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 For fiscal year ended January 31, 1998

                                       OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 For the transition period from ___________ to
      __________.

                        Commission File Number 000-22385

                             ITHACA INDUSTRIES, INC.
               (Exact name of issuer as specified in its charter)

           Delaware                                    56-1385842
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
  incorporation organization)

      Highway 268 West, P.O. Box 620, Wilkesboro, North Carolina    28697
      ----------------------------------------------------------    -----
      (Address of principal executive offices)                    (Zip code)

      Registrant's telephone number, including area code: (336) 667-5231
                                                          --------------

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

      (Title of each class          Name of each exchange on which registered:)
      --------------------          -------------------------------------------
      None

           Securities registered pursuant to Section 12(g) of the Act:
                                 Title and class
                     Common Stock, par value $.01 per share

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

            Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the 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. [ ]

The aggregate market value of the voting stock held by nonaffiliates of the
registrant cannot be determined in the manner called for by Form 10-K. See Item
5.

            Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. YES |X|   NO |_| 

The number of shares of the Registrant's common stock outstanding as of April
24, 1998 was 10,400,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

            The information required by Part III (Items 10, 11, and 12) of this
Form 10-K is incorporated by reference to the Registrant's definitive proxy
statement relating to its annual meeting of stockholders to be held on June 10,
1998, which was filed the same day this Form 10-K was filed with the Commission

                    The Exhibit Index is located on page 44.
<PAGE>

                                     PART I


Special Note Regarding Forward-Looking Statements

      Certain statements in this report including information set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," constitute "Forward-Looking Statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Ithaca
Industries, Inc., a Delaware corporation (the "Company" or "Ithaca"), desires to
take advantage of certain "safe harbor" provisions of the Reform Act and is
including this special note to enable the Company to do so. Forward-looking
statements included in this report, involve known and unknown risks,
uncertainties, and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ materially from
the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. The Company believes a
change in the following important factors could cause such a material difference
to occur: (1) the level of sales to the Company's major customers, in particular
J.C. Penney which accounted for approximately 52% of the Company's total net
sales for the 52-week period ended January 31, 1998; (2) the Company's ability
to source or manufacture its products at a competitively favorable cost; (3) the
general strength of retailing, in particular in the apparel categories in which
the Company operates and at the retail outlets which are major customers of the
Company; (4) the continued services of certain of the Company's senior
executives; (5) the comparative strength of the Company's principal competitors,
particularly the impact of foreign sourcing in certain of the Company's product
categories; (6) the absence of political or economic disruptions, quotas, labor
disruptions, embargoes or currency fluctuations that might adversely affect the
Company, particularly in Honduras and Mexico and other foreign nations where the
Company currently or in the future sources its products; (7) the success of the
Company's Business Plan (as defined below) and reorganization, particularly the
success of the Company's ongoing efforts to consolidate its women's hosiery
operations and to successfully integrate its recent acquisition of Glendale
Hosiery Company and to consolidate certain other operations in offshore
facilities and to increase its foreign sourcing capabilities (especially in
women's and girls' underwear categories), the level of efficiency of operation
of the Company's new centralized distribution centers, the success of the
Company's efforts to streamline its SKU's and eliminate unprofitable and
low-profit lines and products, the success of the Company's efforts to reduce
its selling, general and administrative expenses, and the success of the
Company's efforts to efficiently manage its inventory levels; (8) the impact of
price fluctuations of the Company's raw materials, particularly cotton and
spandex, and the Company's ability to pass on to retailers and consumers any
possible price increases; (9) the continued improvement of the Company's
information systems; or (10) the ability of the Company to have access to
adequate capital to meet its working capital needs and to fund necessary capital
expenditures.

      Many of the foregoing factors have been discussed in the Company's prior
filings with the Securities and Exchange Commission (the "Commission") and other
publicly available documents. Had the Reform Act been effective at an earlier
time, this special note would have been included in earlier Commission filings.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company prior to the effective date of the Reform Act.


