BURKE MILLS INC
The Company  has established  a recycling program for its  major waste items: yarn, cardboard, plastic tubes and cleaning fluid.     The Company believes its manufacturing operations are in compliance with all presently  applicable  federal,  state and local legislative and  administrative regulations concerning environmental protection; and, although it cannot predict the effect that future changes in such  regulations  may have,  particularly  as such changes may require capital  expenditures or affect  earnings,  it does not believe that any competitor subject to the same or similar regulations will gain any  significant  and  competitive  advantages  as a result of any such changes. Compliance  by the Company  during the fiscal year ended  December 31, 2005 with federal, state and local environmental protection laws had no material effect on capital expenditures, earnings, or the competitive position of the Company.     During 1996 in  connection  with a bank  loan to the Company  ecured  by real estate, the Company had a Phase I Environmental Site Assessment conducted on its property.  The  assessment  indicated  the  presence  of a  contaminant  in  the groundwater under the Company's property.  The contaminant was a solvent used by the Company in the past but no longer used.  The  contamination  was reported to the North Carolina  Department of Environment and Natural Resources (DENR). DENR required a Comprehensive Site Assessment that has been completed.  The Company's outside engineering firm conducted testing and prepared a Corrective Action Plan that was submitted to DENR.  The Company has identified  remediation  issues and continues  to move  toward  a  solution  of  natural  attenuation.  The  cost of monitoring is approximately $11,000 per year.     On  January 30, 2006,  the Company  had  149  employees.  The  Company's yarn division is its only  division.  During the fiscal year ended  December 31, 2005 sales to two customers, Quaker Fabric Corporation and Culp Weaving, exceeded ten percent of the Company's revenue.  Quaker  Fabric Corporation was 15.9% of total revenues in 2005,  20.7% in 2004,  and  25.5% in 2003.  Culp  Weaving  was 11.8% of total revenues in 2005,  11.8% in 2004, and 9.7% in 2003.  The loss of either customer would have a material  adverse  effect on the Company in the short run, but the Company believes that it would be able to  replace the  business  within a reasonable time.     The company owns 49.8% of Fytek, S.A. de C.V. (Fytek), a Mexican corporation. Fytek began  operations in the fourth quarter of 1997. The company  accounts for the  ownership  using the  equity  method.  The  Company  and its joint  venture partner, Akra, voted on March 26, 2004 to close their joint venture,  Fytek. The joint venture  operated on a scaled down basis through  mid-August 2004. In 2005 the Company and its joint venture partner  continued  liquidation of Fytek.  The Company has received  approximately  $325,000 cash distribution through year end 2005. Burke Mills does not guarantee any debt for its joint venture.     (d) Financial Information about Geographic  Areas. For each of the last three fiscal years of the Company,  revenues of the Company from customers outside the U.S. are as follows:   Page 5                                  BURKE MILLS, INC. PART I                                     2005            2004              2003     Country of       Domicile -  U.S.         $24,910,000     $24,612,000       $23,563,000                   Mexico           115,000          67,000           272,000                   Canada            15,000          15,000               -0-                   Honduras         155,000         406,000           980,000                   Barbados          11,000             -0-               -0-                   Turkey               -0-           1,000               -0-                   Hong Kong         47,000          33,000               -0-                                -----------     -----------       -----------        Total..........         $25,253,000     $25,134,000       $24,815,000     The basis for attributing  revenues  from  external customers  to  individual countries is payment by country of domicile on invoices  from the  Company.  The Company does not have any long-lived assets,  long-term  customer  relationships with a financial  institution,  mortgage and other  servicing  rights,  deferred policy acquisition costs or deferred tax assets located in any foreign country.     (e) Available Information. No report required.     (f) Reports to Securities Holders. No report required.     (g) Enforceability  of  Civil  Liabilities Against Foreign Persons. No report required.
(a) The textile  market in  the United States has been in substantial decline for at  least  the past ten  years  due  to fibers,  fabrics  and apparel  being imported  from foreign  countries  where  manufacturers  can produce the product at much  lower cost  than  in the United States, primarily because of much lower labor costs.  The  problem  has  been  exacerbated  by free trade agreements and particularly  the reluctance  of the Federal  Government  to impose  duties upon foreign products where the foreign government in effect subsidizes production o products.  The Company, whose  ustomers are in the textile  business,  as a yarn processor  is  faced  with  a  shrinking  customer  base,  as  well as the price pressures  due  to  imports  faced  by  the  Company's customers.  The Company's customer base  has  been  declining as  some of  its  customers  close,  go into bankruptcy or are bought out by other entities.     (b) The Company is a relatively small player in a large  market.  Many of the Company's  competitors  are  divisions  or  segments  of larger  or  diversified entities with far greater financial resources than those of the Company.     (c) The  last  fiscal year in which the Company  made a profit was the fiscal year ended  December 29, 2001. For each fiscal year since that year, the Company has had a net loss.  (   d) Sales of the Company for the fiscal year  ended  December  29,  2001 were $37,194,240.00.  Sales have declined since that year, dropping to $24,814,941.00 for the fiscal year ended January 3, 2004. Sales for the last fiscal year of the Company just ended were $25,143,775.00.     (e) The market for the commons stock of the Company is not favorable.  During 2005,  the  stock of the  Company  was bid at a high bid of $1.30  per share and steadily  declined through the year to close the year at a high bid of $0.60 per share.
Page 6                                  BURKE MILLS, INC. PART I
The  plant  buildings  are steel and brick  structures  protected  by  automatic sprinkler systems. The various departments, with the exception of the production dyehouse,  are heated,  cooled and  humidified.  The Company  considers  all its properties  and  manufacturing  equipment to be in a good state of repair,  well maintained and adequate for its present needs.  The Company  utilizes  substantially  all of the space in its main plant for its offices,  machinery  and  equipment,  storage and receiving  areas.  The Company utilizes  substantially all of the space in the auxiliary building for warehouse and distribution purposes.  The approximate  maximum capacity in pounds per year of the Company's  machinery and equipment,  based upon operating the machinery and equipment  seven (7) days per  week  fifty  (50)  weeks  per  year,  and  the  approximate  percentage  of utilization  thereof  during the  fiscal  year ended  December  31,  2005 are as follows:                                Pounds/Year 2005      Department                  Capacity         Utilization      ----------                  --------         -----------      Winding Machines            21,961,000           9%      Texturing Machines             816,000          27%      Dyeing Equipment            25,800,000          35%
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No  matters  were  submitted  to a vote of  security  holders  during the fourth quarter of the fiscal year covered by this report.                                        PART II                                    ----------
Quarter Ending                  2004                 High Bid         Low Bid              --------------           --------         -------                March 31                $1.29            $1.01                June 30                 $1.60            $1.06                September 30            $1.50            $1.26                December 31             $1.50            $1.10                 February 2, 2006        $0.65            $0.65     Such over-the-counter market quotations reflect inter-dealer prices,  without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.  (   b) As of February 2,  2006 there  were 324  holders of  record of the common stock of the Company.     (c) The Company has declared no dividends on its common stock during the past two fiscal years.     (d) Securities Authorized For Issuance Under Equity  Compensation  Plans.  No equities  securities  of the Company are  authorized  for issuance  under equity compensation plans.
