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

                                    FORM 10-K

  X     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
 ___    EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]

                   For the fiscal year ended December 31, 1998

                                       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 333-18755
                                               ---------
                                   PLUMA, INC.
             (Exact name of registrant as specified in its charter)



              North Carolina                               56-1541893
       (State of other jurisdiction of                 (I.R.S. Employer
          incorporation or organization)              Identification No.)

             801 Fieldcrest Road                             27288
            Eden, North Carolina                          (Zip Code)
  (Address of principal executive offices)





       Registrant's telephone number, including area code: (336) 635-4000

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

               Title of Each Class                      Name of Each Exchange
                                                        on Which Registered

            Common Stock, No par value                  New York Stock Exchange


          Securities registered pursuant to Section 12 (g) of the Act:
                                      None



<PAGE>


        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, 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 Common Stock, no par value, held by
non-affiliates of the registrant, as of April 5, 1999, was approximately
$2,650,316.
 ---------

        As of April 5, 1999 there were 8,109,152 shares of Common Stock, no par
value, outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Proxy Statement for the Annual Meeting of Shareholders
to be held on June 23, 1999 are incorporated by reference into Parts I and III
of this report.


                                     PART I

ITEM 1.  Business

GENERAL

Pluma (the "Company") is a vertically integrated manufacturer and distributor of
high quality fleece and jersey activewear. The Company is focused on increasing
sales and profitability by offering high value products to a diverse customer
base. Also in 1998, Pluma operated two nationally recognized wholesale
distributors, Stardust Corporation ("Stardust") in Verona, Wisconsin and Frank
L. Robinson Company ("FLR") in Los Angeles, California. These distributors were
acquired in December 1997. Although the Company has elected to close FLR in an
effort to reduce overhead, it continues to operate Stardust and believes that
Stardust is strategically important to the distribution of Pluma's "SANTEE"
branded products and allows the Company to serve smaller customers who would
otherwise prove more difficult to service efficiently. Pluma sells its products
to companies such as adidas, Starter and Walt Disney. In addition, the Company
sells products under its own "PLUMA(R)", "SANTEE(R)", and "SNOWBANK(R)" brand
names to retail and wholesale customers such as Sam's Club and Alpha Shirt
Company.

Since its inception, the Company has been an innovator of new products and
styles and has focused on delivering higher quality products. The Company was
one of the first to introduce heavyweight, fuller cut fleece products at
attractive price points and fleecewear with higher cotton content. These
products were well received by consumers, and the Company rapidly increased
sales and profitability as it expanded its business across broad market
segments. In 1990, the Company began to produce heavyweight cotton jersey
products suitable for outerwear in order to diversify its product mix, more
efficiently utilize its manufacturing base and increase sales and profitability.

Pluma targets a diverse customer base across multiple markets and distribution
channels. Currently, Pluma's material customers include branded customers such
as adidas, Reebok and Starter, retailers such as Miller's Outpost and Sam's Club
and entertainment customers such as Hard Rock Cafe and Walt Disney. In addition,
Pluma sells to wholesale distributors, screenprinters and embroiderers who sell
the Company's products to a wide variety of retailers, ranging from small
souvenir and resort stores to large nationwide department stores. The Company's
diverse customer base provides product exposure to many consumer markets and
enables Pluma to balance its production more evenly throughout the year.

Stardust has been in operation since 1988 and served approximately 6000
customers in the apparel industry in 1998. Stardust's products include jersey
and fleece products as well as golf shirts, jackets and headwear. Its primary
customers include smaller screenprinters and embroiderers, retailers and
advertising specialists, customers who otherwise would
<PAGE>

be inaccessible to the Company as the result of financial inefficiencies that
would result from Pluma's manufacturing division's attempts to service these
customers.

Pluma recognizes the benefits of competing in a global market. To take advantage
of lower production costs,during 1998, the Company utilized the services of two
joint ventures in Mexico (in which Pluma is a partner) to assemble (sew)
component parts of the Company's products. However, the Company underestimated
management involvement required to implement non-domestic production. These
joint ventures failed to produce the required quantities of product in a timely
fashion and quality problems were also experienced. The Company also determined
that more competitive pricing could be obtained from other Latin American
manufacturers. The Company is currently analyzing the competitiveness of the two
joint ventures with other manufacturing companies in Latin America. Should it be
determined that similar services are offered by other Latin American companies
at more competitive prices than those currently being offered by the joint
ventures Pluma intends to pursue these opportunities in an effort to expand a
portion of its manufacturing operation to Latin America.

PRODUCTS

Pluma's high quality fleece and jersey activewear meet consumer preferences for
heavier weights and higher cotton content. The Company's fleece products include
a variety of styles and colors of tops and bottoms in seven and one-half, nine,
and eleven ounce weights in cotton/polyester blends ranging from 50% cotton/50%
polyester to 100% cotton. Pluma also manufacturers six and seven ounce 100%
cotton jersey tops and bottoms designed for outerwear.

The Company believes that certain design and construction features enhance the
quality and appeal of its products relative to some competitors.

o Pluma's fleece and jersey tops are fuller cut and heavier weight.
o Pluma produces higher stitch count fabrics to reduce shrinkage, provide a
better printing surface and increase softness.
o Pluma uses air jet spun yarn for its 50% cotton/50% polyester fleece fabric to
prevent pilling. 
o Most of Pluma's ribbed fabrics contain spandex to retain
shape. 
o Pluma uses greater detail in its sewing processes to enhance durability and
appearance. 
o Pluma utilizes advanced finishing techniques, including the application of
softeners and napping (brushing), to give its fleece fabrics more bulk and
softer texture.

The sales mix of fleece and jersey products (excluding sales by FLR and
Stardust) for the three years ended December 31, 1998, in sales, gross dozens
sold, excluding close-outs and irregulars, and the average sales price per dozen
is as follows:
<TABLE>
<CAPTION>


                                                     Year Ended December 31

In thousands                             1998                                1997                              1996
Except average        ------------------------------------  ---------------------------------   ----------------------------------
Sales price per dozen                 Gross          Avg.                  Gross        Avg.                   Gross        Avg.
                                      Dozens     Sales Price/              Dozens   Sales Price/               Dozens   Sales Price/
                         Sales        Sold         Dozen         Sales     Sold        Dozen        Sales      Sold        Dozen

<S>                     <C>            <C>      <C>            <C>        <C>      <C>          <C>           <C>       <C>
Fleece                  $ 57,568         613    $   93.85      $ 80,751     879    $   91.88    $   80,423       871    $   92.41

Jersey                    53,772         944        56.97        51,836     841        61.67        46,803       765        61.16
Total/Average            111,340       1,557        71.50       132,587   1,720        76.78       127,226     1,636        76.79
</TABLE>


Since introducing jersey products in 1990, the Company has increased jersey
sales in order to diversify its product mix, more efficiently utilize its
manufacturing base and reduce the impact of seasonality that is inherent in the
fleece industry. Generally, jersey products sell at lower price points and
generate lower profit margins than fleece.

                                       2

<PAGE>


The sales mix of products for the Company's Stardust and FLR divisions for the
year ended December 31, 1998 was as follows:


                                           STARDUST

                                           GROSS SALES         PERCENTAGE
                      PRODUCT              IN THOUSANDS      OF GROSS SALES
                      -------              ------------      --------------


                      Jersey                  23,998           47.0%
                      Fleece                  11,771           23.1%
                      Golf Shirts             12,984           25.5%
                      Caps                     1,135            2.2%
                      Jackets                  1,132            2.2%

                      TOTAL                   51,019          100.0%




                                              FLR

                                           GROSS SALES           PERCENTAGE
                      PRODUCT              IN THOUSANDS        OF GROSS SALES
                      -------              ------------        --------------
                                           
                      Jersey                  18,474           54.9%
                      Fleece                   9,562           28.6%
                      Underwear                3,222            9.7%
                      Golf Shirts              1,932            5.8%
                      Miscellaneous              492            1.0%

                      TOTAL                   33,682          100.0%


As of December 31, 1998 and 1997, the Company (excluding Stardust and FLR) had
backlog orders of approximately 844,182 dozens, or approximately $43 million,
and 645,475 dozens or approximately $37 million, respectively. Backlogs are
computed from orders on hand at the last day of each fiscal period. The Company
believes that as a result of the seasonality and the just-in-time nature of its
business, order backlogs are not a reliable indicator of future sales volume.

CUSTOMERS

Pluma targets a diverse customer base which is comprised of five primary
markets. These markets include branded, retailers, screenprinters and
embroiderers, wholesale distributors and entertainment. As a result of Pluma's
ability to customize products according to its customer's needs, it is focusing
on increasing sales to its branded and retail customers, which produce higher
gross margins.

For the years ended December 31, 1998, 1997, and 1996, Pluma's top ten customers
accounted for 47.9%, 80.2% and 75.5%, respectively, of the Company's net sales
and 58.9%, 47.2% and 65.4% , respectively, of its accounts receivable. For the
year ended December 31, 1998, the Company's top three customers, Sam's Club,
adidas and Starter Galt, accounted for 25.7%, 9.4% and 2.5%, respectively, of
the Company's net sales. For the year ended December 31, 1997, the Company's top
three customers, Sam's Club, adidas and FLR accounted for 31.1%, 12.0% and 8.7%
respectively of the Company's net sales. For the year ended December 31, 1996,
the Company's top three customers, Sam's Club, adidas and Frank L. Robinson,
accounted for 24.1%, 14.7% and 7.2%, respectively, of the Company's net sales.
Pluma provides products to its customers pursuant to purchase orders on an
as-needed basis.


                                       3
<PAGE>


BRANDED

Branded accounts consist of customers such as adidas, Bike and Reebok. These
accounts require the manufacturer to meet exact specifications, such as styling,
color, screenprinting and embroidery. Products are labeled, packaged and shipped
ready for sale to consumers. The Company's ability to accommodate the
specialized nature of products manufactured for these customers often results in
higher margins. Branded accounts constituted approximately 12.2% of the
Company's net sales for the year ended December 31, 1998, 23.0% of the Company's
net sales for 1997 and 20.6% for 1996.

RETAILERS

Retail customers include specialty, high-end and value-oriented retailers. The
Company's largest retail customer in 1998 was Sam's Club, which markets and
sells "Pluma" labeled products. Pluma's other retail customers include Miller's
Outpost, which sells its own private label products manufactured by Pluma or
products with Pluma's "SANTEE(R)" label. The Company believes that this market
segment holds significant opportunity for growth as other value-oriented retail
formats continue to grow in popularity. Retail customers constituted
approximately 28.0% of the Company's net sales for the year ended December 31,
1998 and 40.9% and 33.7% for the same periods in 1997 and 1996, respectively. As
a result of the growth of the Company's business with Sam's Club, coupled with
increased consumer recognition of the "Pluma" brand name, the Company has
granted a license to Kayser Roth Corporation ("Kayser Roth") that allows it to
manufacture and distribute socks to Sam's Club under the "Pluma" brand name.

SCREENPRINTERS AND EMBROIDERERS

Screenprinters and embroiderers include Endless Design, Artisans and SouthPrint
among others. These customers typically purchase basic products to which they
add design and logos; they then resell these products to a wide variety of
retailers, ranging from small souvenir and resort stores to large, nationwide
department stores. Certain screenprinters and embroiderers resell under Pluma's
"SANTEE(R)" label. Screenprinters and embroiderers constituted approximately
7.9% of the Company's net sales for the year ended December 31, 1998 and 11.3%
and 19.7% for the same periods in 1997 and 1996, respectively.

WHOLESALE DISTRIBUTORS 

Wholesale distributors include T-C Distributors and Laurel Run. These customers
generally purchase goods in large volume for further distribution to companies
such as Converse, as well as to small customers, which are typically more
difficult for the Company to service. All products sold to these customers
contain Pluma's "SANTEE(R)" label, which is becoming more recognizable by
consumers. Wholesale distributors (exclusive of Stardust and FLR in 1998)
constituted approximately 2.0% of the Company's net sales for the year ended
December 31, 1998 and 16.7% and 17.5% for the same periods in 1997 and 1996,
respectively. Wholesale distributor sales were less during 1998 than in prior
years as the result of the acquisition of Stardust and FLR, who were large
customers of Pluma before their acquisition.

ENTERTAINMENT

Entertainment accounts consist of customers such as Hard Rock Cafe and Walt
Disney. This market segment demands a basic product on which designs are printed
or embroidered for souvenir sales. Demand for goods sold to this market segment
is relatively consistent throughout the year. Entertainment accounts constituted
approximately 3.0% of the Company's net sales for the year ending December 31,
1998 and 8.1% and 8.4% for the same periods in 1997 and 1996 respectively.

STARDUST AND FLR

Stardust and FLR accounted for approximately 45.0% of the Company's net sales
for the year ending December 31, 1998. Stardust sells approximately one-third of
its products to screenprinters and embroiderers, one-third to retailers and the

                                       4
<PAGE>

remaining one-third to advertising specialists, Stardust's fastest growing
customer segment. Pluma has closed FLR and is in the process of liquidating a
substantial portion of its inventory.

Historically, approximately two percent of Pluma's sales consisted of irregular
products sold by the Company and independent sellers.

MANUFACTURING

Pluma is a vertically integrated manufacturer. The Company's manufacturing
process consists of knitting, dyeing, finishing, cutting and sewing. Using
proprietary equipment and advanced manufacturing processes, Pluma has the
flexibility to shift its knitting, dyeing and sewing operations between various
fabric weights, blends and styles, as well as between fleece and jersey with
minimal downtime.

At the end of 1998, Pluma was manufacturing all of if its fabrics domestically,
using independent contractors as needed. The Company continued to shift its
sewing operations to Latin America in 1998 to meet customer demands for value
and to take advantage of the labor cost savings. By the end of 1998,
approximately 50% of the Company's products were sewn domestically at sites
within close proximity to the Company's textile manufacturing facilities. The
remaining 50% of the Company's products were sewn or produced in Latin America
by the joint ventures and other contractors.

Pluma's vertically integrated manufacturing process includes the following:

KNITTING

The Company operates, high-speed circular knitting machines that produce various
types of fabric in its manufacturing facilities in Eden, North Carolina. The
circular knitting process eliminates the need for side-seaming, reduces waste
and consequently, lowers production costs. Proprietary knitting processes enable
the Company to change its production with minimal downtime for setup. The
Company can shift its knitting processes between various fabric blends, weights
and styles, as well as between fleece and jersey fabrics, without significant
loss of utilization. Pluma uses spandex in all of its ribbed fabrics to retain
shape and produces high stitch count fabrics, which results in lower shrinkage,
a better printing surface and a softer feel.

DYEING

The Company believes that its computer-controlled, pressurized dyeing operations
in Eden, North Carolina, are state-of-the-art. Computerized controls reduce
processing time and improve control of dyeing cycles, temperatures, water
pressure and chemical usage, thereby producing greater consistency and
minimizing waste. In addition, the Company's pressurized dyeing process
increases bulking, which reduces shrinkage and color bleeding of its fabrics.

FINISHING AND CUTTING

The finishing process consists of extracting, drying, napping (brushing) and
compacting the fabric. Fleece fabrics are then napped to produce a soft and
heavy feel. Also, fabrics are compacted to minimize shrinkage and increase
stability.

Pluma's cutting operation in Eden, North Carolina, uses Bierrebi & Geber
automatic continuous-cutting machines with computer-controlled hydraulic
die-cutting heads. The Company's Gerber cutting system interfaces with its
computerized pattern design process. The Company utilizes these machines to
improve consistency and efficiency and generate less waste. Manual cutting is
used to provide flexibility to process low-volume orders.



                                       5
<PAGE>




SEWING

The Company's domestic sewing facilities are currently located in Martinsville,
Chatham, Vesta and Altavista, Virginia. Pluma's sewing operations begin with the
pre-assembly of component parts utilizing computerized sewing equipment.
Pre-assembled parts are then sewn using the Company's proprietary tandem sewing
process or conventional sewing. Management believes that its tandem sewing
process is unique and gives the Company a competitive advantage in sewing
operations by enhancing product quality and manufacturing flexibility.

Pluma's proprietary tandem sewing process utilizes the Company's patented tandem
sewing table. This proprietary equipment allows operations to move rapidly
between sewing steps to reduce further assembly time. The table is easily
adjustable to accommodate different operators' physical characteristics,
minimizing downtime between shifts and thereby facilitating multi-shift
operations.

The Company increased its engagement of independent sewing contractors in 1998.
These independent contractors sewed approximately 37.0% of all Pluma products
during 1998 as compared to 16.0% of the Company's products in 1997 and 1996.
During 1998, 21.9% of the Company's products were sewn by independent
contractors located in Mexico and Honduras, while 15.1% were sewn by domestic
contractors. The Company intends to increase its engagement of foreign
independent contractors to sew its products as evidenced by the fact that by
December of 1998 approximately 50% of the Company's products were being sewn in
Latin America.

The Company hires independent embroidery and screen printing subcontractors to
print or embroider special images on products ordered by certain of its
entertainment and branded accounts. The Company believes that it is more cost
effective to outsource these services.