                                     Page 1
<PAGE>

      For purposes of presenting financial information in this report (other
than the Financial Statements included in Item 8), the Company's fiscal years
are indicated as ending on January 31, although before December of 1996 such
periods actually ended on the Friday nearest such date and after November of
1996 such periods actually ended on the Saturday nearest such date.

ITEM 1. Business

General

      Ithaca is a leading designer, marketer and manufacturer of private brand
men's and boys' underwear and outerwear T-shirt products, women's and girls'
underwear and women's hosiery. The Company believes it is the largest
manufacturer of private brand men's underwear and women's hosiery products and
the second largest private brand manufacturer of women's underwear in the United
States, operating distribution and manufacturing facilities in the southeastern
United States and off-shore manufacturing facilities in Central America. The key
elements of the Company's strategy are to supply a wide variety of product
offerings at a number of price points, to maintain a strong presence in multiple
channels of distribution, to maintain close customer relationships by developing
products and programs that suit individual customer needs, and to maintain a low
cost and flexible manufacturing capability.

      The Company is organized under the laws of the State of Delaware and its
principal executive offices are located at Highway 268 West, P.O. Box 620,
Wilkesboro, North Carolina 28697, Telephone Number (336) 667-5231.

Plan of Reorganization

      On December 16, 1996, the Company emerged from bankruptcy pursuant to the
Plan of Reorganization, dated as of August 29, 1996 (the "Plan of
Reorganization"). As a result of the reorganization, the Company significantly
reduced its debt and simplified its capital structure. Pursuant to the Plan of
Reorganization, prior equity interests in the company were canceled, 10,000,000
shares of the Company's common stock, par value $0.01 (the "Common Stock") were
distributed to the holders of the Company's outstanding 11.125% Senior
Subordinated Notes due 2002 (the "Notes"), the Notes were retired, the Company
ceased to be a subsidiary of Ithaca Holdings, Inc., the Company's bank credit
agreement, which was subsequently replaced on March 24, 1998, was amended and
restated and general unsecured claims, administrative claims, tax claims,
priority claims and general secured claims allowed by the Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") were paid in full.

      In the third and fourth quarters of fiscal 1996 the Company undertook an
extensive review of its manufacturing capacity, overhead structure, product
lines and customer base. These efforts resulted in the promulgation of a
three-year business plan. The Company consolidated its distribution centers and
production capacity to increase efficiencies, consolidated the operations of
certain plants to off-shore facilities and accelerated the process of moving
sewing operations off-shore. 

      On January 31, 1998 the capital structure of the Company consisted of
approximately $53.5 million of long-term debt exclusive of current maturities,
and approximately $20.9 million of net equity.


                                     Page 2
<PAGE>

Fresh Start Reporting

      The Company adopted Fresh Start Reporting on November 22, 1996, the day
the Plan of Reorganization was confirmed by the Bankruptcy Court. Accordingly,
the Company's Consolidated Balance Sheets as of January 31, 1998 and February 1,
1997 and its Consolidated Statements of Operations, Consolidated Statements of
Stockholders' Equity (Deficit) and Consolidated Statements of Cash Flows for the
year ended January 31, 1998 and the 10-week period ended February 1, 1997 will
not be comparable to the prior periods included elsewhere herein.

Products and Sales

      The Company's three principal product lines are (1) men's and boys'
underwear and outerwear T-shirts, (2) women's and girls' underwear and (3)
women's hosiery. The Company offers a large selection of products in a wide
range of styles, sizes and colors. Ithaca has worked closely with its customers
over the years to develop a wide variety of products in each of its product
lines to meet the needs of retailers in varied distribution channels. The
Company's offerings within each product line range from lower priced goods sold
by supermarkets and discount stores to higher quality, higher priced styles sold
by department stores. Management believes that this product breadth gives it a
competitive advantage over other U.S. private brand manufacturers who do not
offer such a wide selection and over foreign manufacturers who generally are not
as capable of providing prompt delivery on a broad range of products. Ithaca's
products are sold through a wide range of retail distribution channels and are
offered to the public through more than 10,000 customer outlets, including
discount stores, department stores, specialty stores, drug stores and
supermarkets.