SELECTED CASH FLOW DATA   Capital expenditures          $   312   $    72   $   127   $   888   $   388                                 =======   =======   =======   =======   =======   Depreciation                  $ 1,674   $ 1,779   $ 2,010   $ 2,055   $ 2,203                                 =======   =======   =======   =======   =======  SELECTED BALANCE SHEET DATA   Current assets                $ 4,728   $ 5,135   $ 4,445   $ 8,670   $10,132   Current liabilities             1,630     1,676     1,181     2,482     3,322                                 -------   -------   -------   -------   -------   Working capital               $ 3,098   $ 3,459   $ 3,264   $ 6,188   $ 6,810                                 =======   =======   =======   =======   =======   Current ratio                    2.89      3.06      3.76      3.49      3.05                                    ====      ====      ====      ====      ====   Total assets                  $ 9,504   $11,472   $13,078   $20,225   $22,803                                 =======   =======   =======   =======   =======   Long-term debt                $   -0-   $   -0-   $   -0-   $ 2,920   $ 4,098                                 =======   =======   =======   =======   =======   Net deferred tax liability    $   -0-   $   -0-   $   394   $ 1,735   $ 1,977                                 =======   =======   =======   =======   =======   Shareholders' equity          $ 7,874   $ 9,796   $11,503   $13,088   $13,406                                 =======   =======   =======   =======   =======  (A) Income per share has been computed based on the weighted average number of common shares outstanding during each period.
Factors  that may cause  actual  outcome and results to differ  materially  from those expressed in, or implied by, these forward-looking statements include, but are not  necessarily  limited  to,  availability,  sourcing  and  pricing of raw materials, pressures on sales prices due to competition and economic conditions, reliance on and  financial  viability of  significant  customers,  technological advancements,  employee relations,  changes in construction spending and capital equipment  expenditures  (including  those  related  to  unforeseen  acquisition opportunities),  the timely  completion of construction  and expansion  projects planned or in process,  continued  availability of financial  resources  through financing  arrangements and operations,  negotiations of new or modifications of existing   contracts  for  asset  management  and  for  property  and  equipment construction and acquisition, regulations governing tax laws, other governmental and authoritative bodies,  policies and legislation,  and proceeds received from the sale of  assets  held for  disposal.  In  addition  to these  representative factors,  forward-looking  statements  could be impacted by general domestic and international  economic and industry conditions in the markets where the Company competes;  such as, changes in currency  exchange rates,  interest and inflation rates, recession and other economic and political factors over which the Company has no control.
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Report of Independent Registered Public Accounting Firm  To the Stockholders and Board of Directors of Burke Mills, Inc.  We have audited the accompanying balance sheet of Burke Mills, Inc. (the "Company") as of December 31, 2005 and the related statements of operations, changes in shareholders' equity, and cash flows for the year then ended. The Company's audit also included the financial statement Schedule II listed in Item 15. "Exhibits and Financial Statement Schedules".  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinioin on these financial statements and schedule based on our audit.  We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not  Page 18                                  BURKE MILLS INC. PART II
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Burke Mills, Inc. at December 31, 2005, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.   /s/Scott McElveen Columbia, South Carolina January 27, 2006, except for Note 16 as to which the date is March 21, 2006. - -------------------------------------------------------------------------------  Report of Independent Registered Public Accounting Firm  To the Stockholders and Board of Directors of Burke Mills, Inc.  We have audited the accompanying balance sheets of Burke Mills, Inc. as of January 1, 2005 and the related statements of operations, shareholders' equity, and cash flows for each of the two years in the period ended January 1, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Burke Mills, Inc. at January 1, 2005, and the results of its operations and its cash flows for each of the two years in the period ended January 1, 2005, in conformity with accounting principles generally accepted in the United States of America.   /s/BDO SEIDMAN LLP High Point, North Carolina February 4, 2005  Page 19                                      BURKE MILLS, INC.                                   BALANCE SHEETS                                                 December 31     January 1                                                   2005            2005                                                -----------     ---------              ASSETS Current Assets   Cash and cash equivalents                    $   425,812    $   316,745   Accounts receivable                            2,568,838      3,064,365   Inventories                                    1,684,132      1,640,983   Prepaid expenses and other current assets         49,413        112,580                                                -----------    ----------- Total Current Assets                             4,728,195      5,134,673                                                -----------    -----------  Equity Investment in Affiliate                        -0-         196,300                                                -----------    ----------- Property, plant & equipment - at cost           28,085,778     29,848,475   Less: accumulated depreciation                23,326,789     23,724,193                                                -----------    -----------        Property, Plant and Equipment- Net        4,758,989      6,124,282                                                -----------    ----------- Other Assets                                        16,575         16,575                                                -----------    ----------- Total Assets                                   $ 9,503,759    $11,471,830                                                ===========    ===========                         LIABILITIES AND SHAREHOLDERS' EQUITY  Current Liabilities   Accounts payable                             $ 1,434,169    $ 1,465,630   Accrued salaries and wages                        69,272         72,447   Other liabilities and accrued expenses           126,303        137,537                                                -----------    ----------- Total Liabilities                              $ 1,629,744    $ 1,675,614                                                -----------    ----------- Commitments and contingencies  Shareholders' Equity   Common stock, no par value      (stated value, $.66)      Authorized - 5,000,000 shares      Issued and outstanding -          2,741,168 shares                        1,809,171      1,809,171   Paid-in capital                                3,111,349      3,111,349   Retained earnings                              2,953,495       4,875,696                                                -----------     -----------          Total Shareholders' Equity              7,874,015       9,796,216                                                -----------     -----------                                                $ 9,503,759     $11,471,830                                                ===========     ===========  The accompanying notes are an integral part of these financial statements.  Page 20                                      BURKE MILLS, INC.                              