PACKAGING AND DISTRIBUTION

Pluma operates a three-building complex in Martinsville, Virginia, which serves
as its central packaging and distribution facility. The complex contains
approximately 462,950 square feet of packing and storage space.

The packaging process includes folding, tagging, bagging, packing and bar
coding. The Company's packaging operation employs automated folding machines and
other technologically advanced equipment that package products efficiently.

Pluma uses computers, scanners, radios, conveyor systems and order pickers to
track, locate and move products within its facilities and to the loading docks
for shipment. One conveyor system links two facilities, thereby significantly
reducing handling time.

The Company leases a fleet of 7 tractors and 78 trailers and owns six trailers.
It leases one truck to transport materials between plants, as necessary. It
relies upon common carriers for delivery to its customers.

SOURCES OF RAW MATERIALS

Pluma purchases yarn, dye stuffs and chemicals that are the principal raw
materials used in its products. Management believes that there is sufficient
availability of raw materials from a number of suppliers at competitive prices
to satisfy current and anticipated needs of the Company.

The Company does not spin its own yarn. Yarn spinning is a capital intensive
operation in which there is substantial domestic and foreign competition. The
Company often makes advance purchases of yarn based on projected demand. Should
any or all of these yarn suppliers be unable for any reason to fulfill their
obligations under these yarn contracts, the Company believes that such an
occurrence would not have a material adverse effect on the Company's business as
yarn is available to the Company from other suppliers at comparable prices.



                                       6
<PAGE>




Pluma maintains a five- to ten-day supply of raw material inventories,
minimizing the need for storage space. During 1998, Pluma's principal yarn
suppliers included Parkdale Mills, Inc. and Mayo Yarns, Inc. and its principal
suppliers of dye and chemicals included Clariant, DyStar and Ciba Specialty
Chemicals.

As discussed in Item 7 hereof, since June 30, 1998, the Company has experienced
a liquidity crises and has remained in default under certain provisions of a
Credit Agreement with its lenders. Since November 1998, the Company's lenders
have extended to the Company successive thirty-day agreements to forbear from
exercising their remedies as a result of the defaults. As a result of
insufficient cash, the Company has been unable to pay its suppliers on a timely
basis. Furthermore, since November 1998, the Company's suppliers have expressed
concern regarding the Company's ability to operate beyond thirty-day periods
resulting from the short forbearance periods. As a result of not timely paying
its suppliers and the short forbearance periods described above, the Company has
experienced difficulty in obtaining adequate supplies in a timely manner which
caused disruptions and delays in production and some lost sales. The Company has
secured amended credit and forbearance agreements and is implementing a new
business plan designed to eliminate the problems described in this paragraph.
See Item 7 below. There can be no assurance that this problem will not continue.

SEASONALITY

The activewear business is seasonal. Typically, demand for fleece products is
much lower during the first and second quarters each year and is partially
offset by increased demand for jersey products in these periods. Notwithstanding
the Company's efforts to diversify its product mix and customer base to create a
more consistent demand for its products throughout the year, the Company
produces and stores fleece finished goods inventory during the first half of
each year. This practice enables the Company to meet the heavy demand for
delivery during the second half of the year.

COMPETITION

The fleece and jersey activewear industry is highly competitive. Pluma's major
competitors are vertically integrated manufacturers such as Fruit of the Loom,
Inc., Russell Corporation, Tultex Corporation and VF Corporation. Certain of
these competitors have greater financial resources and larger manufacturing,
distribution and marketing capabilities than the Company; however, no single
manufacturer dominates the industry. Among other factors, the Company's future
success will depend to a significant extent upon its ability to remain
competitive in the areas of price, quality, marketing, product development,
manufacturing capabilities, distribution and order processing, which are the
principal methods of competing within the fleece and jersey apparel industry.

ENVIRONMENTAL MATTERS

The Company is subject to various federal, state and local environmental laws
and regulations governing, among other things, the discharge, storage, handling
and disposal of a variety of hazardous and nonhazardous substances and wastes
used in or resulting from its operations and potential remediation obligations
thereunder. At the Company's textile manufacturing facility in Eden, North
Carolina, the Company disposes of dye waste through the city's municipal
wastewater treatment system under a permit issued by state regulatory
authorities.

The Company's operations also are governed by laws and regulations relating to
employee safety and health, principally OSHA and regulations thereunder, which,
among other things, establish exposure limitations for cotton dust,
formaldehyde, asbestos and noise, and regulate chemical and ergonomic hazards in
the workplace.

LABOR

The Company had approximately 2,150 employees at December 31, 1998. Since that
time, Pluma has downsized its labor force in an effort to reduce overhead and
at March 31, 1999 employed 1,626 persons. Management considers labor relations
to be good. Some of the Company's competitors located in its geographic area are
unionized, and there can be no assurance that the Company will not become a
target for union organizing activity in the future. To the extent that
unionization increases the Company's cost of operations, the Company could be
impacted adversely from both an operating and financial standpoint.

                                       7
<PAGE>


TRADEMARKS AND LICENSES

Pursuant to an Assignment from Superba, Inc. recorded December 22, 1997, Pluma
became the owner of the registered trademark SANTEE(R), U.S. Registration No.
830,629. SNOWBANK(R) and PLUMA(R) are also registered trademarks owned by
Pluma, U.S. Registration No. 2,079,657 and U.S. Registration No. 2,139,902,
respectively. Applications have been filed to register these marks and
THERMOLATOR(TM) in the European Community, Japan and Mexico. SANTEE(R) is
registered in Mexico under RN 579379. PLUMA(R), SANTEE(R) and SNOWBANK(R) are
all utilized in connection with marketing certain styles of the Company's
activewear.

On October 24, 1995, the Company entered into a license agreement with Kayser
Roth granting to Kayser Roth a limited exclusive license to use the name "PLUMA"
in connection with the manufacture and sale of socks in the United States and
Mexico to Sam's Club (the "Kayser Roth Agreement"). The Company receives a
royalty from Kayser Roth equal to 2.0% of net sales of socks bearing the Pluma
label up to $3,000,000 of such sales and 1.5% of all net sales of socks
thereafter (in each case, less customary trade discounts, shipping charges,
returns and allowances and sales taxes). The Kayser Roth Agreement terminates on
December 31, 1999, but is renewable by Kayser Roth for successive one-year terms
thereafter. Sam's Club has informed the Company that it may cancel its Pluma
sock program at the end of 1999. The Company maintains appropriate quality
control standards in the Kayser Roth Agreement designed to ensure that only
quality products are distributed under the PLUMA(R) name.

On July 30, 1996, U.S. Patent No. 5,540,160 was issued by the USPTO for the
Company's tandem sewing table.


ITEM 2.  Properties

All of the Company's facilities are located in North Carolina, Virginia and
Wisconsin. All buildings are well maintained and several of its facilities have
been expanded since operations commenced in 1987. All of the facilities owned by
the Company are encumbered by a deed of trust to a group of lenders to secure a
$115,000,000 credit facility previously extended to the Company. The principal
facilities summarized below list those facilities utilized by the company in
1998. The Company consolidated some of its operations in 1999 and any changes
occurring as of April 5, 1999 are footnoted. The location, approximate size,
owned or leased status, year in which operations commenced and use of the
Company's principal facilities are summarized in the following table:

                  [REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]



                                       8
<PAGE>



<TABLE>
<CAPTION>




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

    LOCATION           SQUARE FOOTAGE         OWNERSHIP       OPERATIONS            USE
                                                              COMMENCED

<S>                          <C>                  <C>          <C>           <C>
Eden, NC                     170,900              Owned        1987          Executive
                                                                             offices, dyeing,
                                                                             finishing and
                                                                             cutting

Eden, NC                     139,169              Owned        1993          Knitting and
                                                                             yarn storage

Eden, NC                       4,000             Leased        1998(1)       Outlet Store


Eden, NC                      18,000             Leased       1987(2)        Sewing/Storage

Eden, NC                      21,000             Leased       1998(8)        Storage

Martinsville, VA             198,000             Leased       1996           Distribution and
                                                                             warehouse

Martinsville, VA             181,600             Leased       1988           Distribution,
                                                                             packaging and
                                                                             warehouse

Martinsville, VA              83,200             Leased       1994(7)        Distribution,
                                                                             packaging and
                                                                             management
                                                                             information
                                                                             systems

Martinsville, VA              43,900              Owned       1988           Sewing


Martinsville, VA              15,600             Leased       1992(3)        Storage


Martinsville, VA              11,500             Leased       1997(1)        Product development and outlet


Martinsville, VA               8,300              Owned       1997           Marketing and
                                                                             sales office and
                                                                             some executive
                                                                             offices

Rocky Mount, VA                82,000             Owned       1995(4)        Sewing


Chatham, VA                    52,000             Owned       1990           Sewing

Vesta, VA                      24,000             Owned       1994(5)        Sewing


Altavista, VA                  12,000             Owned       1996           Sewing


Altavista, VA                   2,200            Leased       1997(1)        Outlet store


Los Angeles, CA               139,500            Leased       1997(6)        Distributor


Verona, WI                     63,000             Owned       1997           Distributor
</TABLE>



(1)     In December 1998, the Company made the decision to close the factory
        outlet locations. The Eden Factory Outlet lease terminated December 31,
        1998. The Martinsville Factory Outlet lease ended March 20, 1999.
        Product Development, once housed at this same location, was relocated to
        the Company's main facility in Eden, NC. The Altavista Factory outlet
        closed January 31, 1999.
(2)     The Company leased this facility to perform sewing operations from 1987
        through 1993 and subsequently executed a new lease for this facility in
        December 1996. Sewing operations ceased in this facility in January 1999
        and it is currently used for storage.
(3)     This lease terminated February 12, 1999.


                                       9
<PAGE>




(4)     Sewing operations are expected to cease at this facility in April 1999
        and the Company intends to sell this property in an absolute auction in
        1999.
(5)     The Company exercised its option to purchase this property in October
        1997.
(6)     The Company began the process of closing this facility in March 1999.
(7)     The pre-assembly, packaging and distribution operations at this facility
        were consolidated into the Company's other existing facilities in March
        1999. The Company entered a new lease effective March 31, 1999 to lease
        1,116 square feet of this same facility to house some of its Management
        Information Systems.
(8)     This warehouse was utilized as temporary storage. The lease thereon
        expired April 6, 1999.

ITEM 3.  Legal Proceedings

        The Company is not a party to nor is any of its property the subject of
any legal proceedings, the result of which it believes could have a material
adverse impact on its business, properties, or financial condition.


ITEM 4.  Submission of Matters to a Vote of Security Holders

        None.


EXECUTIVE OFFICERS OF THE COMPANY

        "Election of Directors' on pages 1 and 2 of the Proxy Statement for
the Annual Meeting of Share Owners to be held June 23, 1999, is incorporated
herein by reference.

        Additional executive officers as of December 31, 1998 and as of April 5,
1999 who were not directors are as follows:

<TABLE>
<CAPTION>

            Name                        Age                      Position
-------------------------------------- ------ -------------------------------------------------
<S>                                     <C>   <C>
Forrest H. Truitt, II (1)               44    Executive Vice President and Chief Financial
                                              Officer
Milton A. Barber, IV                    38    Sr. Vice President of Sales and Marketing
David S. Green                          49    Sr. Vice President of Human Resources
Walter E. Helton                        59    Sr. Vice President of Operations
Douglas A. Shelton                      41    Sr. Vice President of Manufacturing
Nancy B. Barksdale                      41    Vice President and Controller
Clifford F. Campbell                    39    Vice President and Treasurer
Raymond L. Rea                          57    Vice President of Manufacturing
Jeffrey N. Robinson (2)                 36    Vice President of Sales and President of Frank
                                              L. Robinson, Inc.
James E. Beale                          45    Vice President of Wholesale Distribution and
                                              President of Stardust Corporation
John R. Beale                           51    Executive Vice President of Stardust Corporation
William H. Watts                        58    Vice President and Chief Financial Officer
Keith D. Lake                           48    Vice President of Textile Operations
Frederick T. Burke, II                  42    Vice President of Distribution
</TABLE>


(1)     Mr. Truitt resigned as an employee of Pluma on March 1, 1999.
(2)     The Company has made the decision to close FLR. Although the Company
        remains obligated to Mr. Robinson under the terms of an employment
        agreement, it is not anticipated that Mr. Robinson will remain an active
        employee of the Company.

FORREST H. TRUITT, II served as Executive Vice President and Chief Financial
Officer of the company until March 1, 1999 when he resigned as an officer of the
Company. He became Vice President, Treasurer and Chief Financial Officer

                                       10
<PAGE>

in March 1996 and became an Executive Vice President in January 1997. Mr. Truitt
relinquished his title as Treasurer in September 1998. From February 1994 until
he joined the Company, Mr. Truitt was a self-employed financial consultant.
Prior to that time, he served as the Chief Financial Officer of Mayo Yarns from
September 1993 to February 1994, and Vice President of Finance and
Secretary/Treasurer of Vintage Yarns, Inc. from 1982 until 1993.

WILLIAM H. WATTS was appointed Chief Financial Officer and Vice President on
March 8, 1999. Prior to joining the Company he was a self-employed financial
consultant. He served as Executive Vice President and Chief Financial Officer of
Signal Apparel Company, Inc., Chattanooga, TN from 1995 to 1997. From 1991 to
1994, he was Vice President of Finance of Land >n Sea, Inc., New York, NY, a
manufacturer and importer of women's and children's sportswear.

MILTON A. BARBER, IV became Senior Vice President of Sales and Marketing in
October 1997. Mr. Barber has been Vice President of Sales and Marketing since
January 1996. From July 1991 until December 1995, Mr. Barber served as an
Assistant Vice President of Sales and Marketing for Box & Company. Mr. Barber
was employed by Bassett-Walker, Inc. from 1987 until 1991.

DAVID S. GREEN became Senior Vice President of Human Resources in October 1997.
Mr. Green has served the company as Vice President of Human Resources since
1993. Prior to joining the Company in 1993, Mr. Green had been employed by Sara
Lee for 17 years where his most recent title was Director of Employee Relations
at the Martinsville, Virginia knitwear division.

WALTER E. HELTON became Senior Vice President of Operations in October 1997. Mr.
Helton is Vice President of Operations responsible for management information
systems. Before joining the Company in January 1992, Mr. Helton was employed by
Sara Lee as Director of Information Systems.

DOUGLAS A. SHELTON is Senior Vice President of Manufacturing. Mr. Shelton joined
the company in May 1996 as Director of Cutting. He was previously employed by
Sara Lee as Plant Manager from August 1989 to May 1996.

NANCY B. BARKSDALE is Vice President and Controller. She received her CPA
certification from the Commonwealth of Virginia in 1983. From 1983 until 1987,
Ms. Barksdale was employed by Bassett-Walker, Inc. as Assistant Controller.
Since 1987, Ms. Barksdale has served as Controller for Pluma, and served as
Treasurer from August 1993 until March 1996. She was promoted to Vice president
in January 1996.

CLIFFORD F. CAMPBELL has served as Vice President and Treasurer since September
1998. Mr. Campbell was employed at Butler and Burke, Certified Public
Accountants in Winston-Salem, NC from 1984 until 1997. He became a partner of
Butler and Burke in 1990. He joined the Company in March of 1997 as a Financial
Analyst.

RAYMOND L. REA is Vice President of Manufacturing responsible for all sewing
operations. Prior to his employment with the Company in 1987, Mr. Rea had been
employed by Bassett-Walker, Inc. for 25 years.

JEFFREY N. ROBINSON was Vice President of Marketing & Sales and President of
Frank L. Robinson, Inc., a division of Pluma, Inc. Prior to joining the Company
in 1997, Mr. Robinson was employed as a partner in Frank L. Robinson Company, a
wholesale distributor, since 1985. The Company has made the decision to close
FLR. Although the Company remains obligated to Mr. Robinson under the terms of
an employment agreement, it is not anticipated that Mr. Robinson will remain an
active employee of the Company.

JAMES E. BEALE is Vice President of Wholesale Distribution and President of
Stardust Corporation, a division of Pluma, Inc. Mr. Beale served as General
Manager of Stardust Corporation, a wholesale distributor since 1988 until he
joined Pluma in December of 1997. Mr. Beale is the brother of John R. Beale, an
executive officer of Stardust Corporation.

JOHN R. BEALE is Executive Vice President of Stardust Corporation, a division of
Pluma, Inc. Mr. Beale was founder and President of Stardust Corporation from
1988 until he joined Pluma in December of 1997. He is the brother of James A.
Beale, an executive Officer of the Company.


                                       11
<PAGE>

KEITH D. LAKE became Vice President of Textile Operations in January 1999. Prior
to joining the Company in May 1998 as Assistant Vice President of Textile
Manufacturing, Mr. Lake was employed by Kingstree Knits, a division of Texfi
Industries, Inc., Haw River, NC from May 1992 to May 1998. He has worked in the
textile industry for 26 years.

FREDERICK T. BURKE II became Vice President of Distribution in March 1999. Mr.
Burke joined Pluma in September 1998 as Director of Retail Sales. Prior to
accepting a position with Pluma, Mr. Burke served as Vice President of Sales of
Starter Corporation, an athletic apparel company, from October 1996 to April
1998. From 1983 to 1996, Mr. Burke was employed by Lee Apparel Company as Vice
President of Sales.