      Men's and boys' underwear and outerwear T-shirts

      Ithaca designs and manufactures over 160 styles of crew-neck T-shirts,
V-neck T-shirts, briefs, athletic shirts and fashion underwear for its line of
men's and boys' underwear. Ithaca also designs and manufactures over 30 styles
of tank top shirts, mock turtleneck shirts, white and colored pocket T-shirts
and white and colored T-shirt blanks for screen printing for its T-shirt product
line. Products are made of 100% cotton, cotton and polyester blends and for
fashion underwear, nylon.

      Men's and boys' underwear and outerwear T-shirts accounted for
approximately 62% of the Company's net sales in the 52-week period ending
January 31, 1998, 51% of the Company's net sales in the 10-week period ended
February 1, 1997, 56% in the 42-week period ended November 22, 1996, and 52% in
fiscal 1996.

      Women's and girls' underwear

      Ithaca designs and manufactures over 100 styles of briefs, hip huggers and
bikini panties for its line of women's and girls' underwear.

      Women's and girls' underwear sales accounted for approximately 14% of the
Company's net sales in the 52-week period ending January 31, 1998, 17% in the
10-week period ended February 1, 1997, 17% in the 42-week period ended November
22, 1996, and 19% in fiscal 1996.


                                     Page 3
<PAGE>

      Women's hosiery

      Ithaca designs and manufactures over 130 styles of regular sheer
pantyhose, control top and support pantyhose, knee-highs and stockings for its
line of women's hosiery.

      Women's hosiery sales accounted for approximately 21% of the Company's net
sales in the 52-week period ending January 31, 1998, 29% in the 10-week period
ended February 1, 1997, 25% for the 42-week period ended November 22, 1996, and
27% in fiscal 1996.

Raw Materials

      The principal materials used in the Company's production of goods are
cotton, polyester, nylon and spandex yarns as well as tricot and powernet
fabrics. The Company does not produce its own yarns and believes that purchasing
yarns from the wide range of available sources in the United States is
cost-effective. Ithaca also purchases dyestuffs and packaging materials. The
Company is not always able to promptly pass on to its customers price increases
in raw materials principally due to the timing of raw material purchases and
customer orders as well as competitive conditions.

      Management believes its sources of raw materials are adequate and does not
currently anticipate difficulty in obtaining raw materials to meet its needs.
The Company has not experienced any significant shortages of raw materials
during the past 30 years.

Manufacturing and Sourcing

      Ithaca manufactures its products at 13 plants in the southeastern United
States and Central America, and sources a portion of its products from
contractors located in other countries throughout the world. Goods typically are
produced in anticipation of customer demand and the Company maintains a general
inventory which turned over 3.0 times in the 52-week period ending January 31,
1998. In both its women's hosiery and fabric production facilities, Ithaca has
the flexibility to shift its manufacturing processes easily among many styles,
colors and sizes in response to changes in demand. Approximately 59% of the
Company's men's and boys' and women's and girls' products are either assembled
off-shore from components that are cut in the United States or sourced from the
Far East. Approximately 89% of the Company's women's hosiery products are
produced domestically.

Trademarks, Licenses and Patents

      Ithaca's products are predominantly sold under the private brand names or
trade names of its customers. The Company usually seeks to obtain trademark
registration protection for those private brand names developed by the Company,
although such protection generally is not as critical as with branded products.
The Company has registered over 48 trademarks in the United States, and has 5
trademark applications pending as of April 24, 1998.

      Ithaca has license agreements permitting it to manufacture and sell
specific underwear products using the trademarks of others. The Company has the
exclusive U.S. license from Hang Ten International to use the Hang Ten trademark
on men's and boys' underwear through January 31, 1999. Ithaca has a license
agreement with International Licensing Corporation to use 


                                     Page 4
<PAGE>

the Lightning Bolt trademark on specified underwear products for men through
January 31, 1999. The Company has exclusive U.S. licenses from Salant
Corporation to use the Lady Manhattan trademark on specified women's underwear
products through December 31, 1999. Ithaca holds a patent for an Automatic
Labeling Machine & Method which expires on February 3, 2001.