STATEMENTS OF OPERATIONS                                                Years Ended                                  ----------------------------------------                                  December 31    January 1      January 3                                     2005          2005           2004                                  -----------   -----------    ----------- Net Sales                       $25,252,600    $25,133,683    $24,814,941 - ---------     Cost of sales                 25,143,775     24,546,085     24,237,006                                 -----------    -----------    -----------    Gross Profit                     108,825        587,598        577,935     Selling, general and        administrative expenses    2,226,739      2,350,520      2,400,335    (Gain) loss on disposal of     property assets                (208,989)       154,353        276,468                                 -----------    -----------    ----------- Operating Loss                   (1,908,925)    (1,917,275)     (2,098,868)                                 -----------    -----------    ----------- Other Income   Interest income                     6,100          2,788         24,030   Other, net                          2,308         33,811         67,720                                 -----------    -----------    -----------       Total Other Income              8,408         36,599         91,750                                 -----------    -----------    ----------- Other Expenses   Interest expense                      370          1,263         91,176   Other, net                            -0-         17,790         64,944                                 -----------    -----------    ----------- Total Other Expenses                    370         19,053        156,120                                 -----------    -----------    -----------  Loss Before Benefit of    Income Taxes and Equity    in Loss of Affiliate          (1,900,887)    (1,899,729)    (2,163,238)  Income Tax Benefit                      -0-       (399,478)      (638,200)                                 -----------    -----------    ----------- Loss before Equity in Net   Loss of Affiliate              (1,900,887)    (1,500,251)    (1,525,038)  Equity in Net Loss of     Affiliate                       (21,314)      (206,892)       (59,095)                                 -----------    -----------    ----------- Net Loss                        $(1,922,201)   $(1,707,143)   $(1,584,133)                                 ===========    ============   ============  Basic Net Loss per share              $     (.70)    $      (.62)   $      (.58)                                 ===========    ============   ============  Weighted Average Common   Shares Outstanding             2,741,168       2,741,168       2,741,168                                 ===========    ============   ============   The accompanying notes are an integral part of these financial statements.  Page 21                                      BURKE MILLS, INC.                                STATEMENTS OF CHANGES                              IN SHAREHOLDERS' EQUITY                             FOR THE THREE YEARS ENDED                                 DECEMBER 31, 2005                                                                      Total                      Shares     Common      Paid-In      Retained   Shareholders                      Issued     Stock       Capital      Earnings   Equity                      ------     ------      -------      --------   ------------  Balance at  Dec. 28, 2002     2,741,168  $1,809,171   $3,111,349   $8,166,972  $13,087,492  Net Loss  for the year ended  Jan. 3, 2004          -          -          -          (1,584,133)  (1,584,133)                     ----------  ----------  ----------  -----------  ----------- Balance at  Jan. 3, 2004      2,741,168  $1,809,171   $3,111,349   $6,582,839   $11,503,359  Net Loss  for the year ended  Jan. 1, 2005          -       -            -           (1,707,143)  (1,707,143)                    ----------  ----------  ----------   -----------  ----------- Balance at  Jan. 1, 2005      2,741,168  $1,809,171   $3,111,349   $4,875,696   $9,796,216  Net Loss  for the year ended  Dec. 31, 2005          -      -            -           (1,922,201)  (1,922,201)                    ----------  ----------  ----------   -----------  ----------- Balance at  Dec. 31, 2005     2,741,168  $1,809,171   $3,111,349   $2,953,495   $7,874,015                    ========== ==========   ===========  ===========  ===========   The accompanying notes are an integral part of these financial statements.  Page 22                                      BURKE MILLS, INC.                              STATEMENTS OF CASH FLOWS                                                        Years Ended                                            -----------------------------------                                            Dec. 31        Jan. 1      Jan. 3                                              2005          2005        2004                                           -----------  ----------- ----------- Cash flows from operating activities:   Net loss                               $(1,922,201)  $(1,707,143) $(1,584,133)                                          ------------  ------------ ------------ Adjustments to reconcile net loss to net    cash provided by operating activities:      Depreciation                          1,674,433     1,779,135    2,010,674      Allowance for doubtful accounts           3,253           -0-          -0-      (Gain) loss on sales of plant &          equipment, including loss on          disposals                          (208,989)      154,353      276,468      Provision for impairment of          inventory                          (126,115)       54,084       96,000      Deferred income taxes                       -0-      (394,000)    (638,200)      Loss in net earnings of affiliate        21,314       206,892       59,095 Changes  in  assets  and  liabilities:      Accounts receivable                     492,274      (699,081)     (96,195)      Inventories                              82,966       185,410      119,386      Prepaid expenses & other current         assets                                63,167       (59,947)      61,367      Accounts payable                        (31,461)      593,935     (225,436)      Accrued salaries & wages                (20,575)       35,797      (46,798)      Other liabilities & accrued expenses      6,166         6,725        7,817                                           -----------   -----------  ----------- Total adjustments                          1,956,433     1,863,303    1,624,178                                           -----------   -----------  ---------- Net cash provided by operating activities     34,232       156,160       40,045                                           -----------   -----------  ----------- Cash flows from investing activities:   Acquisition of property, plant       and equipment                         (312,127)      (72,267)    (127,456)   Proceeds from sales of plant       and equipment                          211,977        77,316          -0-   Proceeds from Investment in Affiliate      174,985       149,988          -0-                                           -----------   -----------   ---------- Net cash provided (used) by       investing activities                    74,835       155,037     (127,456)                                           -----------   -----------   ----------  Cash flows from financing activities:   Net proceeds from revolving credit line        -0-           -0-      141,514   Principal payments of long-term debt           -0-           -0-   (4,098,214)   Net payments to revolving credit line          -0-      (141,514)         -0-                                           -----------   -----------  ----------- Net cash used by financing activities            -0-      (141,514)  (3,956,700)                                           -----------   -----------  ----------- Net increase (decrease) in cash and   cash equivalents                           109,067       169,683   (4,044,111) Cash & cash equivalents at beginning   of year                                    316,745       147,062    4,191,173                                           -----------   -----------  ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR  $  425,812    $   316,745  $  147,062                                           ===========   ===========  ===========    The accompanying notes are an integral part of these financial statements.  Page 23                                  BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - ---------------------------------------- Accounting  Period. The Company's fiscal year is the 52 or 53 week period ending the Saturday nearest to December 31. Fiscal years 2004 and 2005 ended on January 1 and December  31,  respectively.  The two fiscal years  consisted of 52 weeks. Fiscal year 2003 ended on January 3, 2004 and consisted of 53 weeks.  Revenue  Recognition.  Revenues from sales are  recognized at the time shipments are made to the customer. Sales terms are FOB Burke Mills, Inc. unless otherwise specified. Related shipping and handling costs are included in cost of sales.  Cost of Sales. All manufacturing,  quality control, inbound freight,  receiving, inspection,  purchasing,  planning,  warehousing of raw, in-process and finished inventory, outbound freight and internal transfer costs are included in the cost of sales.  Selling,  general  and  administrative.  Includes  cost  related to the  selling process, accounting, information services, and corporate offices.  