 99%
         limited partner of Clipper/Merchant Partners, L.P. CS Holding, an
         affiliate of CS First Boston Corporation, is the indirect 99% limited
         partner of Merban. None of Merchant, Merchant Capital, CS First Boston
         Corporation and CS Holding is an affiliate of Clipper or CCA.
(17)     Grayward Company's address is c/o SunTrust Bank, Nashville, N.A., P.O.
         Box 305110, Nashville, Tennessee 37230. Grayward Company is a trust of
         which SunTrust Bank, Nashville, N.A. serves as trustee. As trustee,
         SunTrust Bank, Nashville, N.A. is deemed to beneficially own under Rule
         13d-3 under the Exchange Act all of the shares beneficially owned by
         Grayward Company.
(18)     The address of Felker Investments, Ltd. is c/o G. Stephen Felker, 506
         South Broad Street, Monroe, Georgia 30655.
(19)     The address of the Avondale Mills, Inc. Associate Profit Sharing and
         Savings Plan (the "Plan") is c/o Scudder Trust Company, P.O. Box 957,
         Salem, New Hampshire 03079. Scudder Trust Company serves as trustee for
         the Plan and, as such, is deemed to beneficially own under Rule 13d-3
         under the Exchange Act all of the shares beneficially owned by the
         Plan.


                                       56
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Kenneth H. Callaway, a director, is president of Calgati Chemical
Company, Ltd. During fiscal 2001, the Company purchased specialty chemicals from
Calgati Chemical Company, Ltd. in the aggregate amount of approximately
$497,000.


                                       57
<PAGE>

                                     PART IV

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

     (a) 1.  Financial Statements.

         The following Consolidated Financial Statements of the Company and its
consolidated subsidiaries and the Report of the Independent Public Accountants,
included in the Registrant's Annual Report to Shareholders for the year ended
August 31, 2001 are included in Part II, Item 8.

         Report of Independent Public Accountants
         Consolidated Balance Sheets as of August 25, 2000 and August 31, 2001
         Consolidated Statements of Income -- Fiscal Years Ended August 27,
         1999, August 25, 2000 and August 31, 2001 Consolidated Statements of
         Shareholders' Equity -- Fiscal Years Ended August 27, 1999, August 25,
         2000 and August 31, 2001 Consolidated Statements of Cash Flows --
         Fiscal Years Ended August 27, 1999, August 25, 2000 and August 31, 2001
         Notes to Consolidated Financial Statements

         2.  Financial Statement Schedules of the Company.

         Schedule II -- Valuation and Qualifying Accounts

         3.  Exhibits.

<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER
  -------
<S>           <C>   <C>
    3.1       --    Restated and Amended Articles of Incorporation of Avondale Incorporated
                    (incorporated by reference to Exhibit 3.1 to Avondale Incorporated's Registration
                    Statement on Form S-4, File No. 333-5455-01).
    3.3       --    Amended and restated bylaws of Avondale Incorporated, adopted as of January 17, 2000
                    (incorporated by reference to Exhibit 3.3 to Avondale Incorporated's Quarterly Report
                    on Form 10-Q for the period ended February 25, 2000, File
                    No. 333-5455-01).
    4.1       --    Indenture for the Notes between Avondale Incorporated, Avondale Mills, Inc. and The
                    Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to Avondale
                    Incorporated's Registration Statement on Form S-4, File No. 333-5455-01).
    4.8       --    Amendments to Letter of Credit Agreements, dated October
                    19, 1999, between and among Avondale Incorporated, Avondale
                    Mills, Inc. and SunTrust Bank, Atlanta related to Industrial
                    Development Board refunding revenue bonds issued to finance
                    improvements at four Company manufacturing facilities
                    (incorporated by reference to Exhibit 4.8 to Avondale
                    Incorporated's 1999 annual report on Form 10-K, File No. 33-68412).
    4.9       --    Second Amended and Restated Credit Agreement, dated as of September 28, 2000, among
                    Avondale  Mills,  Inc.,  various  listed  banks and  Wachovia  Bank,  N.A.,  as agent.
                    (incorporated by reference to Exhibit 4.9 to Avondale Incorporated's 2000 annual report on
                    Form 10-K, File No. 33-68412)
    5.1       --    Charter of the Audit Committee of the Board of Directors,
                    adopted effective July 13, 2000 (Incorporated by reference
                    to Exhibit 5.1 to Avondale Incorporated's 2000 annual report
                    on Form 10-K, File No. 33-68412).
   10.1       --    Receivables Purchase Agreement, dated April 29, 1996, among Avondale Mills, Inc., as
                    Servicer, and Avondale Receivables Company (incorporated by reference to Exhibit