                                     PART II


ITEM 5.   Market for Registrant's Common Equity and Related Stockholder Matters.

        The Company's common stock is the only class of stock currently issued
and outstanding. The Company's common stock is listed on the New York Stock
Exchange under PLU.

        The following table represents the high and low closing sales price of
the Company's common stock as listed on the New York Stock Exchange for each
full quarterly period within 1997, 1998 and on April 5, 1999.
<TABLE>
<CAPTION>

                              High          Low                               High  Low

        1997 Quarter Ended                                1998 Quarter Ended
        <S>                  <C>          <C>             <C>
        March 31             $12.250      $12.000         March 31           $6.75  $6.56
        June 30              $15.750      $11.750         June 30            $6.75  $6.69
        September 30         $14.625      $10.000         September 30       $2.38  $2.13
        December 31          $10.375      $  8.438        December 31        $2.08  $1.13

                                                          April 5, 1999      $ .56    .50
</TABLE>


        The approximate number of registered holders of the Company's common
stock on April 5, 1999 was 236.

        The Company did not pay a dividend on its common stock in 1997 or 1998.
The Company's credit agreement with its several lenders prohibits the Company
from declaring and paying a dividend on its common stock. Any such dividend
payment constitutes a default under the credit agreement. The Company has not
established a dividend policy and does not expect that a dividend will be
declared and paid in the foreseeable future.
                                 
-------------------------------------------------------------------------------

ITEM 6.

                      SELECTED FINANCIAL AND OPERATING DATA

Statement of operations data for each of the years in the three-year period
ended December 31, 1998, and the balance sheet data as of December 31, 1998 and
1997 set forth below have been derived from the Company's audited financial
statements included elsewhere in this Form 10-K. The statement of operations
data for each of the years in the two-year period ended December 31, 1995 and
the balance sheet data as of December 31, 1996, 1995 and 1994 are derived from
the Company's audited financial statements which are not included in this Form
10-K.
<TABLE>
<CAPTION>

                                                            Years Ended December 31,
                                            -----------------------------------------------------
                                              1998(9)   1997(1)    1996(4)     1995(4)    1994
                                             (10)(11)    (2)(3)       (8)       (5)(6)
                                            -----------------------------------------------------
                                                        In thousands, except per share data
<S>                                          <C>         <C>        <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Net sales                                    $ 187,254   $134,555   $127,820  $ 100,710 $  97,908
Cost of goods sold                             186,010    118,279    106,247     81,429    81,409
Gross profit                                     1,244     16,276     21,573     19,281    16,499
Selling, general & administrative expenses      35,969     10,976      9,149     14,385     7,300
Income (loss) from operations                  (34,725)     5,300     12,424      4,896     9,199
Other expenses, net                              7,153      1,782      3,251      3,130     2,255
Income (loss) before income taxes              (41,878)     3,518      9,173      1,766     6,944
Income taxes (benefit)                          (5,819)     1,475      3,355        659     2,594
Net income (loss)                            $ (36,059)   $ 2,043    $ 5,818  $   1,107   $ 4,350

Earnings (loss) per common share - basic and diluted:

Net income (loss)                             $  (4.45)   $  0.27    $  1.09  $    0.21   $  0.83

Weighted average number of
     shares outstanding                          8,109      7,554      5,316      5,316     5,244

Cash dividends per common share               $   0.00     $ 0.02     $ 0.11  $    0.11    $ 0.11

<CAPTION>

                                                                 December 31,
                                            -----------------------------------------------------
                                            1998(9)      1997(1)    1996(4)     1995(4)    1994
                                            (10)(11)     (2)(3)       (8)       (5)(6)
                                            -----------------------------------------------------
                                                                  In thousands
<S>                                          <C>         <C>        <C>       <C>       <C>
BALANCE SHEET DATA:
Working capital                              $ (44,664)  $ 32,975  $  49,901  $  50,052  $ 31,926
Total assets                                   158,543    165,737     89,218     88,613    68,554
Long-term debt, net of current portion               0     40,000     44,420     50,120    30,465
Total shareholders' equity                      27,609     63,668     32,143     26,902    26,373

<CAPTION>
                                                            Years Ended December 31,
                                            -----------------------------------------------------
                                            1998(9)(10)   1997(1)    1996(4)     1995(4)    1994
                                               (11)       (2)(3)       (8)       (5)(6)
                                            -----------------------------------------------------
                                                                  In thousands
<S>                                          <C>         <C>        <C>       <C>       <C>
OTHER DATA:
Gross profit as a percentage of net sales          0.7%      12.1%      16.9%      19.1%     16.9%
Income (loss) from operations as a
     percentage of net sales                     (18.5%)      4.0%       9.7%       4.9%      9.4%
Depreciation & amortization                  $   6,570    $ 4,057    $ 3,804   $  3,440  $  2,885
Capital expenditures                            12,904      9,782      3,399      5,856     4,495
EBITDA (7)                                     (27,494)     9,914     16,712      8,627    12,386
</TABLE>

                                       12
<PAGE>

(1) In March 1997, the Company completed its initial public offering of
    2,500,000 shares of common stock at $12.00 per share. Upon the exercise of
    the over-allotment option in April 1997, the Company issued an additional
    293,300 shares at $12.00 per share. The $29.6 million in net proceeds from
    the issuance of common stock was used to reduce debt.

(2) During 1997, the Company capitalized significant costs associated with the
    implementation of a new management information system designed to improve
    the company's production planning, scheduling and distribution, as well as,
    its financial reporting capabilities. In November 1997, the Emerging Issues
    Task Force released EITF Issue No. 97-13 requiring certain costs associated
    with software implementation to be expensed as incurred. In the fourth
    quarter of 1997, the Company expensed $2.1 million of such costs which had
    previously been capitalized during 1997.

(3)  In December 1997, the Company purchased certain assets and assumed certain
     liabilities of Stardust Corporation ("Stardust") and Frank L. Robinson
     Company ("FLR"), former customers of the Company. The Company paid $51.5
     million in cash for these assets, including related acquisition costs, and
     assumed liabilities in the amount of $16.7 million. The acquisitions have
     been accounted for as purchases. Accordingly, the assets, liabilities and
     results of operations of the acquired businesses are included in the
     balance sheets and statements of operations as of and since December 1997.
     The acquisitions were financed through additional debt.

(4) In December 1995, the Company brought its sales and marketing functions
    in-house in order to increase control and enhance profitability (the "Box
    Transaction"). The Company had previously conducted its sales and marketing
    activities through an exclusive sales agent, Box & Company ("Box &
    Company"), under an arrangement (the "Sales & Marketing Agreement") whereby
    the Company paid a commission of 3.0% of net sales plus an allowance for
    certain promotional material. Box & Company is a corporation owned by G.
    Walker Box, a principal shareholder of the Company and Chairman of the
    Board. The Company terminated the Sales & Marketing Agreement as of December
    31,1995, and recorded a non-recurring charge of $2.0 million, the amount of
    the termination payment. 

(5) Includes a non-recurring charge of $3.3 million to increase the allowance
    for doubtful accounts receivable primarily related to the bankruptcy of a
    customer.

(6) Had the Box Transaction occurred at the beginning of 1995, excluding the two
    non-recurring charges mentioned in notes (4) and (5), for the year ended
    December 31, 1995, selling, general, and administrative expenses ("SG&A")
    would have been $7.3 million compared to $14.4 million as reported. In
    addition, income from operations, net income, earnings per common
    share-basic and diluted and EBITDA would have been $12.0 million, $5.5
    million, $1.04 and $15.7 million, respectively.

(7) Represents earnings (loss) before interest expense, income taxes,
    depreciation and amortization. EBITDA is commonly used to analyze companies
    on the basis of operating performance, leverage and liquidity. EBITDA should
    not be considered as a measure of profitability or liquidity as determined
    in accordance with generally accepted accounting principles in the
    statements of operations and cash flows.

(8)  Includes $83,930 of expense from the change in the method of determining
     the cost of inventories, except production supplies, from the FIFO method
     to the LIFO method. The effect of the change was to decrease net income in
     1996 by $53,212 ($0.01 per share).

(9) During March 1999, the Company announced the closing of FLR. Includes the
    writeoff of goodwill of approximately $7.0 million associated with the FLR
    purchase (see note (3) above). Inventory reserves were increased $3.0
    million to reflect the estimated net realizable value for inventories to be
    liquidated.

(10)Includes approximately $9.2 million reserve to reflect the estimated net
    realizable value associated with a planned inventory liquidation.

(11)Includes reserves of approximately $2.2 million for property to be sold
    during 1999. During January 1999 the Company announced the closing of its
    sewing operation in Rocky Mount, Virginia. The building and related
    equipment are to be disposed of at auction. Other long-lived assets are also
    to be disposed of during 1999. In accordance with SFAS 121, these assets are
    written down to their net realizable value at December 31, 1998.

                                       17

<PAGE>

ITEM 7.

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL

Pluma is a vertically integrated manufacturer and distributor of high quality
fleece and jersey activewear. The Company is focused on increasing sales and
profitability by offering high value products to a diverse customer base across
multiple markets and distribution channels. During 1998, the Company operated
two nationally recognized wholesale distributors, Stardust Corporation in
Verona, Wisconsin ("Stardust") and Frank L. Robinson, Company in Los Angeles,
California ("FLR"). Although the Company elected in March 1999 to close FLR, it
continues to operate Stardust. Currently, Pluma's material customers include
branded customers such as adidas and Starter, retailers such as Miller's Outpost
and Sam's Club and entertainment customers such as Busch Gardens, Hard Rock Cafe
and Walt Disney. The Company sells products under its own "PLUMA(R)",
"SANTEE(R)" and "SNOWBANK(R)" brand names to retail and wholesale customers. In
addition, Pluma sells to screenprinters and embroiderers who sell the Company's
products to a wide variety of retailers, ranging from souvenir and resort stores
to large nationwide department stores. Pluma seeks to grow both by increasing
sales to existing customers and by adding new customers. This diverse customer
base provides product exposure to many customer markets and enables Pluma to
balance its production more evenly throughout the year.

During 1997, the Company capitalized significant costs associated with the
implementation of a new management information system designed to improve the
Company's production planning, scheduling and distribution, as well as, its
financial reporting capabilities. In November 1997, the Emerging Issues Task
Force released EITF Issue No. 97-13 requiring certain costs associated with
software implementations to be expensed as incurred. In the fourth quarter of
1997, the Company expensed $2.1 million of such costs which had previously been
capitalized during 1997.

In December 1997, the Company purchased certain assets and assumed certain
liabilities of Stardust and FLR, former customers of the company. The Company
paid $51.5 million in cash for these assets, including related acquisition costs
and assumed liabilities in the amount of $16.7 million. The acquisitions have
been accounted for as purchases. Accordingly, the assets and liabilities of the
acquired businesses are included in the balance sheet as of December 31, 1997.
The results of Stardust's and FLR's operations from the dates of the
acquisitions to December 31, 1997 did not have a material impact on the
Company's results of operations for that year. The acquisitions were financed
through additional debt.

During 1998, the Company aggressively entered into agreements with Latin
American manufacturers to produce product. Unfortunately, there were
manufacturing disruptions that accompanied these sourcing decisions as their
manufacturers (joint ventures in which the Company is a partner) failed to
provide quantities of product in a timely fashion and quality problems were also
experienced. The Company also determined that more competitive pricing could be
obtained from the Latin American manufacturers. Therefore the Company failed to
realize the full benefit of non-domestic production. Simultaneously, the Company
experienced manufacturing disruptions in its domestic operations, as well as
higher than anticipated levels of fabric waste. The disruptions and waste at its
domestic facilities were due primarily to problems encountered during the
Company's implementation of a new management information system.

In April, 1998, the Company closed a senior credit facility of $115,000,000.00
(the "Credit Agreement") with a group of lenders (the "Banks"). In June, 1998,
the Company violated certain financial and performance covenants contained in
the credit facility and consequently, the Company became in default under the
credit agreement. Thereafter, the Company and the Banks engaged in continuing
negotiations concerning the Company's default and, initially, the Banks agreed
to a number of short-term credit agreement amendments and waiver agreements
which allowed the Company to remain in technical compliance with the credit
agreement. The Banks' agreement to waive the Company's defaults ended on
November 15, 1998. However, while not granting the Company a default waiver, on
November 16, 1998, the Banks entered into a Forbearance Agreement in which they
agreed to forbear from exercising the rights and remedies available to them as a
result of the Company's violations of the financial and performance covenants
set forth in the Credit Agreement. This allowed the Company to continue
operations notwithstanding its loan agreement defaults. The Forbearance
Agreement was subsequently amended a number of times (extending the Banks'
forbearance in successive thirty-day intervals) and, on March 31, 1999 the
Company reached an agreement with the Banks to extend and
modify the existing Credit Agreement through September 30, 1999. Subsequently on
April 15, 1999, the Company's credit facility was once again amended by the
Tenth Amendment to Credit Agreement and Sixth Amendment to Forbearance Agreement
which further modified the Company's credit arrangement and provided a cure
period for an interest payment default in the amount of $1,177,370 until 
June 11, 1999. The Credit Agreement and Forbearance Agreement as amended
require the Company to achieve certain revised performance and financial goals,
grant the Banks the right to acquire warrants representing up to ten percent
(10%) of the equity in the Company, and provide the Company with additional
availability under its revolving credit line in an amount projected by the
Company to be the minimum amount necessary to enable the Company to perform
under a revised business plan designed to return the Company to profitability.

As part of the Company's above-referenced negotiations with the Banks, the
Company was required to retain various consultants to assist in the formulation
and implementation of a strategic business plan (the "New Business Plan") as
well as to assist the Company in managing its operations while under the strain
of continuing severe cash shortages. During the fourth quarter of 1998 and
continuing into the first quarter of 1999, the Company implemented a number of
initiatives in order to counter its cash crisis and remain operationally viable.
These initiatives included the expedited liquidation of a significant amount of
inventory, the closure of certain domestic manufacturing and distribution
operations and a substantial reduction and severance of employees. The Company
anticipates further closures and asset sales to occur in 1999, including the
sale of one or more of the Company's manufacturing facilities and the sale of
the Company's sales office located in Martinsville, Virginia.

As a part of the above referenced initiatives, in March 1999, the Company closed
the operations of FLR and began shipping certain FLR inventories to Stardust.
The remaining FLR inventories have been identified for liquidation and have been
written down to reflect their estimated net realizable value. In addition,
goodwill of approximately $7.0 million associated with the FLR acquisition was
written off as a result of the closing.

                                       14

<PAGE>

The following table presents the major components of the Company's Statements of
Operations as a percentage of net sales:
                                                  Years Ended December 31,
                                             ----------------------------------
                                               1998          1997        1996
                                             ----------------------------------
Net sales                                     100.0%        100.0%      100.0%
Cost of goods sold                             99.3          87.9        83.1
Gross profit                                     .7          12.1        16.9
Selling, general and administrative expenses   19.2           8.1         7.2
Income (loss) from operations                 (18.5)          4.0         9.7
Other expenses, net                             3.9           1.4         2.5
Income (loss) before income taxes             (22.4)          2.6         7.2
Income taxes (benefit)                         (3.1)          1.1         2.6
Net income (loss)                             (19.3)%         1.5%        4.6%

RESULTS OF OPERATIONS

Year Ended December 31, 1998, Compared To Year Ended December 31, 1997

Net Sales. Net sales for 1998 were $187.3 million, an increase of $52.7 million,
or 39.2%, over net sales of $134.6 million for 1997. This increase was
attributable primarily to the inclusion of sales from FLR and Stardust which
were acquired in December 1997. New sales from FLR and Stardust after
intercompany eliminations were $23.8 million and $41.4 million, respectively, in
1998. This increase in net sales, however, was lower than anticipated due to
increased competition resulting in lower sales prices, interruptions in
production associated with a difficult implementation of a new management
information system, a temporary disruption of supply of inventory encountered at
Stardust and FLR and lower than expected sales of fleece products because of a
relatively warm winter.

The Company's implementation during 1998 of a new management information system
consumed signficantly more capital and management focus than had been
anticipated and created numerous operational problems for the Company. Pluma
experienced continuous system problems in scheduling and in producing the
appropriate product mix in the correct volumes required to meet customer orders.
As a result, the Company overproduced certain styles and colors of products not
ordered by customers, which led to an accumulation of excess inventory which
could not be sold. Furthermore, sales were lost as the result of the Company's
inability to timely manufacture product ordered by its customers.

Historically, a large majority of the inventory sold by Stardust and FLR had
been produced by manufacturers other than Pluma. The Company anticipated that
this would continue for some time until its capacity could be increased to meet
the demand for Stardust's and FLR's inventory needs. However, shortly after the
acquisition of these distributorships, two manufacturers who manufactured more
than 50% of Stardust's inventory in 1997, and a significant portion of FLR's
inventory in 1997, ceased shipping product to these distributorships. Shipments
did not resume from these third-party manufacturers until late in the second
quarter of 1998. This unanticipated inventory supply disruption required the
Company to attempt to manufacture product needed by its distributors internally
and/or acquire product from alternate sources. The unexpected demand placed on
the Company's manufacturing facilities delayed manufacturing for other
customers. These delays resulted in the Company not meeting certain customer
orders in a timely fashion, leading to lost sales and an inventory buildup of
product not taken by customers when their orders were completed.