Cash and Cash Equivalents. For the purposes of the statements of cash flows, the Company considers cash and cash equivalents to include cash on hand, deposits in banks, and all highly liquid debt instruments with a maturity of three months or less when  purchased.  At December  31, 2005,  the Company had cash  deposits in excess of federally insured limits in the approximate amount of $217,000.  Accounts Receivable.  Substantially all of the Company's accounts receivable are due from  manufacturers in the furniture,  contract,  automotive  upholstery and apparel  industries.  The Company  grants credit to customers and generally does not require collateral.  Management  continuously performs credit evaluations of its customers,  considering  numerous  inputs  including  past payment  history, financial  condition,   operating  performance,   and  economic  conditions  and prospects.  While  management  believes  that adequate  allowances  for doubtful accounts have been provided in the financial statement,  it is possible that the Company could experience unexpected credit losses.  Inventories.  Inventories are stated at the lower of cost (first-in,  first-out) or  market.  Cost  elements  included  in  work-in-process  and  finished  goods inventories are raw materials,  direct labor and manufacturing overhead.  Market is considered to be net realizable value.  Property, Plant and Equipment. Property, plant and equipment are stated at cost.  Depreciation  and  amortization  of the property  accounts are provided over the estimated  useful  lives  of  the  assets.  For  financial  reporting  purposes, depreciation  on plant and  equipment  is provided  primarily  at  straight-line rates. For income tax purposes,  depreciation has been provided at straight-line rates for all  property,  plant  and  equipment  acquired  prior to 1981 and the accelerated  and modified  accelerated  cost recovery system for property assets acquired  subsequent to December 31, 1980.  The estimated  useful lives used for computing depreciation for financial reporting purposes are generally:           Buildings                           15 - 45 years          Buildings and land improvements     5 - 20 years          Plant machinery and equipment       5 - 17 years          Office equipment                    5 - 10 years          Automotive equipment                3 -  5 years          Computer equipment                  3 -  5 years  Accounting for Possible  Impairment of Long-lived Assets.  Long-lived assets are evaluated  for  impairment  when  events or  changes in  business  circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash   Page 24                                  BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued) - ---------------------------------------------------- Accounting for Possible Impairment of Long-lived Assets (continued)  flows  expected  to  result  from  the use of  these  assets  and  its  eventual disposition are less than its carrying amount.  Impairment,  if any, is assessed using discounted cash flows.  In 2004 and  2003 the  Company  wrote  off  equipment  with net book  values  of $198,000  and  $268,000  respectively.  With the decrease in sales volume and no anticipated  business  increase in products that will run on the machinery,  the machinery  was  written  off as a  non-performing  asset.  No salvage  value was assigned to the machinery, as the Company had no potential buyer.  Earnings Per Share.  Earnings  per share are based on the net income  divided by the weighted average number of common shares  outstanding  during the respective periods.  Use of Estimates in Preparing Financial Statements. The preparation of financial statements in conformity with generally accepted accounting  principles requires management  to make  estimates  and  assumptions  that affect  certain  reported amounts and  disclosures.  Accordingly,  actual  results could differ from those estimates.  Significant  estimates  are the  liability  for  self-funded  health claims, inventory markdowns, allowance for doubtful accounts receivable, and the investment value of affiliates.  Income Taxes. The Company accounts for income taxes in accordance with Statement of Financial  Accounting  Standards  ("SFAS") No. 109 -  "Accounting  for Income Taxes".  Under this method,  deferred tax assets and  liabilities are determined based on  differences  between  financial  reporting and tax bases of assets and liabilities  and are measured  using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.  Because the realization of tax benefits related to the Company's net deferred tax asset is uncertain,  a valuation allowance has been provided against the net deferred tax asset.  Financial Instruments.  The Company's financial instruments consist primarily of receivables,  accounts payable,  and accrued  expenses.  The carrying amounts of receivables, accounts payable, and accrued expenses approximate their fair value because of the short-term maturity of such instruments.  Recent Accounting  Pronouncements.  In December 2004, the FASB issued FASB Staff Position No. 109-1 ("FSP FAS No.  109-1"),  "Application  of FASB  Statement No. 109, `Accounting for Income Taxes,' to the Tax Deduction on Qualified Production Activities  Provided by the  American  Jobs  Creation Act of 2004." The American Jobs  Creation  Act of 2004  introduces  a special  tax  deduction  of up to 9.0 percent when fully phased in, of the lesser of "qualified  production activities income" or  taxable  income.  FSP FAS 109-1  clarifies  that this tax  deduction should be accounted for as a special tax  deduction in accordance  with SFAS No. 109. FSP FAS No. 109-1 has had no impact on our financial statements.  In November 2004, the FASB issued SFAS No. 151,  "Inventory Costs", an amendment of Accounting  Research  Bulletin No. 43,  Chapter 4. SFAS No. 151 clarifies the accounting  for abnormal  amounts of idle facility  expense,  freight,  handling costs and  wasted  material.  SFAS No.  151 is  effective  for  inventory  costs incurred during fiscal years beginning after June 15, 2005.  Management believes adoption  of SFAS  No.  151 will not have a  material  effect  on our  financial position, results of operations or cash flows.  In  December  2004,  the FASB issued SFAS No.  153,  "Exchanges  of  Nonmonetary Assets,  an  amendment  of APB  Opinion  No.  29." SFAS No.  153 is based on the principle that  exchanges of nonmonetary  assets should be measured based on the fair  value of the  assets  exchanged.  APB  Opinion  No.  29,  "Accounting  for Nonmonetary  Transactions,"  provided  an  exception  to its  basic  measurement principle (fair value) for exchanges of similar productive assets. Under APB   Page 25                                   BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued) - ---------------------------------------------------- Recent Accounting Pronouncements (continued)  Opinion No. 29, an exchange of a productive asset for a similar productive asset was  based on the  recorded  amount  of the  asset  relinquished.  SFAS No.  153 eliminates  this  exception  and  replaces it with an  exception of exchanges of nonmonetary  assets  that do no  have  commercial  substance.  SFAS  No.  153 is effective  for the  Company as of January 1, 2005.  The  Company  will apply the requirements of SFAS No. 153 when such an exchange occurs.  In January 2003, the FASB issued  Interpretation  ("FIN") No. 46, "Consolidation of Variable  Interest  Entities" and in December 2003, a revised  interpretation was issued (FIN No. 46, as  revised).  In general,  a variable  interest  entity ("VIE") is a corporation,  partnership, trust, or any other legal structure used for business  purposes  that either does not have equity  investors  with voting rights  or has  equity  investors  that  do  not  provide  sufficient  financial resources  for the entity to support  its  activities.  FIN No. 46, as  revised, requires a VIE to be  consolidated by a company if that company is designated as the  primary  beneficiary.  The  interpretation  applies to VIEs  created  after January 31, 2003,  and for all financial  statements  issued after  December 15, 2003 for VIEs in which an enterprise  held a variable  interest that it acquired before  February 1, 2003.  The adoption of FIN No. 46, as revised,  did not have any material effect on our financial position or results of operations.  In May 2005,  the FASB issued  Statement of Financial  Accounting  Standards No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS 154").  SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting  principle.  SFAS 154 applies  to all  voluntary  changes in  accounting  principles,  and  applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 requires retrospective  application to prior period financial  statements for a change in accounting  principle.   