</TABLE>


                                       58
<PAGE>

<TABLE>
<S>           <C>   <C>
                    10.1 to Avondale Incorporated's Registration Statement on Form S-4, File No.
                    333-5455-01).
   10.2       --    Pooling and Servicing Agreement, dated April 29, 1996, among Avondale Receivables
                    Company, Avondale Mills, Inc. and Manufacturers and Traders Trust Company
                    (incorporated by reference to Exhibit 10.2 to Avondale Incorporated's Registration
                    Statement on Form S-4, File No. 333-5455-01).
   10.3       --    Amendment No. 1 to Pooling and Service Agreement and Receivables Purchase Agreement;
                    Dated November 21, 1997, among Avondale Receivables Company, Avondale Mills, Inc.,
                    And  Manufacturers  and Traders Trust Company.  (Incorporated  by reference to Exhibit
                    10.3 to Avondale Incorporated's 1998 Annual Report on Form 10-K, File No. 33-68412).
   10.4       --    Amended and Restated Series 1996-1 Supplement to the Pooling and Servicing Agreement,
                    Dated November 21, 1997, among Avondale Receivables Company, Avondale Mills, Inc.
                    And  Manufacturers  and Traders Trust Company.  (Incorporated  by reference to Exhibit
                    10.4 to Avondale Incorporated's 1998 Annual Report on Form 10-K, File No. 33-68412).
   10.5       --    Amended and Restated Certificate Purchase Agreement, dated November 21, 1997, among
                    Avondale Receivables Company, Avondale Mills, Inc., the purchasers described therein
                    And First National Bank of Chicago,  as Agent.  (Incorporated  by reference to Exhibit
                    10.5 to Avondale Incorporated's 1998 Annual Report on Form 10-K, File No. 33-68412).
   10.6       --    Registration Rights Agreement, dated April 29, 1996 between Avondale Incorporated And the
                    Persons listed therein (incorporated by reference to Exhibit 10.8 to Avondale
                    Incorporated's Registration Statement on Form S-4, File No. 333-5455-01).
   10.7       --    Shareholders Agreement, dated April 29, 1996 among Avondale Incorporated, the Investors
                    listed therein, the Shareholders listed therein and Clipper Capital Partners,
                    L.P., in its capacity as Purchaser Representative under the Agreement (incorporated by reference
                    to Exhibit 10.9 to Avondale Incorporated's Registration Statement on Form S-4,
                    File No. 333-5455-01).
   10.10      --    Incorporated's Registration Statement on Form S-4, File No. 333-5455-01).
                    To Avondale Incorporated's Registration Statement on Form S-4, File No.
                    333-5455-01).
   10.11      --    Avondale Mills, Inc. Associate Profit Sharing and Savings Plan (incorporated by
                    Reference to Exhibit 10.13 to Avondale Incorporated's Registration Statement on Form
                    S-4, File No. 333-5455-01).
   10.12      --    Avondale Mills, Inc. Fiscal 2001 Management Incentive Plan for G. Stephen Felker.
   10.13      --    Avondale Mills, Inc. Fiscal 2001 Management Incentive Plan for Jack R. Altherr, Jr.
   10.14      --    Avondale Mills, Inc. Fiscal 2001 Management Incentive Plan for T. Wayne Spraggins.
   10.15      --    Avondale Mills, Inc. Fiscal 2001 Management Incentive Plan for Keith Hull.
   10.16      --    Avondale Mills, Inc. Fiscal 2001 Management Incentive Plan for Craig Crockard.
   10.17      --    Phantom Unit Awards to G. Stephen Felker (incorporated by reference to Exhibit 10.19
                    To Avondale Incorporated's Registration Statement on Form S-4, File No. 333-5455-01).
   10.18      --    Phantom Unit Awards to Jack R. Altherr, Jr. (incorporated by reference to Exhibit
                    10.21 to Avondale Incorporated's Registration Statement on Form S-4, File No.
                    333-5455-01).
   10.19      --    Phantom Unit Awards to T. Wayne Spraggins (incorporated by reference to Exhibit
                    10.23 to Avondale Incorporated's Registration Statement on Form S-4, File No.
                    333-5455-01).
   10.20      --    Phantom Unit Awards to Keith M. Hull (incorporated by reference to Exhibit 10.19
                    To Avondale Incorporated 's 1996 Annual Report on Form 10-K,File No. 33-68412).
   10.21      --    Supply Agreement dated March 31, 1996 between the Company and B.F. Goodrich
                    (incorporated by reference to Exhibit 10.24 to Avondale Incorporated's
                    Registration Statement on Form S-4, File No. 33-5455-01).
   10.22      --    Avondale  Incorporated Stock Option Plan for Non-Employee Directors, Dated April 10,
                    1997
</TABLE>