During 1998, because of the downward trend in product prices due to an overall
market decline, inflation had a minimal effect on the Company's net sales. The
Company is exposed to inflationary pressures from the purchases of raw materials
and labor. However, during 1998, these markets were relatively stable and
inflation did not have a material effect on income from continuing operations.

Gross Profit. Gross profit as a percentage of net sales declined to 0.7% in 1998
from 12.1% in 1997. This decline was primarily due to increases in the inventory
market reserves based on the Company's decision in early 1999 to liquidate
certain inventories and to record those inventories at the resulting estimated
net realizable values at December 31, 1998. A $3.0 million reserve was recorded
against FLR inventory that is to be liquidated as a result of the closing of
FLR. The Company has also applied a $9.2 million reserve against manufactured
inventory for items that will be liquidated in order to reduce SKU's and
generate cash for operations. As a result of the general decline in the textile
industry during 1998, the Company experienced increased pricing pressures,
resulting in lower margins. In addition, the Company's product mix shifted more
toward jersey goods as the demand for fleece declined due to a warmer than
expected winter. Margins on jersey products are typically lower than those for
fleece.

Selling, General and Administrative Expenses. SG&A increased by $25.0 million in
1998 to $36.0 million from $11.0 million in 1997, an increase of 227.7%. This
increase was due to several factors. The Company's SG&A expenses include $20.5
million for the operations of FLR and Stardust in 1998. As these acquisitions
occurred in late December 1997, SG&A expenses were not materially affected by
the operations of FLR and Stardust in 1997. Amortization of the goodwill
associated with the acquisitions of FLR and Stardust was $1.7 million in 1998.
Amortization of goodwill in 1997 was not substantial. Additionally, with the
closing of the FLR operations, the Company wrote off the $7.0 million of
goodwill associated with the FLR acquisition. Furthermore, the Company has also
announced its intent to sell its Rocky Mount, Virginia sewing facility with
certain related equipment and its Martinsville, Virginia corporate offices. As a
result of these planned dispositions, the Company has placed reserves totaling
$2.3 million against these assets to reflect the estimated fair value of the
properties.

Other Expenses, Net. Other expenses, net, increased 301.4% to $7.2 million in
1998 from $1.8 million in 1997, an increase of $5.4 million. This increase was
primarily a result of an increase in interest expense. Interest expense
increased by 234.1% to $7.8 million in 1998 from $2.3 million in 1997 due to an
increase in average debt outstanding during 1998.

Income Taxes. The effective tax rate was 13.9% in 1998 compared to 41.9% in
1997. This decrease is attributable primarily to a valuation allowance in 1998
of $10.0 million, or 23.7% as a percentage of the loss before income taxes. The
valuation allowance was established due to the uncertain ability of the Company

                                       15
<PAGE>

to generate future taxable income and the resulting uncertain realization of tax
loss carryforwards and other deferred tax assets.

YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996

Net Sales. Net sales increased 5.3% to $134.6 million in 1997 from $127.8
million in 1996. Gross dozens sold of fleece and jersey increased 5.1% to 1.7
million dozens in 1997 from 1.6 million dozens in 1996. The increase in net
sales was primarily attributable to increased sales of jersey activewear and
revenue from the addition of new customers. Sales of jersey activewear increased
by $5.0 million to $51.8 million in 1997, a 10.8% increase over the $46.8
million of jersey product sold in 1996. The average sales price per dozen for
total products sold declined by 1.0% primarily due to the increase in volume of
jersey activewear sold. Jersey products generally carry a lower sales price than
fleece products. During 1997, because of the downward trend in product prices
due to an overall market decline, inflation had a minimal effect on the
Company's net sales. The Company is exposed to inflationary pressures from the
purchases of raw materials and labor. However, during 1997, these markets were
relatively stable and inflation did not have a material effect on income from
continuing operations.

Gross Profit. Gross profit was 12.1% of net sales in 1997 compared to 16.9% in
1996. This decline in gross profit was the result of lower manufacturing
efficiencies and increased labor costs. Manufacturing efficiencies were
adversely impacted during the second and third quarters of 1997 by the
reconfiguration of the Company's textile facilities and product quality issues
resulting from changes in the Company's manufacturing processes and the
utilization of defective yarns. Labor costs increased in order to recapture a
loss of production which resulted from the Company's manufacturing
inefficiencies.

Selling, General and Administrative Expenses. SG&A increased 19.7% to $11.0
million in 1997 from $9.1 million in 1996, an increase of $1.9 million. This
increase was due primarily to the expensing of $2.1 million of software
implementation costs in compliance with EITF Issue No. 97-13. This increase in
SG&A expense was partially offset by a decline in management bonuses.

Other Expenses, Net. Other expenses, net, decreased 44.4% to $1.8 million in
1997 from $3.3 million in 1996. This decrease was primarily the result of a
decrease in interest expense. Average borrowings were lower due to the
application of the net proceeds of the Company's March 1997 initial public
offering.

Income Taxes. The effective tax rate was 41.9% in 1997 compared to 36.6% in
1996.

UNAUDITED QUARTERLY FINANCIAL DATA

Summarized unaudited quarterly financial data for 1998 follows:
<TABLE>
<CAPTION>

                                                               Three Months Ended
                                            --------------------------------------------------------
                                              March 31       June 30    September 30    December 31
                                            --------------------------------------------------------
<S>                                         <C>            <C>             <C>           <C>
Sales                                       $39,196,435    $51,059,701     $54,608,997   $42,388,437
Gross profit (loss)                           4,014,171      4,631,530       2,969,030   (10,370,812)
Net income (loss)                              (881,683)    (1,718,296)     (2,709,364)  (30,749,345)
Earnings (loss) per share - basic and diluted     (0.11)         (0.21)          (0.33)        (3.80)



Summarized unaudited quarterly financial data for 1997 follows:
<CAPTION>

                                                               Three Months Ended
                                            --------------------------------------------------------
                                              March 31       June 30     September 30   December 31
                                            --------------------------------------------------------
<S>                                         <C>            <C>             <C>          <C>
Sales                                       $27,285,730    $33,226,268     $38,965,527  $ 35,077,528
Gross profit                                  4,692,571      5,172,762       4,897,317     1,513,041
Net income (loss)                               864,435      1,430,627       1,768,378    (2,020,602)
Earnings (loss) per share - basic and diluted      0.15           0.18            0.22         (0.25)
</TABLE>


                                       16
<PAGE>
Liquidity And Capital Resources

As a result of the inability of the Company to increase the amount of funds
available for borrowing under its credit facility with the Banks and its
operating losses during 1998, the Company experienced severe liquidity
shortages during the last quarter of 1998 which continued during the first
quarter of 1999. As a result of this inadequate liquidity, the Company failed to
pay its suppliers in a timely manner, causing delays in the delivery to the
Company of raw materials. This caused some disruptions and delays in production
and, at times, resulted in lost sales.

At December 31, 1998, the Company had a working capital deficiency of ($44.7)
million, a decrease of $77.7 million as compared to working capital of $33.0
million at December 31, 1997. This decrease is primarily attributable to an
increase in current maturities of long-term debt of $64.9 million resulting from
the Company classifying all of its debt as current. In addition, working capital
declined due to increases in accounts payable and accrued expenses of $7.7
million and a net decrease in receivables of $8.0 million. These reductions in
working capital were partially offset by an increase in inventories of $5.5
million.

Net cash used in operating activities of $11.0 million for the year ended
December 31, 1998 resulted primarily from the net loss of $36.1 million, less
noncash charges of $6.6 million for depreciation and amortization, $2.3 million
for losses on disposal of property and $7.0 million for the write off of
goodwill attributable to FLR. The changes in accounts payable, accrued expenses,
receivables and inventories discussed above were also adjustments to reconcile
the net loss to the net cash used in operations.

Net cash used in investing activities of $13.8 million for the year ended
December 31, 1998 was attributable primarily to capital expenditures for
manufacturing and computer equipment to enhance manufacturing and management
information systems capabilities.

Net cash provided by financing activities of $25.5 million for the year ended
December 31, 1998 resulted from additional net borrowings during the year.

ORIGINAL CREDIT AGREEMENT

In April 1998, the Company entered into a syndicated credit agreement (the
"Credit Agreement") with a group of financial institutions (the "Banks") for the
purpose of refinancing its then existing credit facility. The Credit Agreement
has been amended several times and currently exists under the "Ninth Amendment
to Credit Agreement". Among the various provisions, limitations and restrictions
contained in the Credit Agreement, the Company must meet specified consolidated
net worth, leverage ratio, fixed charge coverage ratio, funded debt to total
capitalization ratio and consolidated earnings before the effect of interest
expense, income taxes, depreciation and amortization requirements. Under the
Credit Agreement, the Company is restricted in the amount of its capital
expenditures, indebtedness to certain other parties, payment of dividends, or
redemption of its stock that would create an event of default. In the event of
a default under the Credit Agreement unless a waiver or forbearance is
obtained, any unpaid principal and accrued interest may be declared immediately
due and payable. The Credit Agreement may be terminated at any time upon the
occurrence of an event of default. The Company retains the right to remedy
certain events of default within 30 days after notice.

As of December 31, 1998, the Company was in default under certain of the
above-referenced covenants and had not obtained waivers of these defaults from
the Banks. As of December 31, 1998, the Company was required to have a funded
indebtedness to capitalization ratio of less than 0.65, a consolidated net worth
greater than or equal to $62.5 million, a fixed charge coverage ratio of less
than 1.50, and consolidated earnings before the effect of interest expense,
income taxes, depreciation and amortization greater than or equal to $20
million. As of December 31, 1998, the Company had a funded indebtedness to
capitalization ratio of 0.80, a consolidated net worth of $27.6 million, a fixed
charge coverage ratio of (2.26), and a consolidated loss before the effect of
interest expense, income taxes, depreciation and amortization of $(27.5)
million. Due to these violations, the Company has classified all of its debt as
current at December 31, 1998.

AMENDED CREDIT AGREEMENT AND AMENDED FORBEARANCE AGREEMENT

The Credit Agreement and Forbearance Agreement have been amended several times
and currently exist under the Tenth Amendment to the Credit Agreement and Sixth
Amendment to the Forbearance Agreement, which were executed on April 15, 1999.
As currently amended, the Credit Agreement includes a revolving loan facility
(the "Revolving Loans") and a term loan facility. The maximum amount available
under the term loan is $45.0 million (the "Term Loan"). The total amount that
can be borrowed under the Revolving Loans is limited to the Borrowing Base,
defined as the sum of (i) 85% of Eligible Receivables (as defined), (ii) 60% of
Eligible Inventory (as defined), and (iii) $18.0 million through April 29, 1999;
$18,400,000 through May 28, 1999; $18,800,000 through June 29, 1999;

<PAGE>

$19.5 million from June 30, 1999 through July 30, 1999; $16.1 million from July
31, 1999 through August 30, 1999; $14.5 million from August 31, 1999 through
September 29, 1999; and $0 thereafter. The maximum amount that can be borrowed
under the Revolving Loans is limited to $63.0 million through July 30, 1999;
$55.6 million from July 31, 1999 through August 30, 1999 and, $53.0 million
thereafter.

Although the Company's defaults under the original Credit Agreement have not
been waived by the Banks, pursuant to the Forbearance
Agreement as amended, the Banks have agreed to forbear until September 30, 1999
from exercising the rights and remedies available to them as a result of the
Company's defaults under the Credit Agreement. Among other provisions in the
Forbearance Agreement, as amended until September 30, 1999, (i) the
Company's capital expenditures are limited to $0.2 million in the aggregate in
any calendar month and $0.6 million in the aggregate from April 1, 1999 to
September 30, 1999; (ii) the Company must have net sales of at least $7.2
million in any three week period; (iii) the Company must not have aggregate
payments, less aggregate cash receipts, in excess of $1.8 million in any one
week; (iv) the Company must have aggregate receipts in excess of aggregate cash
payments during any three-week period; (v) for the period April 1, 1999 through
May 31, 1999, the Company's EBITDA must be greater than or equal to $3.0
million, and for the period from April 1, 1999 through July 31, 1999, the
Company's EBITDA must be greater than or equal to $5.6 million; and (vi) the
Company's trade payables may not exceed $16.4 million at any time. The
Forbearance Agreement as amended, also provides that the Banks may request
that the Company transfer to them warrants for the issuance of stock
representing 10% of the diluted common equity of the Company and requires
that interest in the amount of $1,177,310 which was payable on April 13, 1999
be paid in weekly installments of $150,000 until paid in full on June 11, 1999.

A violation of the covenants contained in the Credit Agreement, as
amended and/or the Forbearance Agreement, as amended, will constitute events of
default thereunder. As such, unless a waiver or forbearance is obtained, the
Banks may, at their discretion, declare the unpaid principal of and any accrued
interest in respect of all amounts outstanding to them to be immediately due and
payable. Furthermore, even if there are no defaults by the Company under its
agreements with the Banks, the Banks' obligation to forbear from exercising
their remedies resulting from the Company's loan defaults expires on September
30, 1999. The Company is seeking alternative sources of financing. However,
there can be no assurances that new or additional financing will be obtained by
the Company or that the Banks will waive or continue to forbear from exercising
their rights to demand payment of the outstanding debt in the future. In the
event that the Banks declare the unpaid principal balances of their loans and
accrued interest due and payable and alternative financing can not be obtained,
the Company may not have the ability to continue to operate.

In response to the Company's poor performance and its liquidity problems
experienced during 1998 and the first quarter of 1999, the Company developed the
New Business Plan which is designed to return the Company to profitability by
reducing overhead and other costs and to provide the Company with the ability to
service its debt. Pursuant to the New Business Plan, the Company has eliminated
management positions and reduced some management salaries. Additional personnel
and overhead cost reduction measures have been and are planned to be taken
related to organizational down-sizing and the closing of certain facilities. In
January 1999, management announced its intention to close its Rocky Mount
production facility and all of the Company's outlet stores and has listed its
Rocky Mount manufacturing facility for auction. In addition, the Company has
down-sized its administrative office and has discontinued its Eden sewing
operations.

In connection with the closing of the sewing facilities noted above and a
down-sizing at its other sewing facilities, the Company has shifted a
significant portion of its sewing operations to outside contractors, primarily
in Mexico. The Company has experienced lower overhead costs associated with the
use of outside sewing contractors. In March 1999, the Company also announced the
closing of FLR. As a result of this closing, the Company will move certain FLR
inventories to Stardust to be sold as part of the Stardust operations.
Approximately $5.0 million of other FLR inventories will be liquidated to
generate cash. These inventories to be liquidated are reported at the estimated
net realizable value in the balance sheet at December 31, 1998.

As part of the Company's New Business Plan, the Company is in the process of
eliminating certain less profitable product styles. The Company believes that
this will reduce its product mix to a more manageable level. As a result of this
reduction, close-out inventories of approximately $7.9 million have been
identified for liquidation. These inventories are also reported in the balance
sheet at the estimated net realizable value at December 31, 1998.

Notwithstanding their expiration dates of September 30, 1999, the Ninth
Amendment to the Credit Agreement and the Fifth Amendment to the Forbearance
Agreement provide the Company with operating flexibility not available to it
during the last quarter of 1998 and the first quarter of 1999. Furthermore, the
New Business Plan's goal to complete an operational and financial restructuring
of the Company is designed to return the Company to profitability. However,
there can be no assurances that (i) the Company will have sufficient liquidity
to successfully implement the New Business Plan or pay its debts in a timely
manner, (ii) the New Business Plan will return the Company to profitability,
even if successfully and completely implemented and (iii) the Company will be
able to comply with every covenant contained in its Credit Agreement (as amended
by the Ninth Agreement thereto) and the Fifth Amendment to the Forbearance
Agreement.

The Company's independent public accountants have included a "going concern"
emphasis paragraph in their audit report accompanying the 1998 financial
statements. The paragraph states that the Company's significant net loss,
negative working capital and uncertain ability to obtain additional financing
for operations raise substantial doubt about the Company's ability to continue
as a going concern and cautions that the financial statements do not include
adjustments that might result from the outcome of this uncertainty.


                                       17
<PAGE>


YEAR 2000 COMPLIANCE

The Company recognizes that the arrival of the Year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000 and, like other companies, has
assessed its computer applications and business processes to provide for their
continued functionality. The Company believes that its current management
information systems will consistently and properly recognize the Year 2000. As
stated above, the Company is in the process of completing its implementation of
its new management information systems to improve its production planning,
scheduling and distribution, as well as its financial reporting capabilities.
This new management information system will be Year 2000 compliant. Many of the
Company's other systems include new hardware and packaged software recently
purchased from large vendors who have represented that these systems are Year
2000 compliant. The Company is in the process of obtaining assurances from
vendors that timely updates will be made available to make all remaining
purchased software Year 2000 compliant. The Company does not believe anticipated
expenditures to assure Year 2000 compliance will be material. In addition, the
Company plans to communicate with others with whom it does significant business
to determine their Year 2000 compliance readiness and the extent to which the
Company is vulnerable to any third party Year 2000 issues. Although the Company
expects to be Year 2000 compliant when necessary, failure of the Company or
significant key suppliers or customers to be fully compliant could potentially
have a material adverse impact on the results of the Company's operations.
However, due to the many factors involved, including factors impacting third
parties, which the Company cannot readily ascertain, the Company is currently
unable to estimate the potential impact. However, there can be no guarantee that
a failure to convert by another company would not have a material adverse effect
on the Company.