Previously,   a  change  in  accounting  principle  was recognized  by  including  the change in net income in the period of the change. SFAS 154 is effective for fiscal years  beginning  after  December 15, 2005. The Company  is  currently  reviewing  SFAS 154,  and at the  current  time does not believe  that SFAS 154 will have a material  impact on the  financial  position, results of operations or cash flows.  In December 2004, the FASB issued SFAS No. 123 (revised), "Share-Based Payment." Statement  123  (revised)  replaced SFAS No. 123,  "Accounting  for  Stock-Based Compensation,"  and supersedes APB Opinion No. 25,  "Accounting for Stock Issued to  Employees."  Statement  123  (revised)  covers a wide  range of  share-based compensation  arrangements  and requires that the  compensation  cost related to these types of payment transactions be recognized in financial statements.  Cost will be measured based on the fair value of the equity or liability  instruments issued. Statement 123 (revised) becomes effective for years beginning after June 15, 2005.  SFAS No. 123 will have no affect on the Company as the Company has no share-based payments,  and the Board does not anticipate any share-based payment programs.  Reclassifications.  Certain  January 1, 2005 amounts have been  reclassified  to conform to the December 31, 2005 presentation.    Page 26                                  BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE - ---------------------------------------- The Company is engaged in texturing,  twisting,  winding, dyeing, processing and selling of cotton, polyester, rayon, nylon, and other specialty yarns and in the dyeing and processing of these yarns for others on a commission basis.  With  respect to its  operations,  the  Company's  products and its services for others on a commission basis are sold and/or  performed for customers  primarily located in the territorial limits of the United States.  The Company had foreign sales as a percentage of total sales as follows:                      Country           2005             2004            2003                     -------           ----             ----            ----                     Mexico             .46%             .27%           1.10%                     Canada             .06%             .06%             .0%                     Honduras           .62%            1.62%           3.95%                     Barbados           .05%              .0%             .0%                     Hong Kong          .19%             .13%             .0%                     Turkey              .0%             .01%             .0%                                       -----            -----           -----        Total..........                1.38%            2.09%           5.05%  Other than  sales as shown  above,  the  Company  had no other  sales in foreign markets during the three year period ended December 31, 2005. For the three year period  ended  December  31,  2005,  the  Company has  operated  within a single industry segment with classes of similar products.  The principal markets served by the Company are apparel,  upholstery,  home furnishings,  and industrial uses through the knitting and weaving industry.  In connection with sales to major  customers,  one customer  exceeded 10% of the Company's  sales during each of the three years ended  December  31,  2005,  and another customer exceeded 10% of the company's sales for the year ended December 31, 2005 and January 1, 2005.  For the purpose of this  determination,  sales to groups of companies under common control have been combined.   Page 27                                  BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 2 - SEGMENTS OF BUSINESS ENTERPRISE (continued) - ----------------------------------------------------          Customer:                   A            B          --------                   ----         ----           2005                      15.9%        11.8%           2004                      20.7%        11.8%           2003                      25.5%         9.7%  The Company had equipment located in Mexico that was leased to its joint venture Fytek in 2003 and 2004. The company sold the equipment in 2005.   NOTE 3 - ACCOUNTS RECEIVABLE - ---------------------------- Accounts receivable comprise the following:                                          December 31         January 1                                           2005                2005                                           ----                ----      Due from factor on regular           factoring account            $      -0-          $2,192,000      Non-factored accounts receivable   2,572,000             872,000      Allowance for doubtful accounts       (3,000)                -0-                                        ----------          ----------                Total                   $2,569,000          $3,064,000                                        ==========          ==========  During the first  quarter of 2005,  the Company  moved its  accounts  receivable in-house, eliminating its factoring arrangement.   NOTE 4 - INVENTORIES - -------------------- Inventories are summarized as follows:                                       December 31,       January 1,                                         2005               2005                                         ----               ----      Finished & in process           $  853,000        $  944,000      Raw materials                      614,000           553,000      Dyes & chemicals                   165,000           195,000      Other                               76,000            99,000      Mark-down allowance                (24,000)         (150,000)                                      ----------        ----------      Total                           $1,684,000        $1,641,000                                      ==========        ==========  NOTE 5 - PROPERTY, PLANT AND EQUIPMENT - -------------------------------------- Major classifications of property, plant and equipment are as follows:                                December 31, 2005           January 1, 2005                               ------------------          ----------------                                      Accumulated                Accumulated                             Cost     Depreciation       Cost    Depreciation                             ----     ------------       ----    ------------ Land                      $  156,425 $       -0-     $  156,425  $       -0- Land improvements            182,913     126,246        182,913      119,928 Building & improvements    6,389,684   5,246,690      6,385,441    5,121,383 Plant machinery &     equipment             20,266,886  16,899,874     21,980,038   17,422,409 Office equipment             967,766     948,898        967,766      928,722 Automotive equipment         122,104     105,081        175,892      131,751                            ---------  ----------     ----------   ---------- Total                    $28,085,778 $23,326,789    $29,848,475  $23,724,193                          =========== ===========    ===========  =========== Page 28                                  BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 6 - LINE OF CREDIT - ----------------------- The  Company  has  entered  into  an  Accounts  Receivable  Inventory  Financing Agreement (the "Financing  Agreement") with The CIT Group/ Commercial  Services, Inc. ("CIT"). In addition,  the Company signed a Letter of Credit Agreement (the "LOC Agreement") with CIT. Under the terms of the Financing Agreement,  CIT may, at its sole discretion,  advance up to $5,000,000 to the Company as follows: (a) revolving  credit  advances  in  amounts  up to 85  percent of the net amount of eligible accounts receivable;  (b) revolving credit advances in amounts up to 60 percent of the value of eligible inventory.  Advances against eligible inventory will not exceed the lesser of  $2,000,000  and the advances  made by CIT against accounts receivable. Further, CIT will not make advances against inventory until receiving and being satisfied with (a) unqualified  financial  statements of the Company as of the fiscal year ended  December 31, 2005,  (b) a business plan and forecasted  financial  statements  for the fiscal year 2006,  (c) a satisfactory examination of the Company's books and records, and no default having occurred.  With regard to the LOC Agreement, the Financing Agreement provides that CIT will assist the  Company in opening  letters of credit or  guarantee  the payment and performance  of such  letters  of  credit up to an  aggregate  face  amount  not exceeding $500,000 at any one time outstanding.  