                                       59
<PAGE>

<TABLE>
<S>           <C>   <C>
                    (incorporated  by reference to Exhibit  10.23 to Avondale  Incorporated's  1997 Annual
                    Report on Form 10-K, File No. 33-68412).
   10.23      --    Omnibus Amendment No. 1 to Amended and Reinstated Series 1996-1 Supplement to Pooling
                    and Servicing Agreement,  and Amended and Reinstated  Certificate Purchase Agreements,
                    dated April 25, 2000, among Avondale Receivables  Company,  Avondale Mills, Inc. and various
                    banks.
   10.24      --    First Amendment to Second Amended and Reinstated Credit Agreement,  dated as of August
                    30, 2001, among Avondale Mills, Inc., various banks and Wachovia Bank, N.A., as agent.
   10.25      --    Amendment  No. 6 to Letter of Credit  Agreement,  dated August 30,  2001,  between and
                    among Avondale  Incorporated,  Avondale Mills, Inc. and Suntrust Bank related to Development
                    Authority of Walton County Industrial Development Revenue Bonds.
   10.26      --    Consent and First Amendment  between Avondale Mills, Inc. and B.F.  Goodrich,  Partial
                    Assignment and Assumption of Supply  Agreement  between  Avondale  Mills,  Inc.,  B.F.
                    Goodrich  and Noveon,  Inc.  (formerly  B.F.  Goodrich  PMD Group) and  Amendment  and
                    Partial  Assignment of Supply Agreement,  between Avondale Mills,  Inc., B.F. Goodrich
                    and C.H. Patrick & Co. (formerly CHP Acquisition Group,  Inc.), all dated February 28,
                    2001.
   12.1       --    Computation of Ratio of Earnings to Fixed Charges.
</TABLE>

----------

         (b)      Reports on Form 8-K

                  Not applicable.

         (c)      See Item 14(a)(3) and separate Index to Exhibits attached
                  hereto.


                                       60
<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.

                                   AVONDALE INCORPORATED

                                   By: /s/ G. STEPHEN FELKER
                                   -------------------------
                                   Name: G. Stephen Felker
                                   Title: Chairman of the Board,
                                          President and
                                          Chief Executive Officer

Date:   November 12, 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:

PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:

<TABLE>
<CAPTION>
NAME                                                         TITLE                         DATE
----                                                         -----                         ----
<S>                                              <C>                                <C>
/s/  G. STEPHEN FELKER                           Chairman of the Board,             November 12, 2001
----------------------                           President and Chief Executive
G. Stephen Felker                                Officer


PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER:

/s/  JACK R. ALTHERR, JR.                        Vice Chairman, Chief               November 12, 2001
-------------------------                        Financial Officer and
Jack R. Altherr, Jr.                             Director


DIRECTORS:

/s/  DALE J. BODEN                               Director                           November 12, 2001
------------------
Dale J. Boden

/s/  ROBERT B. CALHOUN                           Director                           November 12, 2001
----------------------
Robert B. Calhoun

/s/  KENNETH H. CALLAWAY                         Director                           November 12, 2001
------------------------
Kenneth H. Callaway

/s/  HARRY C. HOWARD                             Director                           November 12, 2001
--------------------
Harry C. Howard

/s/  C. LINDEN LONGINO, JR.                      Director                           November 12, 2001
---------------------------
C. Linden Longino, Jr.
</TABLE>


                                       61
<PAGE>

<TABLE>
<S>                                              <C>                                <C>
/s/  JAMES A. RUBRIGHT                           Director                           November 12, 2001
-----------------------
James A. Rubright

/s/  JOHN P. STEVENS                             Director                           November 12, 2001
--------------------
John P. Stevens
</TABLE>


                                       62
<PAGE>

                                                                    SCHEDULE  II

                              AVONDALE INCORPORATED

                    CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
                VALUATION AND QUALIFYING ACCOUNTS (in thousands)


<TABLE>
<CAPTION>
                                                                                  CHARGED                               (B)
                                                                  BALANCE AT      TO COSTS                            BALANCE
                                                                  BEGINNING         AND              (A)              AT END OF
                                          DESCRIPTION              PERIOD         EARNINGS        DEDUCTIONS           PERIOD
                                          -----------             ----------      --------        ----------          ---------
<S>                                 <C>                            <C>            <C>              <C>                <C>
Year Ended August 27, 1999          Allowance for doubtful         $7,043         $1,464           $ (857)            $ 7,650
                                      accounts
Year Ended August 25, 2000          Allowance for doubtful          7,650            900             (747)              7,803
                                      accounts
Year Ended August 31, 2001          Allowance for doubtful          7,803            699           (1,306)              7,196
                                      accounts

</TABLE>

(A)      Deductions represent customer account balances written off during the
         period.

(B)      At August 27, 1999, August 25, 2000, and August 31, 2001, the balance
         at end of period includes $5,035, $4,814, and $4,580 respectively,
         related to accounts receivable sold. These amounts are included in
         other accrued expenses in the Consolidated Balance Sheets.