The Company considers the likelihood of the Company not being ready for the Year
2000 to be remote, but is currently unable to determine the likelihood of its
key suppliers and customers not being ready for the Year 2000. Contingency plans
are not being developed in the event that critical operations become interrupted
as the result of key suppliers or customers failing to resolve their respective
Year 2000 issues in a timely manner.

FORWARD LOOKING STATEMENTS

Information in this annual Form 10-K may contain forward looking statements.
These statements involve risks and uncertainties that could cause actual results
to differ materially, including without limitation, the actual costs of
operating the Company's business, actual operating performance, the ability to
maintain large client contracts, or to enter into new contracts and the level of
demand for the Company's products. Additional factors that could cause actual
results to differ materially are the ability to maintain adequate borrowing
capability to operate as discussed above and in the Company's previous filings
with the Securities and Exchange Commission.




                                       18

<PAGE>

ITEM 8.  Pluma, Inc. Financial Statements for the years ended December 31, 1998,
1997 and 1996 and Independent Auditor's Report.

INDEPENDENT AUDITOR'S REPORT


Shareholders and Board of Directors of Pluma, Inc.:

We have audited the accompanying balance sheets of Pluma, Inc. as of December
31, 1998 and 1997, and the related statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Pluma, Inc. at December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998 in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming that Pluma,
Inc. will continue as a going concern. As discussed in Notes 5 and 17 to the
financial statements, at December 31, 1998, the Company was not in compliance
with certain covenants of its long-term debt agreement and had not obtained 
waivers relating to its non-compliance. The Company has negotiated a forbearance
agreement with the lenders through September 30, 1999 and also is seeking other 
sources of long-term financing. The Company is also experiencing difficulty in 
generating sufficient cash flow to meet its obligations and sustain its 
operations. The Company's difficulties in meeting its debt agreement covenants 
and financing needs, its substantial loss from operations for the year ended 
December 31, 1998, and its negative working capital position discussed in Note 
17 raise substantial doubt about its ability to continue as a going concern. 
Management's plans in regard to these matters are also described in Note 17. The
financial statements do not include any adjustments that might result from the 
outcome of this uncertainty.

The Company changed its method of capitalizing and expensing certain costs
related to software implementation in 1997 in accordance with EITF Issue No.
97-13 (see Note 6).  As discussed in Note 3, the Company changed its method of
determining the cost of inventories in 1996.

Deloitte & Touche LLP
Winston-Salem, North Carolina

April 6, 1999


                                       19

<PAGE>

<TABLE>
<CAPTION>


PLUMA, INC.

BALANCE SHEETS, DECEMBER 31, 1998 AND 1997
----------------------------------------------------------------------------------------------


ASSETS                                                1998               1997

CURRENT ASSETS:

<S>                                                   <C>                <C>
  Cash                                                $ 1,612,087        $ 1,875,992
  Accounts receivable, including related parties
    (less allowance - 1998, $6,845,714; 
      1997, $2,353,577)                                24,844,607         32,001,332
  Income taxes receivable                               3,039,390          1,952,796
  Other receivables                                                        1,906,178
  Deferred income taxes                                                    1,539,385
  Inventories, net                                     56,690,891         51,177,900
  Other current assets                                     83,043            919,873
                                                         --------         ----------
           Total current assets                        86,270,018         91,373,456
                                                      -----------        -----------


PROPERTY, PLANT AND EQUIPMENT:

  Land                                                  1,065,689            929,689
  Land improvements                                       810,419            719,699
  Buildings and improvements                           18,916,761         16,663,608
  Machinery and equipment                              48,585,396         36,420,561
  Construction in progress                                486,121          4,762,235
                                                         --------         ----------
           Total property, plant and equipment         69,864,386         59,495,792
  Less accumulated depreciation                        26,046,667         21,496,857
                                                      -----------        -----------
           Property, plant and equipment, net          43,817,719         37,998,935
                                                      -----------        -----------


OTHER ASSETS:

  Goodwill (less accumulated amortization -
    1998, $1,412,700; 1997, $26,655)                   26,308,208         34,831,646
  Other                                                 2,147,465          1,533,840
                                                       ----------         ----------
           Total other assets                          28,455,673         36,365,486
                                                      -----------        -----------
TOTAL                                               $ 158,543,410      $ 165,737,877
                                                   ==============     ==============

<CAPTION>
  LIABILITIES AND
    SHAREHOLDERS' EQUITY                               1998               1997

  CURRENT LIABILITIES:
    Current maturities of long-term debt             $ 108,723,716       $ 43,869,192
    Accounts payable, including related parties         17,838,270         12,057,069
     Accrued expenses                                    4,372,255          2,472,458
                                                        ----------         ----------
              Total current liabilities                130,934,241         58,398,719
                                                      ------------        -----------


  LONG-TERM DEBT                                                           40,000,000
                                                      ------------        -----------


  DEFERRED INCOME TAXES                                                     3,671,301
                                                      ------------        -----------


  COMMITMENTS AND CONTINGENCIES
    (Notes 10, 12 and 13)



  SHAREHOLDERS' EQUITY:
    Preferred stock, no par value, 1,000,000
      shares authorized

    Common stock, no par value, 15,000,000
      shares authorized, 8,109,152 shares
      issued and outstanding                            36,849,127         36,849,127
    Retained earnings (deficit)                         (9,239,958)        26,818,730
                                                        ------------      -----------
             Total shareholders' equity                 27,609,169         63,667,857




  TOTAL                                              $ 158,543,410      $ 165,737,877
                                                      ==============   ==============
</TABLE>

                                                                                
See notes to financial statements.

                                       20

<PAGE>
<TABLE>
<CAPTION>


PLUMA, INC.

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
----------------------------------------------------------------------------------------------

                                                                       1998               1997               1996

<S>                                                                <C>                <C>                <C>
NET SALES, including related parties                               $ 187,253,570      $ 134,555,053      $ 127,820,319

COST OF GOODS SOLD, including related parties                        186,009,651        118,279,362        106,247,340
                                                                    ------------       ------------        -----------

GROSS PROFIT                                                           1,243,919         16,275,691         21,572,979
                                                                    ------------       ------------        -----------    

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES, including related parties                                 24,834,379          8,859,529          9,149,039

AMORTIZATION OF GOODWILL                                               1,742,913             26,655

WRITEOFF OF GOODWILL                                                   7,042,973

PROVISION FOR LOSS ON DISPOSAL OF ASSETS                               2,348,578

SOFTWARE IMPLEMENTATION EXPENSES                                                          2,089,316
                                                                     -----------         ----------         ----------
           Total operating expenses                                   35,968,843         10,975,500          9,149,039
                                                                     -----------        -----------         ----------

INCOME (LOSS) FROM OPERATIONS                                        (34,724,924)         5,300,191         12,423,940
                                                                     -----------         ----------         ----------

OTHER INCOME (EXPENSES):
  Interest expense                                                    (7,813,572)        (2,338,930)        (3,735,468)
  Other income                                                           660,702            557,102            484,058
                                                                     -----------         ----------         ----------
           Total other expenses, net                                  (7,152,870)        (1,781,828)        (3,251,410)
                                                                     -----------         ----------         ----------

INCOME (LOSS) BEFORE INCOME TAXES                                    (41,877,794)         3,518,363          9,172,530
                                                                     -----------         ----------         ---------

INCOME TAXES (BENEFIT):
  Current                                                             (3,687,190)         1,390,880          2,445,471
  Deferred                                                            (2,131,916)            84,645            908,680
                                                                     -----------         ----------         ----------
           Total income taxes (benefit)                               (5,819,106)         1,475,525          3,354,151
                                                                     -----------         ----------         ----------

NET INCOME (LOSS)                                                  $ (36,058,688)       $ 2,042,838        $ 5,818,379
                                                                   =============       ============       ============

EARNINGS (LOSS) PER COMMON SHARE - BASIC
  AND DILUTED                                                            $ (4.45)            $ 0.27             $ 1.09
                                                                         =======            =======            =======

WEIGHTED AVERAGE NUMBER OF SHARES
  OUTSTANDING                                                        $ 8,109,152        $ 7,553,782        $ 5,315,852
                                                                    ============       ============       ============
</TABLE>


See notes to financial statements.
                                       21

<PAGE>
<TABLE>
<CAPTION>


PLUMA, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
----------------------------------------------------------------------------------------------



                                                                                       RETAINED
                                                           Common Stock                Earnings        Shareholders'
                                                       Shares           Amount         (Deficit)           Equity


<S>                                                  <C>            <C>               <C>               <C>
BALANCE, JANUARY 1, 1996                             5,315,852      $ 7,222,550       $ 19,679,768      $ 26,902,318

NET INCOME                                                                               5,818,379         5,818,379

DIVIDENDS ($.11 per share)                                                                (577,804)         (577,804)
                                                    ----------       ----------         -----------      ------------

BALANCE, DECEMBER 31, 1996                           5,315,852        7,222,550         24,920,343        32,142,893

DIVIDENDS ($.02 per share)                                                                (144,451)         (144,451)

ISSUANCE OF COMMON STOCK
  IN PUBLIC OFFERING                                 2,793,300       29,626,577                           29,626,577

NET INCOME                                                                               2,042,838         2,042,838
                                                    ----------       ----------         -----------      ------------

BALANCE, DECEMBER 31, 1997                           8,109,152       36,849,127         26,818,730        63,667,857
                                                    ----------       ----------         -----------      ------------

NET LOSS                                                                               (36,058,688)      (36,058,688)
                                                    ----------       ----------         -----------      ------------
BALANCE, DECEMBER 31, 1998                           8,109,152     $ 36,849,127       $ (9,239,958)    $  27,609,169 
                                                    ==========     ============       =============    ==============
</TABLE>

See notes to financial statements.

                                       22

<PAGE>
<TABLE>
<CAPTION>


PLUMA, INC.

STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
------------------------------------------------------------------------------------------------------------------------------------


                                                                                       1998              1997              1996

CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                                              <C>                <C>                <C>
  Net income (loss)                                                              $(36,058,688)      $  2,042,838       $  5,818,379
  Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
    Provision for depreciation and amortization                                     6,570,209          4,056,744          3,804,481
    Provision for loss on disposal of property, plant and
      equipment                                                                     2,348,578
    Writeoff of goodwill                                                            7,042,973
    Other, net                                                                      1,040,342           (192,066)          (105,154)
    (Increase) decrease in accounts receivable                                      7,156,725         (6,966,587)          (606,032)
    (Increase) decrease in income taxes receivable                                 (1,086,594)        (1,952,796)         1,057,783
    (Increase) decrease in other receivables                                        1,906,178         (1,906,178)
    Increase (decrease) in deferred income taxes                                   (2,131,916)            84,645            908,680
    (Increase) decrease in inventories                                             (5,512,991)         1,483,055         (1,856,648)
    Increase (decrease) in accounts payable                                         5,781,201           (380,638)         1,627,989
    Increase (decrease) in accrued expenses                                         1,899,797           (992,524)           943,100
    Decrease in note payable - related party sales agency                                                                (1,999,000)
                                                                                 ------------       ------------       ------------
           Net cash provided by (used in) operating activities                    (11,044,186)        (4,723,507)         9,593,578
                                                                                 ------------       ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:

  Purchases of property, plant and equipment                                      (12,904,276)        (9,781,622)        (3,398,804)
  Acquisitions                                                                                       (51,538,504)
  Other, net                                                                         (921,177)          (453,997)          (221,175)
                                                                                 ------------       ------------       ------------
           Net cash used in investing activities                                  (13,825,453)       (61,774,123)        (3,619,979)
                                                                                 ------------       ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of long-term debt                                         45,000,000         83,268,342
  Repayments of long-term debt                                                    (84,117,982)          (849,640)          (849,640)
  Borrowings from note payable - Bank                                                                                    20,000,000
  Repayments of note payable - Bank                                                                                     (20,000,000)
  Net borrowings from (repayments of) revolving loan                               64,591,000        (43,569,904)        (4,851,096)
  Payment of loan fees                                                               (867,284)          (248,790)
  Payment of dividends                                                                                  (144,451)          (577,804)
  Proceeds from issuance of common stock                                                              29,626,577
                                                                                 ------------       ------------       ------------
           Net cash provided by (used in) financing activities                     24,605,734         68,082,134         (6,278,540)
                                                                                 ------------       ------------       ------------

NET INCREASE (DECREASE) IN CASH                                                      (263,905)         1,584,504           (304,941)
CASH, BEGINNING OF PERIOD                                                           1,875,992            291,488            596,429
                                                                                 ------------       ------------       ------------
CASH, END OF PERIOD                                                              $  1,612,087       $  1,875,992       $    291,488
                                                                                 ============       ============       ============
</TABLE>
                                       23

<PAGE>
<TABLE>
<CAPTION>


PLUMA, INC.

STATEMENTS OF CASH FLOWS (CONCLUDED)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
----------------------------------------------------------------------------------------------------------------------


                                                                       1998              1997              1996

SUPPLEMENTAL DISCLOSURES OF CASH
  FLOW INFORMATION:
  <S>                                                                   <C>              <C>               <C>
  Cash paid during the year for:
    Interest                                                            $ 6,215,444      $  2,970,587      $ 3,860,064
    Income taxes                                                           $ 57,500      $  3,715,176      $ 1,430,000

  Details of acquisitions:
    Fair value of assets                                                                 $ 68,248,278
    Liabilities                                                                          $ 16,709,774
    Cash paid                                                                            $ 51,538,504
</TABLE>


See notes to financial statements.

                                       24

<PAGE>


PLUMA, INC.

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------



1.   ORGANIZATION

     Pluma, Inc. (the "Company") is a vertically integrated manufacturer and
     distributor of high quality fleece and jersey activewear. The Company is
     focused on increasing sales and profitability by offering high value
     products to a diverse customer base. The Company sells its products either
     directly or through its distributors to a number of highly recognized
     companies such as adidas, Starter and Walt Disney. In addition, the Company
     sells products under its own "Pluma," "SANTEE" and "SNOWBANK" brand names
     to retail and wholesale customers. The Company operates in a single
     business segment.

     During 1997, the Company completed acquisitions of two of its distributor
     customers, Stardust Corporation ("Stardust") and Frank L. Robinson Company
     ("FLR") (see Note 11). In March 1999, the Company announced the closing of
     FLR (see Note 17).


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     ACCOUNTS RECEIVABLE - Accounts receivable is reduced by an allowance for
     bad debts and sales returns to the amount expected to be collected with a
     charge against net income. Specific accounts that are considered to be
     uncollectible are written off by reducing accounts receivable and the
     allowance.

     INVENTORIES - Beginning in 1996, raw materials, work-in-progress and
     finished goods inventories are valued at the lower of cost, as determined
     by the last-in, first-out ("LIFO") method, or market. Production supplies
     are valued at the lower of cost, as determined by the first-in, first-out
     ("FIFO") method, or market. Inventory cost includes material and conversion
     costs.

     PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at
     cost and is depreciated using the straight-line method for financial
     reporting purposes and accelerated methods for income tax purposes.
     Maintenance and repairs are charged to income and betterments are
     capitalized.

     The average estimated useful lives of property for purposes of computing
     depreciation are:

          Land improvements                                           15 years
          Buildings and improvements                                  39 years
          Machinery and equipment                                     10 years
          Computer hardware and software                               5 years

     GOODWILL - Goodwill represents costs in excess of net assets of businesses
     acquired (see Note 11). Goodwill is amortized on a straight-line basis over
     20 years. The Company continually reviews goodwill to assess recoverability
     from estimated future results of operations and cash flows of the related
     operating entities (see Note 17).

                                       25
<PAGE>


     SELF-INSURANCE RESERVES - Self-insurance reserves represent the estimated
     liability on medical and workers' compensation claims reported to the
     Company plus reserves for claims incurred but not yet reported and the
     estimated settlement expenses related to these claims. The liabilities for
     claims and related settlement expenses are determined using "case basis"
     evaluations and statistical analysis and represent estimates of the
     ultimate net cost of all losses incurred through the balance sheet date.
     The Company's policy is to discount its workers' compensation reserves at a
     discount rate not to exceed a risk-free rate of return on U.S. government
     securities of similar duration on the reserves being discounted. Although
     considerable variability is inherent in such estimates, management believes
     that the liabilities for unpaid claims and related settlement expenses are
     adequate. The estimates are continually reviewed by management and, as
     adjustments to these liabilities become necessary, such adjustments are
     reflected in current operations. Self-insurance reserves are included in
     accrued expenses (see Note 4).

     LOAN FEES - Loan fees are capitalized and amortized to other expense using
     the effective interest method over the term of the related debt.