The Company has granted to CIT a security  interest in its accounts  receivable; monies, securities and other property held in transit to CIT; present and future deposits held by CIT; all rights of the Company in future  accounts  receivable; the Company's  inventory;  the Company's equipment (defined to be all machinery, equipment,   rolling  stock,   furnishings   and  fixtures  and  all  additions, substitutions or employments thereof);  all proceeds and products of any defined collateral;  and other customary  definitions of collateral  related to accounts receivable, inventory and equipment.  The Company is  obligated  to pay interest to CIT on the average of net balances owed  monthly at one percent  above the prime rate  announced by JP Morgan Chase Bank in New York, NY. Interest is calculated on a 360 day year. In addition, the Company paid CIT an initial  facility fee of $25,000 and will pay CIT $1,000 per month as a "collateral management fee."  The  Company  had no debt under its line of credit at  year-end,  and the unused line of credit was approximately $2,100,000.   NOTE 7 - OTHER LIABILITIES AND ACCRUED EXPENSES - ----------------------------------------------- Other liabilities and accrued expenses consist of the following:                                         December 31      January 1                                          2005             2005                                          ----             ---- Employee insurance                     $ 55,000         $ 60,000 Payroll taxes payable                    41,000           24,000 Other                                    30,000           54,000                                        --------         --------        Total                           $126,000         $138,000                                        ========         ========   NOTE 8 - INCOME TAXES - ---------------------- The  Company  uses the  liability  method  as  required  by FASB  Statement  109 "Accounting  for Income  Taxes".  Under  this  method,  deferred  tax assets and liabilities are determined based on the differences  between financial reporting and tax bases of assets and  liabilities  and are measured using the enacted tax rates and laws.   Page 29                                  BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 8 - INCOME TAXES (continued) - ---------------------------------- The items that comprise deferred tax assets and liabilities are as follows:                                                  Dec. 31        Jan. 1                                                  2005           2005                                                ---------      --------- Deferred tax assets: Alternative minimum taxes paid                $  349,000      $  349,000 Net operating loss carryover                   1,284,000         873,000 Charitable contributions carryover                13,000          12,000 State tax credits                                 41,000          41,000 Bad debts                                          1,000             -0- Inventory                                         14,000          52,000                                                ----------      ---------- Total gross deferred tax assets               $1,702,000      $1,327,000 Valuation Allowance                           (1,020,000)       (301,000)                                                ----------      ---------- Net deferred tax assets                       $  682,000      $1,026,000                                                ----------      ---------- Deferred tax liabilities:  Accelerated depreciation for tax purposes       682,000       1,026,000                                                ----------      ---------- Net deferred tax liability                     $     -0-      $      -0-                                                ==========     ==========  At December  31, 2005,  the Company had a net  operating  loss carry  forward of approximately $3,185,755 which expires in various amounts starting 2022-2024.  The  provision for income taxes on  historical  income  differs from the amounts computed  by  applying  the  applicable  Federal  statutory  rates,  due  to the following:                                                    Years Ended                                    -------------------------------------------                                     December 31     January 1       January 3                                       2005            2005            2004                                     ----------     ----------      ----------- Loss before income taxes (credit)  $(1,922,000)   $(2,106,000)    $(2,223,000) Federal income taxes                       34%            34%              34%                                    ------------   ------------    ------------ Computed taxes (credit) at maximum    statutory tax                      (654,000)      (716,000)       (756,000) State income taxes (credit), net of    federal income tax benefits         (88,000)       (96,000)       (101,000) Total adjustment for foreign    affiliate earnings                    8,000        115,000          21,000  Adjustment for deferred income    taxes                               (12,000)        (4,000)        194,000 Prior year tax examination & other       3,000          6,000           4,000 State tax refund                           -0-         (5,000)            -0-                                    ------------   ------------     ------------      Sub-Total                     $  (719,000)   $  (700,000)     $  (638,000) Valuation allowance                    719,000        301,000              -0-                                    ------------   ------------     ------------ Provision (credit) for    income taxes                    $       -0-    $  (399,000)     $  (638,000)                                    ===========    ============     ============    Page 30                                  BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 8 - INCOME TAXES (continued) - ---------------------------------- The benefit for taxes on income consists of the following:                                                  Years Ended                                    -----------------------------------------                                     December 31      January 1      January 3                                       2005             2005           2004                                       ----             ----           ---- Deferred: Federal                             $(634,000)       $(605,000)     $(541,000) State and local                       (85,000)         (95,000)       (97,000) Valuation allowance                   719,000          301,000           -0-                                     ----------       ----------     ---------- Total                               $     -0-        $(399,000)     $(638,000)                                     ==========       ==========     ==========   NOTE 9 - INVESTMENT IN AFFILIATE AND RELATED PARTY TRANSACTIONS - ------------------------------------------------------------------- The Company owns 49.8% of Fytek,  S.A. de C.V. (Fytek),  a Mexican  corporation. Fytek began  operations in the fourth quarter of 1997. The company  accounts for the  ownership  using the  equity  method.  The  Company  and its joint  venture partner, Akra, voted on March 26, 2004 to close their joint venture,  Fytek. The joint venture  operated on a scaled down basis through  mid-August 2004. In 2005 the Company and its joint venture partner  continued  liquidation of Fytek.  The Company has received  approximately  $325,000 cash distribution through year end 2005. Burke Mills does not guarantee any debt for its joint venture.                                Statements of Income                          (In thousands of U.S. Dollars)                                                    December 31                                          ---------------------------------                                            2005         2004        2003                                            ----         ----        ---- Net Sales                                 $ -0-        $1,436      $2,305 Gross Profit/(Loss)                         -0-          (173)         15 Loss from operating income                  -0-          (378)       (192) Loss from discontinued operations          (440)          -0-         -0- Loss before income taxes                   (440)         (563)       (139) Income taxes                                 24           -0-          52                                           ------        ------      ------- Net loss                                  $(464)       $ (563)     $  (87)                                           ======        ======      =======                                   Balance Sheets                          (In thousands of U.S. Dollars)                                                    December 31                                          ---------------------------------                                            2005         2004         2003                                            ----         ----         ---- Current assets                             $168         $783        $1,861 Non-current                                 -0-          185           164                                            -----        -----       ------ Total assets                               $168         $968        $2,025                                            =====        =====       ======  Current liabilities                        $152         $160        $  466                                            -----        -----       ------ Total liabilities                          $152         $160        $  466  Stockholder's equity                         16          808         1,559                                            -----        -----       ------ Total liabilities and stockholder's equity $168         $968        $2,025                                            =====        =====       ======  Page 31                                  BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 10 - STATEMENTS OF CASH FLOWS - ---------------------------------- Cash paid for  interest was $400 in 2005,  $1,300 in 2004,  and $91,000 in 2003. The  Company  had cash  payments  for state  franchise  taxes of $5,000 in 2005, $6,000 in 2004, and $14,000 in 2003. The Company  received a state tax refund of $6,000 in 2004.   NOTE 11 - RENTAL EXPENSES AND LEASE COMMITMENTS - ----------------------------------------------- Rental  expenses  under all lease  commitments  for the three fiscal years ended December 31, 2005, aggregated $62,000, $57,000, and $60,000 respectively.  Minimum commitments under terms of all non-cancelable leases, which consist only of leased equipment, are as follows as of December 31, 2005:                  2006     $57,000                 2007     $34,000                 2008      $1,000   NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED) - ----------------------------------------------                          (in thousands of dollars except for per share amounts)                                                 QUARTER                                -----------------------------------------   2005                         First(1)      Second       Third     Fourth(2)   -----                        -------       ------       ------    --------   Net sales                    $7,138        $6,579       $5,769    $5,766   Cost of sales                 6,887         6,698        5,810     5,748   Gross profit/(loss)             251          (119)         (41)       18   Net loss                       (307)         (659)        (601)     (355)   Net loss per common share    $(0.11)       $(0.24)      $(0.22)    $(0.13)     2004                         First(3)      Second       Third     Fourth(4)   ----                         -------       ------       ------    --------   Net sales                    $6,601        $6,710       $6,162    $5,661   Cost of sales                 6,401         6,295        6,119     5,731   Gross profit/(loss)             200           415           43       (70)   Net loss                       (462)          (84)        (321)     (840)   Net loss per common share    $ (.17)       $ (.03)      $ (.12)   $ (.31)   (1)In the first quarter of 2005 the Company recorded a gain on $101,000 on the sale of a portion of its machinery located at its joint venture.  (2)In the fourth quarter of 2005 the Company recorded a gain of $105,000 on the sale of the remaining machinery located at its joint venture.  (3)During the first quarter of 2004, the Company recorded a write-down for the impairment of its investment in affiliate of $298,000.  (4)During the fourth quarter of 2004, the Company recorded a write-down for the impairment of machinery of $198,000.   NOTE 13 - EMPLOYEE BENEFIT PLAN - ------------------------------- The Company is a participating  employer in the Burke Mills,  Inc.,  Savings and Retirement  Plan and Trust that has been  qualified  under Section 401(k) of the Internal  Revenue  Code.  This plan allows  eligible  employees to  contribute a salary  reduction  amount  of not  less  than  1% nor  greater  than  25% of the employee's salary but not to exceed dollar limits set by law. The employer may  Page 32                                   BURKE MILLS, INC. PART II                           NOTES TO FINANCIAL STATEMENTS  NOTE 13 - EMPLOYEE BENEFIT PLAN (continued) - ------------------------------------------- make a discretionary  contribution  for each employee out of current net profits or accumulated  net profits in an amount the employer may from time to time deem advisable. No provision was made for a discretionary contribution in 2005, 2004, or 2003.   NOTE 14 - CONCENTRATIONS OF CREDIT RISK - -------------------------------------------- Financial  instruments that potentially  subject the Company to concentration of credit risk consist  principally of occasional  temporary cash  investments  and accounts receivable.  At year-end 2005, two customers represented  approximately 27% of total accounts receivable compared to 32% in 2004.   NOTE 15 - OTHER COMMITMENTS - ------------------------------    a) The Company and  Titan  Textile  Company, Inc.,  signed an agreement which became  effective  April 1,  1999,   whereby  the  Company   sold  its  friction texturing equipment  to Titan and in  turn  will  purchase  textured  yarns from Titan.  The agreement  states that the Company  will purchase  70,000 pounds per week as long as the Company has a  requirement  for  textured  yarns.  When  the Company's requirements  xceed 140,000 pounds per week, the Company will purchase at least 50% of its requirements from Titan. The textured yarn pricing structure will be reviewed  every six months and when partially oriented yarn (POY) prices increase or decrease by 5% or more.      b) During 1996 in connection with a bank loan to the Company secured by real estate, the Company had a Phase I Environmental Site Assessment conducted on its property.  The  assessment  indicated  the  presence  of a  contaminant  in  the groundwater under the Company's property.  The contaminant was a solvent used by the Company in the past but no longer used.  The  contamination  was reported to the North Carolina  Department of Environment and Natural Resources (DENR). DENR required a Comprehensive Site Assessment that has been completed.  The Company's outside engineering firm conducted testing and prepared a Corrective Action Plan that was submitted to DENR.  The Company has identified  remediation  issues and continues  to move  toward  a  solution  of  natural  attenuation.  The  cost of monitoring is approximately $11,000 per year.   NOTE 16 - SUBSEQUENT MATTERS - ------------------------------ On March 17, 2006,  Quaker Fabric,  the Company's  largest customer for the last three years,  filed Form 12B-25 Request for Extension  with the U.S.  Securities and Exchange  Commission.  The  narrative  part of the filing  stated that while there has been no  payment  default,  Quaker  Fabric  failed to comply  with the amended financial  covenants in the 2005 credit agreement as of the fiscal month ended March 4, 2006.  Quaker  Fabric also  stated it  anticipates,  based on its recent operating results, that its independent registered public accounting firm will issue a report on Quaker  Fabric's  fiscal 2005 financial  statements  that includes an  explanatory  paragraph  expressing  substantial  doubt about Quaker Fabric's  ability  to  continue  as a going  concern.  The  delivery  of audited financial statements to lenders with qualifications of expression of substantial doubt as to Quaker  Fabric's  ability to  continue  as an ongoing  concern is an event of default under the 2005 credit  agreement.  As a result of the events of default,  Quaker  Fabric's  obligations,  liabilities,  and  indebtedness to its lenders  under the 2005 credit  agreement  may at any time be  declared  due and payable  in full.  As of March 21,  2006  Quaker  Fabric's  accounts  receivable balance  with the Company is  $280,000  and is all  current.  In the fiscal year ended  December 31, 2005 the Company's  sales to Quaker Fabric were  $4,007,000. The  Company  believes  that  unless  Quaker  Fabric  can  obtain a waiver  or a forbearance agreement from its lenders, the account may be lost.    Page 33                                  BURKE MILLS, INC. PART II
The Company has engaged a new independent  registered  public accounting firm to audit the Company's financial statements. That firm is Scott McElveen, L.L.P. of Columbia, SC.
During the quarter  ended  December 31, 2005,  there have been no changes in the Company's internal controls or in other factors that could significantly  affect such internal  controls.  Subsequent to the date of the  evaluation,  there have been no changes or  corrective  actions  with regard to the  material  weakness, except for the items listed above.