     INCOME TAXES - Income taxes are provided on pre-tax earnings as reported in
     the financial statements. Deferred income taxes result from temporary
     differences between the amounts of assets and liabilities for financial
     reporting purposes and such amounts as measured for income tax purposes.

     STOCK OPTIONS - SFAS No. 123, "Accounting for Stock-Based Compensation,"
     adopts a "fair value based method" of accounting for employee stock option
     plans or similar stock-based compensation plans. Under the fair value based
     method, compensation cost is measured at the grant date based on the fair
     value of the award and is recognized over the service or vesting period.
     The statement does allow entities to continue to measure compensation using
     the "intrinsic value based method" of APB No. 25 provided that they make
     pro forma disclosures on net income and earnings per common share as if the
     fair value based method of accounting had been applied. The Company has
     elected to continue to follow APB No. 25 (see Note 8).

     TREASURY STOCK - Under the state laws of North Carolina, shares of stock
     repurchased by the Company are considered authorized but unissued shares,
     and are reflected as such in the financial statements.

     EARNINGS (LOSS) PER COMMON SHARE - In February 1997, the Financial
     Accounting Standards Board issued SFAS No. 128, "Earnings per Share." SFAS
     No. 128 is effective for financial statements for periods ending after
     December 15, 1997 and early adoption is not permitted. This statement
     changes the method of computing and presenting earnings (loss) per common
     share. SFAS No. 128 requires the presentation of basic earnings (loss) per
     common share and diluted earnings (loss) per common share ("EPS") on the
     face of the income statement for all entities with complex capital
     structures and requires a reconciliation of the numerator and denominator
     of the basic EPS computation to the numerator and denominator of the
     diluted EPS computation. Basic EPS is computed by dividing the net income
     available to common shareholders by the weighted average shares of
     outstanding common stock. The calculation of diluted EPS is similar to
     basic EPS except that the denominator includes dilutive potential common
     shares such as stock options and warrants and the numerator is adjusted to
     add back (a) any convertible preferred dividends and (b) the after tax
     amount of interest recognized in the period associated with any convertible
     debt.

     Options to purchase shares of common stock were outstanding during 1998,
     1997 and 1996 (see Note 8) but were not included in the computation of
     diluted EPS because the options' exercise prices were greater than the
     average market prices of the common shares during those years. Accordingly,
     there were no differences in the numerators and denominators
     used in the basic EPS and diluted EPS computations.

                                       26
<PAGE>


     REVENUE RECOGNITION - The Company recognizes the sale of goods when the
     goods are shipped or ownership is assumed by the customer. Sales are
     recognized net of estimated returns and allowances.

     ADVERTISING - The Company expenses the costs of advertising as incurred
     except for catalog expenses, which are capitalized and amortized over the
     expected period of future benefits.

     CAPITALIZED SOFTWARE COSTS - The Company capitalizes certain computer
     software costs which are amortized utilizing the straight-line method over
     the economic lives of the related products not to exceed five years. As
     discussed in Note 6, certain costs related to SAP software implementation
     are expensed.

     DERIVATIVE INSTRUMENTS - The Company entered into a derivative instrument
     to manage exposure to fluctuations in interest rates. The differential to
     be paid or received as interest rates change is accrued and recognized as
     an adjustment of interest expense related to the debt (the hedge method).
     The related amount payable to or receivable from the counterparty is
     included in trade and other payables. The fair value of the swap agreement
     is not recognized in the financial statements. Gains and losses on
     terminations of interest rate swap agreements are deferred on the balance
     sheet (in other long-term liabilities) and amortized as an adjustment to
     interest expense related to the debt over the remaining term of the
     original contract life of the terminated swap agreement.

     COMPREHENSIVE INCOME - Effective January 1, 1998, the Company adopted SFAS
     No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes new
     rules for the reporting and display of comprehensive income and its
     components; however, the adoption of this Statement had no impact on the
     Company's net income (loss) or shareholder's equity.

     ACCOUNTING ESTIMATES - The preparation of financial statements in
     conformity with generally accepted accounting principles 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 reported period. Actual results
     could differ from these estimates.

     RECLASSIFICATIONS - Certain 1997 and 1996 amounts have been reclassified
     from their original presentation to conform with the 1998 presentation.

     NEW ACCOUNTING STANDARDS - In June 1998, SFAS No. 133, "Accounting for
     Derivative Instruments and Hedging Activities," was issued, establishing
     accounting and reporting standards for derivative instruments, including
     certain derivative instruments embedded in other contracts, (collectively
     referred to as derivatives) and for hedging activities. This statement
     requires that an entity recognize all derivatives as either assets or
     liabilities in the statement of financial position and measure those
     instruments at fair value. The Company will be required to apply the
     provisions of this statement beginning with the first fiscal quarter of
     2000.


                                       27

<PAGE>



3.   INVENTORIES, NET

     Inventories at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>

                                                                                     1998                1997

At FIFO cost:
<S>                                                                                <C>              <C>
  Raw materials                                                                    $ 986,561        $ 1,429,371
  Work-in-progress                                                                 6,652,569          6,077,538
  Finished goods                                                                  64,207,881         45,885,484
  Production supplies                                                                870,382            953,147
                                                                                 -------------       -----------
                                                                                  72,717,393         54,345,540
Excess of FIFO over LIFO cost                                                     (2,804,528)        (1,846,435)
                                                                                 -------------       -----------
                                                                                  69,912,865         52,499,105
Excess of cost over market                                                       (13,221,974)        (1,321,205)
                                                                                 -------------       -----------

Total                                                                           $ 56,690,891        $51,177,900
                                                                                 =============       ===========
</TABLE>


     During 1996, the Company changed its method of determining the cost of
     inventories, except production supplies, from the FIFO method to the LIFO
     method. The Company believes the LIFO method more closely relates current
     costs with current sales in periods of rising prices. The effect of the
     change was to decrease net income for 1996 by $52,212 ($.01 per share). The
     change had no effect on prior years because inventories under the FIFO
     method at December 31, 1995, as previously reported, were the amount of the
     beginning 1996 inventories used under the LIFO method. Accordingly, pro
     forma results for prior years under the LIFO method are not applicable.

     If the cost of all inventories had been determined by the FIFO method,
     which approximates current cost, the cost of inventories would have been
     $2,804,528 and $1,846,435 greater at December 31, 1998 and 1997,
     respectively.

     Reserves have been recorded against inventory for the estimated excess of
     cost over market related primarily to inventories to be liquidated (see
     Note 17).


4.   ACCRUED EXPENSES

     Accrued expenses at December 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>


                                                                                       1998              1997

<S>                                                                                 <C>               <C>
Salaries, commissions and bonuses                                                   $ 183,601         $ 702,186
Interest                                                                            1,724,710           126,582
Insurance                                                                           1,467,314           888,309
Other                                                                                 996,630           755,381
                                                                                  -----------       -----------

Total                                                                              $4,372,255       $ 2,472,458
                                                                                  ===========       ===========
</TABLE>

                                       28

<PAGE>



5.   LONG-TERM DEBT

     Long-term debt at December 31, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>


                                                                                    1998                1997

<S>                                                                             <C>                <C>        
Revolving loans                                                                 $ 64,591,000       $83,268,342
Term loan                                                                         45,000,000
Subordinated debt                                                                                      849,640
Loan fees                                                                           (867,284)         (248,790) 
                                                                                ------------        ----------
Total                                                                            108,723,716        83,869,192
Less current maturities                                                          108,723,716        43,869,192
                                                                                ------------        ----------

Long-term debt                                                                  $                  $40,000,000
                                                                                ============       ===========
</TABLE>




     The Company entered into a syndicated credit facility (the "Credit
     Agreement") on April 23, 1998 with a group of financial institutions for
     the purpose of refinancing its existing revolving loan. The Credit
     Agreement is administered by one of the member financial institutions. This
     agreement has been amended and was operating under the fifth amendment as
     of December 31, 1998. As amended at December 31, 1998, this agreement
     consists of a term loan (the "Term Loan") and revolving loans (the
     "Revolving Loans"), which include swingline loans. The Term Loan consists
     of $45,000,000. Revolving Loans may be either Eurodollar Loans with a
     minimum aggregate principal of $2,000,000 and integral multiples of
     $500,000 or Base Rate loans with a minimum aggregate principal amount of
     $500,000 and integral multiples of $100,000. The amount that can be
     borrowed under Revolving Loans is limited to the lesser of the Borrowing
     Base, as defined, or $70,000,000. The borrowing base is calculated as the
     sum of (i) 85% of eligible receivables, as defined, (ii) 60% of eligible
     inventory, as defined, and (iii) $3,000,000 through January 29, 1999, and
     $0 thereafter. Swingline loans may be obtained up to $5,000,000. Swingline
     loans can be made as advances of Revolving Loan amounts. Term Loan
     borrowings are due in specified quarterly installments beginning in April
     1999 with the final maturity in January, 2003. Any amounts outstanding
     under the Revolving Loans mature on April 23, 2003.

     Long-term debt is collateralized by substantially all accounts receivable,
     inventories, general intangibles and property. In addition, dividends on
     common stock are prohibited until such time that amounts outstanding under
     the Credit Agreement have been repaid.

     For the Term Loan and Revolving Loans, interest rates under the Credit
     Agreement are based on the Base Rate or the Eurodollar Rate. The interest
     rate for swingline loans is based on the Quoted Rate, the rate per annum
     offered by the swingline lender and accepted by the Company with respect to
     the swingline loan. The interest rate for the swingline loan at December
     31, 1998 was 9.3%. For loans bearing the Eurodollar Rate, the interest rate
     equals the quotient obtained by dividing (a) the interbank offered rate for
     such eurodollar loans for such interest period by (b) 1 minus the
     eurodollar reserve required for such eurodollar loans for such interest
     period plus 3.75%. The interest rate for Eurodollar loans at December 31,
     1998 ranged from 8.95% to 9.09%. For Base Rate loans, the per annum rate is
     equal to the higher of (a) the Federal Funds Rate for such day plus one
     percent and (b) the prime rate for such day plus one percent. The interest
     rate for Base Rate loans was 8.75% at December 31, 1998. The Credit
     Agreement also requires a commitment fee equal to 0.375% per annum on the
     daily amounts of unused revolving loans. For letters of credit, a fee is
     charged for the average daily maximum amount available to be drawn under
     each letter of credit computed at a per annum rate of 3.5% for each day
     from the date of issuance to the date of expiration.

                                       29

<PAGE>


     Among the various provisions, limitations and restrictions contained in the
     Credit Agreement, the Company must meet specified funded indebtedness to
     capitalized ratio, fixed charge coverage ratio, leverage ratio,
     consolidated net worth, and earnings before the effect of interest expense,
     income taxes, depreciation and amortization ("EBITDA") requirements. The
     Credit Agreement may be terminated at any time upon the occurrence of an
     event of default. The Company retains the right to remedy certain events of
     default within 30 days after notice. The Company was not in compliance with
     the Credit Agreement covenants and had not obtained waivers relating to its
     non-compliance. Accordingly, all amounts outstanding under the Credit
     Agreement have been reported in the balance sheet at December 31, 1998 as
     current.

     Subsequent to December 31, 1998, the Credit Agreement was amended and is
     currently operating under the Ninth Amendment to Credit Agreement, executed
     on March 31, 1999. This amendment redefined the Borrowing Base as the sum
     of (i) 85% of eligible receivables, as defined, (ii) 60% of eligible
     inventory, as defined, and (iii) $18,000,000 through June 29, 1999;
     $19,500,000 from June 30, 1999 through July 30, 1999; $16,100,000 from July
     31, 1999 through August 30, 1999; $14,500,000 from August 31, 1999 through
     September 29, 1999; and $0 thereafter. The maximum amount that can be
     borrowed under the Revolving Loans was also limited to $63,000,000 through
     July 30, 1999; $55,600,000 from July 31, 1999 through August 30, 1999; and
     $53,000,000 thereafter.

     Although the Company did not obtain a waiver for its covenant violations,
     the Company reached an agreement with its lenders whereby the lenders
     agreed to forbear exercising their rights and remedies (the "Forbearance
     Agreement") under the Credit Agreement through September 30, 1999. Among
     other provisions in the Forbearance Agreement, the Company is limited as to
     the amount of capital expenditures, must maintain specified net sales,
     maintain a minimum change in cash, maintain a minimum EBITDA and is limited
     in the amount of trade payables. The Forbearance Agreement also provides
     that the lenders may request stock warrants representing 10% of the diluted
     common equity of the Company (see Note 7).

     The Company issued a promissory note dated January 28, 1994, to a former
     officer/shareholder in connection with the repurchase of his stock (see
     Note 7). Interest on the unpaid principal balance is paid quarterly at an
     annual rate of 5.0%, since May 1, 1994. The promissory note is subordinated
     to the Credit Agreement. The Company's obligations under the promissory
     note are secured by the shares repurchased from the former
     officer/shareholder. In the event the Company is in default under the terms
     of the promissory note, the former officer/shareholder will be entitled to
     have the Company's Common Stock reissued to him. The number of shares to be
     reissued in the event of default will be determined by dividing the amount
     due under the note at the time of such default by the fair value of the
     Company's Common Stock shares at such time. This note was paid in full on
     January 31, 1998.

     Although the entire debt outstanding as of December 31, 1998 has been
     reported as current due to the covenant violations as mentioned above, the
     Credit Agreement, as amended, requires future annual payments as follows:
<TABLE>
<CAPTION>

          <S>                                                     <C>
          1999                                                    $ 6,000,000
          2000                                                      9,500,000
          2001                                                     11,500,000
          2002                                                     14,250,000
          2003                                                     67,473,716
                                                                -------------

          Total                                                 $ 108,723,716
                                                                =============
</TABLE>


                                       30

<PAGE>



6.   SOFTWARE IMPLEMENTATION EXPENSES

     During 1997, the Company capitalized significant costs in connection with
     its SAP software implementation. In November 1997, EITF Issue No. 97-13 was
     issued requiring certain costs related to software implementation be
     expensed as incurred. The Company expensed $2,089,316 of such costs in
     1997.


7.   CAPITAL STOCK

     In March 1997, the Company completed its initial public offering of
     2,500,000 shares of Common Stock at $12.00 per share. In April 1997, the
     Underwriters' over-allotment option for 293,300 shares of Common Stock at
     $12.00 per share was exercised. The net proceeds of $29,626,577 were used
     to reduce debt.

     On January 28, 1997, the Board of Directors declared a .736-for-one reverse
     Common Stock split for shareholders of record on February 3, 1997. All
     references in the accompanying financial statements to the number of common
     shares and per share amounts reflect the reverse stock split.

     On July 22, 1996, the Company amended its Articles of Incorporation
     changing the par value of Common Stock from $1.00 per share to Common Stock
     having no par value and authorizing 1,000,000 shares of no par value
     Preferred Stock.

     During the year ended December 31, 1996, the Company held stock exchanges
     which are private stock sales or purchases as defined under the terms of
     its Stock Transfer and Redemption Agreement adopted by the Company on June
     10, 1991. Under this agreement, shares of the Company could be traded at
     certain times of the year. Numerous transactions among authorized parties
     (as defined in the agreement) took place under these exchanges. The Company
     did not repurchase shares during 1998, 1997 and 1996 under the Stock
     Transfer and Redemption Agreement.

     Effective March 31, 1999, the Company reached an agreement with its lenders
     whereby the lenders agreed to forbear exercising their rights and remedies
     under the Credit Agreement (see Note 5). Among the provisions of the
     Forbearance Agreement, the lenders may request stock purchase warrants
     to acquire 10% of the diluted common equity of the Company (901,017
     shares as of March 31, 1999). The warrants have an exercise price of $0.01
     per share. These warrants vest and become exercisable as follows: 25%
     beginning March 31, 1999; 25% beginning October 1, 1999; 25% beginning
     April 1, 2000; and, 25% beginning October 1, 2000. If the debt under the
     Credit Agreement is paid in full, all unvested warrants are forfeited.
     Furthermore, the Company may call the warrants for a price of $5.00 per
     share through December 31, 1999 and $10.00 per share thereafter. The
     estimated fair value of these warrants at the date of agreement was $0.50
     per share using the Black-Scholes option-pricing model with the following
     assumptions: dividend yield of 0.0%, expected volatility of 243.7%,
     risk-free interest rate of 4.6% and expected lives of 2 years.


                                       31

<PAGE>



8.   STOCK OPTIONS

     In May 1995, the Company adopted the 1995 Stock Option Plan in which
     515,200 shares of the Company's Common Stock may be issued. The exercise
     price of the options may not be less than the fair value of the Common
     Stock on the date of grant. The options granted become exercisable at such
     time or times as shall be determined by the Compensation Committee of the
     Board of Directors (the "Committee"). The Committee may at any time
     accelerate the exercisability of all or any portion of any stock option.
     These options expire, if not exercised, ten years from the date of grant.
     Participants in the Plan may be independent contractors or employees of
     independent contractors, full or part-time officers and other employees of
     the Company, or independent directors of the Company.

     The Company applies APB No. 25 and related interpretations in accounting
     for the 1995 Stock Option Plan. Accordingly, no compensation cost has been
     recognized since the exercise price approximates the fair value of the
     stock price at the grant dates. Had compensation cost been determined based
     on the fair value at the grant dates consistent with the method of SFAS No.
     123, the Company's net income (loss) and earnings (loss) per share would
     have been as follows:
<TABLE>
<CAPTION>


                                                                      1998               1997              1996

Net income (loss):
<S>                                                            <C>                 <C>               <C>
  As reported                                                  $(36,058,688)       $2,042,838        $5,818,379
  Pro forma                                                     (36,230,316)        1,838,229         5,679,877

Earnings (loss) per share - basic and dilutive:
  As reported                                                        $(4.45)           $ 0.27            $ 1.09
  Pro forma                                                           (4.47)             0.24              1.07

</TABLE>

A summary of the status of the Company's Stock Option Plan as of December 31,
1998, 1997 and 1996, and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>

                                                                                         WEIGHTED-AVERAGE
                                                                    SHARES                EXERCISE PRICE

<S>                                                                 <C>                       <C>
Outstanding, January 1, 1996                                        350,336                  $13.077
Granted                                                              32,384                   13.077
                                                                   --------
Outstanding, December 31, 1996                                      382,720                   13.077
Forfeited                                                            (2,355)                  13.077
                                                                   --------
Outstanding, December 31, 1997                                      380,365                   13.077
Granted                                                             123,000                    2.000
Forfeited                                                           (15,309)                  13.077
                                                                   --------

Outstanding, December 31, 1998                                      488,056                   10.285
                                                                   ========


                                                                         1998            1997            1996

Options exercisable at year end                                        364,999         181,351         117,171
                                                                       ========        ========        =======

Weighted-average fair value of options
  granted during the year                                               $ 0.90          $ 0.00          $ 6.60
                                                                        =======         =======         ======

</TABLE>

                                       32
<PAGE>


     The following table summarizes information about fixed stock options
     outstanding at December 31, 1998:
<TABLE>
<CAPTION>

                                      OPTIONS OUTSTANDING                           OPTIONS EXERCISABLE
                                      -------------------                           -------------------
                       Number              Weighted-      Weighted-            Number              Weighted-
                     Outstanding            Average        Average           Exercisable            Average
  Exercise               at                Remaining      Exercise               at                 Exercise
   Prices             12/31/98           Contractual Life   Price             12/31/98               Price

  <S>                    <C>                 <C>            <C>                  <C>                  <C>
      $13.077             365,056             7.0            $ 13.077             241,999              $ 13.077
        2.000             123,000            10.0               2.000             123,000                 2.000
                         --------                                                --------
  $2.000 to
       13.077             488,056             7.8              10.285             364,999                 9.344
                         ========                                                ========
</TABLE>


     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option-pricing model with the following weighted-average
     assumptions used for grants in 1998 and 1996, respectively: dividend yield
     of 0.0% and 0.08%, expected volatility of 123.0% and 40.9%, risk-free
     interest rates of 4.7% and 5.9%, and expected lives of 5 years.


9.   INCOME TAXES

     The provision for income tax expense (benefit) for the years ended December
     31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>

                                                                   1998              1997              1996

<S>                                                             <C>               <C>               <C>
Current federal income tax expense (benefit)                    $(3,306,063)      $1,254,831        $2,178,903
Current state income tax expense (benefit)                         (381,127)         136,049           266,568
                                                                 ------------      ----------        ---------
           Total current income tax expense
             (benefit)                                           (3,687,190)       1,390,880         2,445,471
                                                                 ------------      ----------        ---------

Deferred federal income tax expense (benefit)                    (1,902,244)          78,638           809,689
Deferred state income tax expense (benefit)                        (229,672)           6,007            98,991
                                                                 ------------      ----------        ---------

           Total deferred income tax expense
             (benefit)                                           (2,131,916)          84,645           908,680
                                                                 ------------      ----------        ---------

Total income tax expense (benefit)                              $(5,819,106)      $1,475,525        $3,354,151
                                                                =============     ===========       ==========
</TABLE>


     The provision for income taxes differs from the amount computed by applying
     the U.S. federal income tax rate (34%) because of the effect of the
     following items:
<TABLE>
<CAPTION>

                                                                    1998               1997              1996

<S>                                                            <C>                 <C>               <C>
Income taxes computed at U.S. federal
  statutory rate                                               $(14,238,450)       $1,196,243        $3,118,660
State income taxes, net of federal
  income tax effect                                              (1,532,046)          93,758            243,027
Valuation allowance                                               9,917,010
Other, net                                                           34,380          185,524             (7,536)
                                                               --------------     -----------        -----------

Total income tax expense (benefit)                             $ (5,819,106)      $1,475,525         $3,354,151
                                                               ==============     ===========        ===========
</TABLE>

                                       33

<PAGE>


     Deferred income taxes result from temporary differences between the tax
     basis of assets and liabilities and their reported amounts in the financial
     statements. Significant components comprising the Company's net deferred
     tax assets and liabilities were as follows at December 31:
<TABLE>
<CAPTION>

                                                                                                 1998                        1997

Deferred tax liabilities:
  Current -
<S>                                                                                        <C>                         <C>
    Prepaid insurance and other                                                            $    (99,890)               $   (115,838)
  Long-term -
    Property, plant and equipment                                                            (4,818,302)                 (3,669,607)
    Goodwill                                                                                                                 (3,246)
                                                                                           ------------                ------------
           Total deferred tax liabilities                                                    (4,918,192)                 (3,788,691)
                                                                                           ------------                ------------

Deferred tax assets:
  Current -
    Bad debt and returns reserves                                                             1,928,796                     244,324
    Medical and workers' compensation reserves                                                  278,908                     205,575
    Uniform capitalization                                                                    1,085,228                     606,434
    Lower of cost or market write-down                                                        4,465,202                     408,905
    Deferred compensation                                                                       326,765                     165,485
    Other                                                                                        40,040                      24,500
  Long-term
    Goodwill writeoff and amortization                                                        2,367,466
    Tax loss carryforwards                                                                    4,317,463
    Other                                                                                        25,334                       1,552
                                                                                           ------------                ------------
           Total deferred tax assets                                                         14,835,202                   1,656,775
                                                                                           ------------                ------------

Valuation reserve allowance                                                                  (9,917,010)
                                                                                           ------------                ------------
Net deferred tax asset (liability)                                                        $                            $ (2,131,916)
                                                                                           ============                ============
</TABLE>

     A valuation allowance has been established due to the uncertain ability of
     the Company to generate future taxable income and the resulting uncertain
     realization of tax loss carryforwards and other deferred tax assets.

     The Company has tax loss carryforwards of $10,416,764 which expire
     principally in 2019.

                                       34


<PAGE>



10.  LEASES

     At December 31, 1998, the Company was committed to pay rentals under
     various noncancelable operating leases with lease terms in excess of one
     year as follows:
<TABLE>
<CAPTION>

               Year ending December 31:
                 <S>                                                     <C>
               1999                                                    $ 2,316,009
               2000                                                      2,184,359
               2001                                                      2,094,977
               2002                                                      1,724,933
               2003                                                      1,347,941
               Thereafter                                                4,229,522
                                                                     -------------

               Total                                                 $  13,897,741
                                                                     =============
</TABLE>


     Lease agreements frequently include renewal options and require that the
     Company pay for utilities, taxes, insurance and maintenance expenses.
     Options to purchase are also included in some lease agreements.

     Rental expense under all leases accounted for as operating leases was
     $2,827,628, $2,260,469, and $2,145,061 for the years ended December 31,
     1998, 1997 and 1996, respectively (see Note 13).


11.  ACQUISITIONS

     In December 1997, the Company purchased certain assets and assumed certain
     liabilities of Stardust Corporation ("Stardust") and Frank L. Robinson
     Company ("FLR") for $51,538,504 in cash, including related acquisition
     costs. The acquisitions have been accounted for as purchases. Accordingly,
     the assets and liabilities of the acquired businesses are included in the
     balance sheet as of December 31, 1997. The results of Stardust's and FLR's
     operations from the dates of the acquisitions to December 31, 1997 were not
     significant. The acquisitions were financed through additional debt.

     The allocation of the acquisition costs resulted in intangibles, primarily
     non-compete agreements of $500,000, and goodwill of $34,858,301. The
     non-compete agreements and the goodwill are being amortized on a
     straight-line basis over 5 years and 20 years, respectively.

     The pro forma unaudited results of operations as though Stardust and FLR
     had been acquired as of the beginning of fiscal 1997 and 1996 are as
     follows:
<TABLE>
<CAPTION>

                                                                    1997                1996

                <S>                                              <C>                 <C>         
                Net sales                                        $221,960,415        $225,898,606
                Net income                                          2,225,288           6,239,372
                Earnings per share - basic and diluted                   0.29                1.17
</TABLE>


     The pro forma results include amortization of the intangibles presented
     above and interest expense on debt assumed to finance the acquisitions. The
     pro forma results are not necessarily indicative of what actually would
     have occurred if the acquisitions had been completed as of the beginning of
     each of the fiscal periods presented, nor are they necessarily indicative
     of future results.

                                       35
<PAGE>


12.  COMMITMENTS AND CONTINGENCIES

     The Company has employment agreements with three of its senior executive
     officers. The terms of two of these agreements expire in December 2000 and
     the third expires December 2002. Upon termination of one of the employment
     agreements after a change of control in the Company, as defined, the
     Company would be liable for a maximum of three times the eligible
     employee's (i) average annual salary, as defined, plus (ii) any bonuses, as
     defined. For the other two agreements, upon termination of an employment
     agreement after a change of control in the Company, as defined, the Company
     would be liable for (i) a maximum of the employee's annual salary, as
     defined, plus (ii) any bonuses, as defined. In addition, under the
     employment agreements, the senior executive officers are entitled to a
     minimum annual bonus payment to be paid at such time as bonuses to other
     executive officers.

     WATER TAKE-OR-PAY - At December 31, 1998, the Company had an outstanding
     take-or-pay agreement for the purchase of treated water and wastewater
     treatment for its Eden, North Carolina facilities. The committed amount is
     for 450 million gallons per year through June 30, 2011. Under this
     contract, the Company is committed at December 31, 1998 to purchase treated
     water and wastewater treatment, assuming current price levels, as follows:

     Fixed and Determinable Portion of Take-or-Pay Obligations:

<TABLE>
<CAPTION>

               YEAR                                         COMMITTED AMOUNT

               <S>                                               <C>
               1999                                             $ 1,018,125
               2000                                               1,002,375
               2001                                                 988,875
               2002                                                 975,375
               2003                                                 959,625
               Thereafter                                         6,887,250
                                                                -----------
               Total                                            $11,831,625
                                                                ===========
     
</TABLE>


     The Company maintains a Sales Incentive Plan payable to the sales staff if
     specified sales volume is reached.

     Arising out of the conduct of its business, on occasion, various claims,
     suits and complaints have been filed or are pending against the Company. In
     the opinion of management, all matters are adequately covered by insurance
     or, if not covered, are without merit or are of such kind, or involve such
     amounts, as would not have a material effect on the financial position or
     results of operations taken as a whole if disposed of unfavorably.


13.  RELATED PARTY TRANSACTIONS

     Prior to 1996, sales commissions of $3,327,307, at a rate of 3.0% of the
     aggregate sales price of orders shipped by the Company, plus marketing
     reimbursements, were paid to the Company's sales agency, a company owned by
     a certain shareholder and director of the Company. During December 1995,
     the Company entered into an agreement for the termination of the sales
     contract with the sales agency. Under the terms of this agreement, the
     Company paid the sales agency $1,000 on December 29, 1995 and $1,999,000
     with a promissory note that was paid in full in January 1996. The Company
     has not paid commissions to the sales agency for sales subsequent to
     December 31, 1995.

     The Company has various operating leases from certain shareholders. The
     leases have terms of approximately one to 14 years with aggregate minimum
     monthly payments of $122,037, $100,623 and $98,751 in 1998, 1997 and 1996,
     respectively. Total operating lease expense for 1998, 1997 and 1996 was
     $1,472,948, $1,197,186 and $1,144,193, respectively. As of December 31,
     1998, future minimum lease payments under these operating leases totaled
     $9,823,944.

                                      36

<PAGE>


     A contractor performed miscellaneous work totaling $2,774,992, $344,751,
     and $478,646 for the years ended December 31, 1998, 1997 and 1996,
     respectively. Certain shareholders/directors of the Company are affiliated
     with the contractor. At December 31, 1998, $43,791 was due to this
     contractor.

     During 1998, 1997 and 1996, the Company made payments totaling $938,109,
     $118,345 and $223,338, respectively, for contract services rendered to the
     Company for packaging and preparing Company products for shipment. A
     director/shareholder is affiliated with this contractor. At December 31,
     1998, $343,385 was due to this contractor.

     During 1998, 1997 and 1996, the Company contracted for fabric dyeing
     totaling $160,351, $16,894 and $42,776, respectively, with a contractor
     owned by a shareholder and former director of the Company. The Company had
     sales to this contractor in 1998, 1997, and 1996 of $115,131, $871,958 and
     $80,005, respectively, and had a net balance receivable of $393,749 at
     December 31, 1998.

     During 1998, 1997 and 1996, the Company made payments to a contractor
     totaling $121,394, $361,472 and $121,395, respectively, for advisory fees.
     A director/shareholder of the Company is affiliated with this contractor.
     At December 31, 1998, $20,522 was due to this contractor.

     During 1998, the Company made payments to a contractor totaling $184,899
     for advisory fees. A director of the Company is affiliated with this
     contractor. At December 31, 1998, $9,636 was due to this contractor.

     An electrical contractor performed services totaling $263,923 and $333,104
     during 1998 and 1997, respectively. This contractor is affiliated with a
     director/officer of the Company.


14.  SALES TO MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK

     A substantial amount of sales and receivables are to relatively few
     customers. Credit limits, ongoing credit evaluations and account monitoring
     procedures are utilized to minimize the risk of loss. Collateral is
     generally not required.

     Certain customers have accounted for significant percentages of the
     Company's net sales as follows:
<TABLE>
<CAPTION>

                                                                                1998          1997         1996

          <S>                                                                   <C>          <C>          <C>
          Customer A                                                            25.7%        31.1%        24.1%
          Customer B                                                             9.4%        12.0%        14.7%


     Gross sales by type of product were as follows (in millions):

          Fleece                                                               $ 76.7      $ 81.0       $ 80.4
          Jersey                                                                 96.2        51.9         46.8
          Closeouts/Irregulars                                                    3.2         4.6          5.0
          Other                                                                  21.8         0.1


     The geographic location of property, plant and equipment, net, was as
     follows (in millions):

                                                                                1998         1997

          U.S.                                                                 $42.8        $38.0
          Mexico                                                                 1.0
</TABLE>

                                       37
<PAGE>


15.  EMPLOYEE BENEFIT PLANS

     The Company maintains a 401(k) retirement savings plan for the benefit of
     its employees who have completed at least one year of service and have
     attained age 21. The amount of the Company's annual matching contribution
     is discretionary, and the Company currently funds accrued profit sharing
     expenses. During 1998, 1997 and 1996, the Company contributed $297,842,
     $172,983 and $161,461, respectively, to the 401(k) retirement savings plan.

     The Company has a deferred compensation plan providing key executives and
     directors with the opportunity to participate in an unfunded, deferred
     compensation program. Under the program, participants may defer base
     compensation and bonuses and earn returns on their deferred amounts. The
     Company may make discretionary matching contributions to the Plan. The
     program is not qualified under the Internal Revenue Code. The total of net
     participant deferrals, which is reflected in accrued liabilities was
     $790,333 at December 31, 1998 and $452,115 at December 31, 1997 and $0 at
     December 31, 1996. The Company contributed to the plan $25,343 in 1998 and
     $20,246 in 1997 and $0 in 1996.

16.     FINANCIAL INSTRUMENTS

     The following methods and assumptions were used to estimate the fair value
     of each class of financial instruments for which it is practicable to
     estimate that value. The carrying amount of cash, accounts receivable and
     trade accounts payable is a reasonable estimate of fair value. The fair
     value of long-term debt is estimated based on quoted market prices. At
     December 31, 1998, the carrying value of long-term debt is a reasonable
     estimate of fair value. All financial instruments are held for purposes
     other than trading.

     The Company has entered into an interest rate swap agreement to reduce the
     impact of changes in interest rates on some of its variable rate debt. The
     swap agreement is a contract to exchange variable rate for fixed rate
     interest payments over the life of the agreement without the exchange of
     the underlying notional amounts. The notional amount of the interest rate
     swap agreement is used to measure interest to be paid or received and does
     not represent the amount of exposure to credit loss. The differential paid
     or received on the interest rate swap agreement is recognized as an
     adjustment to interest expense. The interest rate swap agreement is held
     for purposes other than trading. The Company has entered into an interest
     rate swap transaction pursuant to which it has exchanged its variable rate
     interest obligation on $45,000,000 notional principal amount for a fixed
     rate payment obligation of 5.89% per annum for the four year period
     beginning April 30, 1999. The fixing of the interest rate for these periods
     minimizes in part the Company's exposure to the uncertainty of variable
     interest rates during this four-year period. The carrying value of the
     interest rate swap at December 31, 1998 is $0 and the fair value is
     ($841,465). The fair value of the interest rate swap is based on an average
     quoted market price. The interest rate swap contract is with one of the
     financial institutions which is a member of the Credit Agreement (see 
     Note 5).