PART III  The  information  required  for Items 10,  11, 12, 13 and 14 of Part III of this report  is  incorporated  by  reference  from  the  Company's  definitive  proxy statement  to be filed  pursuant  to  Regulation  14A for the annual  meeting of shareholders  scheduled  for May 16, 2006,  involving the election of directors, which is  expected  to be filed  not  later  than 120 days  after the end of the fiscal year covered by this report.   Page 34                                      BURKE MILLS, INC.                                       PART IV
1. Report of Independent Registered Public Accounting Firm.         2. The following financial statements of Burke Mills, Inc. and the related auditors' report required to be included in Part II Item 8, are listed below:                    Report of Independent Registered Public Accounting Firm                    Balance sheets                      December 31, 2005                      January 1, 2005                    Statements of operations                      Year ended December 31, 2005                      Year ended January 1, 2005                      Year ended January 3, 2004                    Statements of changes in shareholders' equity                      Year ended December 31, 2005                      Year ended January 1, 2005                      Year ended January 3, 2004                    Statements of cash flows                      Year ended December 31, 2005                      Year ended January 1, 2005                      Year ended January 3, 2004                    Notes to financial statements                                      SCHEDULE II                          VALUATION AND QUALIFYING ACCOUNTS                                  FOR YEARS ENDED              JANUARY 3, 2004, JANUARY 1, 2005, AND DECEMBER 31, 2005                                                          Net                             Balance At   Provisions     Deductions     Balance                             Beginning    Charged To     From           At End Descriptions                Of Period    Expense        Allowances     Of Period - ----------------            ---------    ----------     ----------     --------- Yr Ended:  Jan. 3, 2004   Valuation allowance for   deferred tax assets      $   -0-       $   -0-        $   -0-      $   -0-    Allowance for doubtful    accounts receivable     $   -0-       $   -0-        $   -0-      $   -0-  Yr Ended:  Jan. 1, 2005   Valuation allowance for   deferred tax assets      $   -0-       $301,000       $   -0-      $301,000    Allowance for doubtful    accounts receivable     $   -0-       $   -0-        $   -0-      $   -0-  Yr Ended:  Dec. 31, 2005   Valuation allowance for   deferred tax assets      $301,000      $719,000       $   -0-      $1,020,000    Allowance for doubtful    accounts receivable     $   -0-       $13,000        $10,000      $3,000  Page 35                                    BURKE MILLS, INC.                                       PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued) - ---------------------------------------------------------------       3. The exhibits required by Item 601 of Regulation S-K and paragraph (c) of Item 14 are: (a) the articles of incorporation and by-laws of the Company which are incorporated herein by reference from the Amendment on Form 8K to the annual report on Form 10-K of the Company for the fiscal year ended January 2, 1982 previously filed with the Commission; (b) Exhibit 31 - Rule 13a-14(a) certifications; and (c) Exhibit 32 - Section 1350 certifications.   - --------------------------------------------------------------------------------                                       SIGNATURES                                    ----------  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.   Date: March 29 , 2006                   BURKE MILLS, INC.                                          By: s/Humayun N. Shaikh                                             ----------------------                                             Humayun N. Shaikh                                             Chairman of the Board                                             (Principal Executive Officer)   Date:  March 29, 2006                   By: s/Thomas I. Nail                                             -----------------------                                             Thomas I. Nail                                             President and COO                                             (Principal Financial Officer)  Page 36                                      BURKE MILLS, INC.                                     SIGNATURES                                    ----------  Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.   Date:  March 29, 2006                       By: s/Humayun N. Shaikh                                                 ---------------------------                                                 Humayun N. Shaikh, Director   Date:  March 29, 2006                       By: s/Thomas I. Nail                                                 ---------------------------                                                 Thomas I. Nail, Director   Date:  March 29, 2006                       By: s/Richard F. Byers                                                 ---------------------------                                                 Richard F. Byers, Director   Date:  March 29, 2006                       By: s/Robert P. Huntley                                                 ---------------------------                                                 Robert P. Huntley, Director   Date:  March 29, 2006                       By: s/William T. Dunn                                                 ---------------------------                                                 William T. Dunn, Director   Date:  March 29, 2006                       By: s/Robert T. King                                                 ---------------------------                                                 Robert T. King, Director   Date:  March 29, 2006                       By: s/Aehsun Shaikh                                                 ---------------------------                                                 Aehsun Shaikh, Director   Page 37                                          EXHIBIT TABLE    (3)(i)   Articles of Incorporation - Incorporated by reference     (ii)  Bylaws - Incorporated by reference  (14)     Code of Ethics  (31)(1)  Rule 13a - 14(a)/15d - 14(a) Certifications  (32)     Section 1350 Certifications                    Page 38                                         EXHIBIT 14                                   CODE OF ETHICS                                        OF                                 BURKE MILLS, INC.      Burke Mills, Inc. (the "Company") has adopted a Code of Ethics. The terms of this code are as follows:           (1) This Code of Ethics applies to the Company's principal executive officer, principal financial officer, principal accounting officer or controller, and any other persons who, now or in the future, are performing similar functions (hereafter individually "Officer").           (2) No Officer shall engage in any criminal, fraudulent or unethical acts or omissions with respect to conduct of the business, operations, financial, accounting and all other functions of the Company.           (3) All actual or apparent conflicts of interest between personal and professional relationships involving the Company shall be reported to the chief executive officer of the Company or in his absence, the chief operating officer or next highest-ranking officer. If the actual or apparent conflict of interest exists with respect to the chief executive officer, the chief operating officer or other next highest-ranking officer, such conflict of interest shall be reported to an independent member of the board of directors of the Company.           (4) All Officers shall at all times insure that all reports and documents filed with or submitted to the Securities and Exchange Commission and any other public communications made by the Company shall be prepared, filed, submitted and disseminated with complete, full, fair, accurate, timely and understandable disclosure.           (5) No Officer shall take any action, or fail to take any action, to fraudulently influence, coerce, manipulate or mislead the outside auditors of the Company's financial statements for the purpose of rendering those financial statements materially misleading.           (6) All Officers shall at all times comply with all governmental laws, rules and regulations in the conduct of the business, operations, financial, accounting and all other functions of the Company.           (7) Any violations of this code shall be reported to the chief executive officer, or in the absence of the chief executive officer, to the chief operating officer or the next highest-ranking officer of the Company. In the event any violation of the code involves the chief executive officer, or the chief operating officer or next highest-ranking officer of the Company, then such violation shall be reported to an independent member of the board of directors of the Company.           (8) All Officers of the Company shall be held accountable for adherence to this Code of Ethics. Whenever any violation of this Code of Ethics has been determined by management or by the board of directors of the Company to have occurred, appropriate measures shall be taken with respect to the Officer or Officers committing such violations.           Adopted by the board of directors of the Company on May 20, 2003.    Page 39                                        EXHIBIT 31 (1)                    CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER            I, Humayun N. Shaikh, certify that:           1. I have reviewed this annual report on Form 10-K of Burke Mills, Inc.;           2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;           3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;           4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:           (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;           (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and           (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and           5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):           (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and           (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.                                               s/Humayun N. Shaikh Date:    March 29, 2006                     ---------------------------                                             Humayun N. Shaikh                                             Chairman and CEO                                             (Principal Executive Officer)  Page 40                        CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER            I, Thomas I. Nail, certify that:           1. I have reviewed this annual report on Form 10-K of Burke Mills, Inc.;           2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;           3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;           4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:           (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;           (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and           (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and           5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):           (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and           (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.                                                  s/Thomas I. Nail Date:    March 29, 2006                       ---------------------------                                               Thomas I. Nail                                               President and COO                                               (Principal Financial Officer)  Page 41                                          EXHIBIT 32                   CERTIFICATION PURSUANT TO 18 U.S. CODE ss. 1350   The undersigned Chief Executive Officer of Burke Mills, Inc., (the "Issuer") hereby certifies that the foregoing periodic report containing financial statements of the issuer fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o(d)) and that the information contained in the foregoing report fairly presents, in all material respects, the financial condition and results of operations of the issuer.                                                 s/Humayun N. Shaikh Date:    March 29, 2006                       ---------------------------                                               Humayun N. Shaikh                                               Chairman and CEO                      CERTIFICATION PURSUANT TO 18 U.S. CODE ss. 1350   The undersigned Chief Financial Officer of Burke Mills, Inc., (the "Issuer") hereby certifies that the foregoing periodic report containing financial statements of the issuer fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 USC 78m or 78o(d)) and that the information contained in the foregoing report fairly presents, in all material respects, the financial condition and results of operations of the issuer.                                                 s/Thomas I. Nail Date:    March 29, 2006                       ---------------------------                                               Thomas I. Nail                                               President and COO                                               (Chief Financial Officer)    Page 42      -----END PRIVACY-ENHANCED MESSAGE-----