17.  GOING CONCERN MATTERS

     The accompanying financial statements have been prepared on a going concern
     basis, which contemplates the realization of assets and the satisfaction of
     liabilities in the normal course of business. As shown in the financial
     statements, the Company incurred a net loss of $36,058,688 for the year
     ended December 31, 1998 and has classified all of its debt as current as of
     December 31, 1998 (see Note 5). The Company also has negative working
     capital of $44,664,223 at December 31, 1998. These factors among others may
     indicate that the Company will be unable to continue as a going concern for
     a reasonable period of time.

                                       38

<PAGE>


     The financial statements do not include any adjustments relating to the
     recoverability and classification of liabilities that might be necessary
     should the Company be unable to continue as a going concern. As described
     in Note 5, the Company was not in compliance with debt covenants and was
     unable to get a waiver for its violations from the banks. The Company has
     been experiencing difficulty in obtaining additional financing in excess of
     its current obligations. The Company's ability to continue as a going
     concern is dependent upon its ability to generate sufficient cash flow to
     meet its obligations on a timely basis and its ability to continue or
     obtain other long-term financing.

     In response to the Company's poor performance and its liquidity problems
     experienced during 1998, the Company took on a project to develop a
     business plan to discuss, analyze and plan future turnaround measures to
     bring the Company back into profitability and to provide the Company with
     the ability to service its debt.

     In order to reduce overhead and other costs, the Company has eliminated one
     management position, reduced management salaries, and has suspended
     management bonuses for an indefinite period. Additional personnel and
     overhead cost reduction measures have been and are planned to be taken
     related to the closing of certain facilities. In December 1998, management
     announced its intention to close the Rocky Mount production facility and
     all of the outlet stores and has listed the Rocky Mount facility for
     auction. The Company has also decided to sell its sales office in
     Martinsville, Virginia. Due to these planned dispositions, property, plant
     and equipment have been reduced by approximately $2,300,000 to reflect
     their estimated net realizable value. In addition, the Company has
     down-sized its corporate and administrative positions and has discontinued
     the Eden sewing operations.

     Because of the closing of the sewing facilities noted above and due to the
     down-sizing at other sewing facilities, the Company has shifted a
     significant portion of its sewing operations to outside contractors,
     primarily in Mexico. The Company has experienced lower overhead costs
     associated with the use of outside sewing contractors. In March 1999, the
     Company also announced the closing of the Frank L. Robinson, Inc.
     distributorship. As a result of this closing, the Company will move certain
     FLR inventories to Stardust to be sold as part of the Stardust operations.
     Approximately $2,000,000 of other FLR inventories will be liquidated to
     generate cash. These inventories to be liquidated are reported at their
     estimated net realizable value in the balance sheet at December 31, 1998.

     The Company is in the process of eliminating certain less profitable
     product styles. The Company believes that this will reduce its product mix
     to a more manageable level. Due to this reduction, close-out inventories of
     approximately $7,900,000 have been identified for liquidation. These
     inventories are also reported in the balance sheet at their estimated net
     realizable value at December 31, 1998.

     While there is no assurance that the measures discussed above will be
     sufficient to return the Company to profitability or enable it to generate
     the sufficient cash to service the existing debt, the Company has 
     negotiated a forbearance agreement with the banks (see Note 5) and is 
     seeking additional outside financing to support its turnaround efforts.


18.  ADVERTISING

     The Company expenses the costs of advertising as incurred, except for
     catalog expenses which are capitalized and amortized over the expected
     period of future benefits.

     Catalog expenses consist primarily of the production and distribution costs
     of the catalog. The capitalized costs of the catalog are amortized over the
     twelve-month period following the publication of the catalog.

     At December 31, 1998, and 1997, $287,523 and $353,040, respectively, of 
     advertising, primarily catalog costs, was reported as other current assets.
     Advertising expense was $1,579,103, $304,610 and $253,441 in 1998, 1997 and
     1996, respectively, including $195,000 in 1998 for amounts written down to 
     net realizable value.



                                       39
<PAGE>


ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

               None.



                                       40
<PAGE>

                                    PART III


ITEM 10.   Directors and Executive Officers of the Registrant

        The sections entitled "Nominees for Election Term Expiring 2002,"
"Incumbent Directors Term Expiring 2001," and "Incumbent Directors Term Expiring
2000" on pages 2 and 3 of the Proxy Statement for the Annual Meeting of Share
Owners to be held June 23, 1999, are incorporated herein by reference.

        "Executive Officers of the Company" on page 10 of this report is
incorporated herein by reference.


ITEM 11.  Executive Compensation

        "Compensation Committee Report on Executive Compensation," "Performance
Graph," "Executive Compensation," "Stock Options and Stock Appreciation Rights"
and "Aggregated Opinion/SAR Exercises in the Last Fiscal Year and Year End
Option Values" on pages 10 through 16 of the Proxy Statement for the Annual
Meeting of Share Owners to be held June 23, 1999, are incorporated herein by
reference.


ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

        (a) Information concerning security ownership of management set forth in
the Proxy Statement for the Annual Meeting of Share Owners to be held June 23,
1999, under the caption "Ownership of Equity Securities in the Company" on pages
7 and 8 is incorporated herein by reference.

        (b) "Principal Share Owners" on page 9 of the Proxy Statement for the
Annual Meeting of Share Owners to be held June 23, 1999 is incorporated herein
by reference.

        (c) There are no arrangements known to the registrant the implementation
on consummation of which may result in a change in control of the registrant.


ITEM 13.  Certain Relationships and Related Transactions

        "Compensation Committee Interlocks and Insider Participation" and
"Certain Relationships and Related Transactions Involving Directors not on the
Compensation Committee" on pages 4 thru 6 of the Proxy Statement for the Annual
Meeting of Share Owners to be held June 23, 1999 are incorporated herein by
reference.


                                    PART IV

ITEM 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

     (a)  List of Documents filed as part of this report:

          (1)  Financial Statements
               All financial statements of the registrant as set forth under
               Item 8 of this report on Form 10-K.
          (2)  Financial Statement Schedules
          (3)  Exhibits (numbered in accordance with Item 601 of Regulation S-K)


<TABLE>
<CAPTION>
Exhibit                                                              Page Number or
Number                         Description                          Incorporation by
------                         -----------                            Reference to
                                                                    -----------------
<S>            <C>                                         <C>
3.1            Amended and Restated Articles of            Exhibit 3.1 to Registration
               Incorporation                               Statement No. 333-18755, filed
                                                           December 24, 1996
3.2            By-Laws                                     Exhibit 3.2 to Registration
                                                           Statement No. 333-18755, filed
                                                           December 24, 1996
4.1            Specimen Common Stock Certificate           Exhibit 4.1 to Registration
                                                           Statement No. 333-18755, filed
                                                           December 24, 1996
10.1           Lease Agreement dated June 10, 1989,        Exhibit 10.1 to Registration


<PAGE>
Exhibit                                                              Page Number or
Number                         Description                          Incorporation by
------                         -----------                            Reference to
                                                                    -----------------

               by and between North Bowles                 Statement No. 333-18755, filed
               Partnership and Pluma, Inc. and             December 24, 1996
               amendment thereto date December 1,
               1990
10.2.1         Lease Agreement dated February 1,           Exhibit 10.2.1 to Registration
               1996, by and between North Bowles           Statement No. 333-18755, filed
               Partnership and Pluma, Inc.                 December 24, 1996
10.2.2         Lease Agreement dated December 1,           Exhibit 10.2.2 to Registration
               1995, by and between North Bowles           Statement No. 333-18755, filed
               Partnership and Pluma, Inc.                 December 24, 1996
10.3.1         Form of Credit Agreement Dated as of        Exhibit No. 10.1 to
               April 23, 1998 Among Pluma, Inc., as        Form 10-Q filed for the quarter
               Borrowers, and Certain Subsidiaries of the  ending June 30, 1998.
               Borrowers From Time to Time Party Hereto,
               as Guarantors, the Several Lenders From
               Time to Time Party Hereto and
               NationsBank, N.A., as Agent (the "Credit
               Agreement")
10.3.2         First Amendment to Credit Agreement and
               Waiver Dated as of August 27, 1998
10.3.3         Second Amendment to Credit Agreement
               Dated as of September 30, 1998
10.3.4         Third Amendment to Credit Agreement
               Dated as of November 16, 1998
10.3.5         Fourth Amendment to Credit Agreement
               Dated as of December 11, 1998
10.3.6         Fifth Amendment to Credit Agreement
               Dated as of December 31, 1998
10.3.7         Sixth Amendment to Credit Agreement
               Dated as of January 29, 1999
10.3.8         Seventh Amendment to Credit Agreement
               Dated as of March 1, 1999
10.3.9         Eighth Amendment to Credit Agreement
               Dated as of March 15, 1999
10.3.10        Ninth Amendment to Credit Agreement
               Dated as of March 31, 1999
10.3.10a       Tenth Amendment to Credit Agreement
               Dated as of April 15, 1999
10.3.11        Forbearance Agreement Dated as of
               November 16, 1998 Between Pluma, Inc.,
               as Borrower and NationsBank, N.A., as
               Agent
10.3.12        Amendment to Forbearance Agreement
               Dated as of December 31, 1998
10.3.13        Second Amendment to Forbearance
               Agreement Dated as of January 29, 1999
10.3.14        Third Amendment to Forbearance
               Agreement Dated as of March 1, 1999
10.3.15        Fourth Amendment to Forbearance
               Agreement Dated as of March 15, 1999
10.3.16        Fifth Amendment to Forbearance
               Agreement Dated as of March 31, 1999
10.3.17        Sixth Amendment to Forbearance Agreement
               Dated as of April 15, 1999
10.4           Trademark License Agreement dated           Exhibit 10.7 to Registration
               July 2, 1996, by and between Pluma,         Statement No. 333-18755, filed
               Inc. and Kayser Roth Corporation            December 24, 1996
10.5           Adoption Agreement #005                     Exhibit 10.11 to Registration
               Nonstandardized Codess.401(k) Profit         Statement No. 333-18755, filed
               Sharing Plan by Pluma, Inc. to First        December 24, 1996
               Union National Bank of North Carolina
               dated November 30, 1993 and
               Amendments thereto
10.6           1995 Stock Option Plan of Pluma, Inc.       Exhibit 10.12 to Registration
                                                           Statement No. 333-18755, filed
                                                           December 24, 1996
10.7           Form of Incentive Stock Option              Exhibit 10.13 to Registration
               Agreement by and among Pluma, Inc.          Statement No. 333-18755, filed
               and the Named Officers                      December 24, 1996
10.8           Form of Nonstatutory Stock Option           Exhibit 10.14 to Registration
               Agreement by and among Pluma, Inc.          Statement No. 333-18755, filed
               and its Directors                           December 24, 1996
10.9           Pluma, Inc. Non-Qualified Deferred          Exhibit 10.15 to Registration
               Compensation Plan                           Statement No. 333-18755, filed
                                                           December 24, 1996
10.10          Pluma, Inc. Senior Executive Bonus          Exhibit 10.16 to Registration
               Plan                                        Statement No. 333-18755, filed
                                                           December 24, 1996
10.11          Pluma, Inc. Sales Incentive Plan            Exhibit 10.17 to Registration
                                                           Statement No. 333-18755, filed
                                                           December 24, 1996

                                       42

<PAGE>
Exhibit                                                              Page Number or
Number                         Description                          Incorporation by
------                         -----------                            Reference to
                                                                    -----------------

10.12.1        License Agreement dated October 9,          Exhibit 10.18.1 to Registration
               1996 between SAP America, Inc. and          Statement No. 333-18755, filed
               Pluma, Inc. for license to utilize SAP      December 24, 1996
               R/3 Software
10.12.2        Professional Services Agreement dated       Exhibit 10.18.2 to Registration
               October 9, 1996, between SAP                Statement No. 333-18755, filed
               America, Inc. and Pluma, Inc. for           December 24, 1996
               installation of R/3 Software
10.13.1        Consulting Agreement dated
               December 6, 1996, between Philpott Ball &
               Company and Pluma, Inc.
  
                                       13

<PAGE>
Exhibit                                                              Page Number or
Number                         Description                          Incorporation by
------                         -----------                            Reference to
                                                                    -----------------

10.14          Form of Employment Agreement by             Exhibit 10.21 to Registration
               and among Pluma, Inc. and R. Duke           Statement No. 333-18755, filed
               Ferrell, G. Walker Box, George G.           December 24, 1996
               Wade, C. Monroe Light, David S.
               Green, Walter Helton, Raymond Rea,
               Nancy Barksdale, Forrest H. Truitt, II;
               Milton A. Barber and Jeffrey D. Cox,
               John Beale, Jim Beale and Jeffrey
               Robinson, except John Beale and
               Jim Beale's agreement provided for
               guaranteed bonuses of $50,000 annually
               and Jeffrey Robinson's agreement
               provides for a $55,000 bonus annually,
               to be paid when bonuses are paid to
               other executives
10.15          Form of Asset Purchase Agreement            Exhibit 1 to Form 8-K filed
               among Pluma, Inc., Stardust                 December 22, 1997
               Corporation and John Beale and Linda
               Beale dated December 22, 1997
10.16          Form of Asset Purchase Agreement            Exhibit 1 to Form 8-K filed
               among Pluma, Inc., Frank L. Robinson        January 12, 1998
               Company and the Partners of Frank L.
               Robinson Company dated December
               30, 1997
10.17          Letter Agreement Between Ronald A.
               Norelli and Pluma, Inc. Dated January 28,
               1999 engaging Mr. Norelli to assume the
               responsibilities of Chief Executive Officer
               of Pluma, Inc.
10.18          Settlement Agreement Dated June 18,
               1998 Between Gildan Activewear, Inc. and
               Pluma, Inc. for the supply of product
10.19          Agreement and Release Between Pluma,
               Inc. and C. Monroe Light Dated February 9,
               1999
10.20          Agreement and Release Between Pluma,
               Inc. and R. Duke Ferrell, Jr. Dated February
               22, 1999
10.21          Representative's Agreement Dated August
               18, 1998 Between Pluma, Inc. and the Adair Group
               for the sale of irregular products
10.22          Form of Non-Statutory Stock Option
               Agreement By and Among Pluma, Inc. and 
               Certain of its Employees
10.23          Form of Incentive Stock Option Agreement
               By and Among Pluma, Inc. and Certain of 
               its Employees
10.24          Letter Agreement Dated December 29, 1997
               Between Pluma, Inc. and Norelli &
               Company for the performance of consulting
               services
10.25          Letter Agreement Dated February 4, 1998
               Between Pluma, Inc. and Norelli &
               Company for the performance of consulting
               services
10.26          Letter Agreement Dated March 17, 1998
               Between Pluma, Inc. and Norelli &
               Company for the performance of consulting
               services
10.27          Letter Agreement Dated October 1, 1998 Between
               Pluma, Inc. and Ronald A. Norelli for the
               engagement of Mr. Norelli as Vice Chairman
               of the Company's Board of Directors.
11             Statement re:  Computation of Per           Set forth in Company's Annual
               Share Earnings                              Report attached hereto as
                                                           Exhibit 13
24             Power of Attorney (included as the
               signature page hereto)
</TABLE>

(b)    Reports on Form 8-K.


                                       14
<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, thereunder duly authorized.

                                            PLUMA, INC.

                                            By:    /s/ Ronald A. Norelli
                                                   -------------------------
                                                   Ronald A. Norelli.,
                                                   Chief Executive Officer

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

/s/ Ronald A. Norelli                                     4-15-98
------------------------------------------                ---------------------
Ronald A. Norelli, CEO                                    Date

/s/ George G. Wade                                        4-12-98
------------------------------------------                ---------------------
George G. Wade, President, COO & Secretary                Date

/s/ John B. Adams                                         4-15-98
------------------------------------------                ---------------------
John B. Adams, Director                                   Date

/s/ Barry A. Bowles                                       4-12-98
------------------------------------------                ---------------------
Barry A. Bowles, Director                                 Date

/s/ G. Walker Box                                         4-15-98
------------------------------------------                ---------------------
G. Walker Box, Chairman                                   Date

/s/ Kemp D. Box                                           4-13-98
------------------------------------------                ---------------------
Kemp D. Box, Director                                     Date

/s/ C. Monroe Light                                       4-15-98
------------------------------------------                ---------------------
C. Monroe Light, Director                                 Date

/s/ R. Stephens Pannill                                   4-12-98
------------------------------------------                ---------------------
R. Stephens Pannill, Director                             Date

/s/ J. Robert Philpott, Jr.                               4-12-98
------------------------------------------                ---------------------
J. Robert Philpott, Jr., Director                         Date

/s/ William H. Watts                                      4-12-98
------------------------------------------                ---------------------
William H. Watts, VP & CFO                                Date

/s/ Nancy B. Barksdale                                    4-12-98
------------------------------------------                ------------------
Nancy B. Barksdale, VP & Controller                       Date

                                       45