      The Company does not believe that the loss of any trademark or license
with respect to any product or products or the expiration or invalidation of any
patent would have a material adverse effect on the overall business of the
Company.

Delivery Requirements

      All purchase orders are taken for current delivery and the Company has no
long-term sales contracts with any customer, or any contract entitling Ithaca to
be the exclusive supplier of merchandise to any retailer. The Company's standard
payment terms are net 30 days and are shipped F.O.B.--distribution center.

Seasonality

      The Company does not regard its overall business as highly seasonal.

Importance of Major Customers

      For the 52-week period ended January 31, 1998, J.C. Penney accounted for
approximately 52% of the total net sales of the Company, compared to nearly 48%
in fiscal 1997. No other customers accounted for 10% or more of net sales in the
52-week period ended January 31, 1998, or the 10-week period ended February 1,
1997 or the 42-week period ended November 22, 1996. The loss of a material
amount of sales to J.C. Penney, or a decline in J.C. Penney's business, or the
loss of one of the Company's other major customers would have a material adverse
effect on Ithaca's Results of Operations.

Backlog

      The dollar amount of backlog of orders believed to be firm is not material
for an understanding of the business of the Company.

Competition

      The underwear and women's hosiery markets in the United States are highly
competitive. The Company's products compete with products manufactured by other
private brand suppliers as well as with products manufactured under recognized
name brands.

      Ithaca believes it is the largest manufacturer of private brand
merchandise in its men's underwear and women's hosiery business and the second
largest manufacturer in its women's underwear line, offering a broad selection
of styles, sizes and colors. The private brand underwear and women's hosiery
products business is generally comprised of small scale, privately owned
companies with limited product lines. However, management is aware of several
large private brand manufacturers with substantial resources. Ithaca's principal
private brand competitors include: Beltex, Springford, Nantucket, Oneita, Tultex
and Delta Woodside in men's and boys' 


                                     Page 5
<PAGE>

underwear or outerwear T-shirts; Fitzgerald and Wundies Industries Inc. in
women's and girls' underwear; and Americal Corp., Holt, and Acme-McCrary Corp.
in women's hosiery.

      The supply of branded underwear and women's hosiery products is dominated
by a few large manufacturers, some of which have substantially greater financial
resources and market recognition than Ithaca. Many of these manufacturers also
produce some private brand underwear and women's hosiery products. The Company's
largest competitors among branded product manufacturers are: Jockey
International Inc. ("Jockey" and "Jockey for Her" brands), Sara Lee Corp.
("Hanes" and "Hanes Her Way" brands) and Fruit of the Loom, Inc. ("Fruit of the
Loom" and "BVD" brands) in underwear; and Sara Lee Corp. ("Hanes" and "L'eggs"
brands), Kayser-Roth Corp. ("No Nonsense" brand) and Pennaco Hosiery Inc.
("Round the Clock" brand) in women's hosiery.

      Competition in the underwear and women's hosiery products market is
generally based on price, quality and service. The Company believes that it
offers a higher level of merchandising and marketing services to retailers
implementing private brand programs.

Imports and Export Sales

      Ithaca's products compete with goods produced worldwide. Over the past
decade, US imports of underwear and hosiery have increased substantially. US
manufacturers have responded to the influx of lower cost products by shifting
production offshore. Ithaca's management believes that a significant portion of
US imports represent goods for which cut components have been shipped overseas
for assembly. Given the variety of sources for industry data and differences in
categorization, it is difficult to compare retail spending categories to
imports, but according to the American Apparel Manufacturers Association
("AAMA"), imports represented approximately 49% of underwear and 13% of sheer
hosiery sales in calendar 1997, up from approximately 29% and 5%, respectively,
in 1994. The Company believes that it is important to have the capability of
sourcing a portion of its products from outside the United States. The Company
has consolidated certain plants to off-shore facilities and has continued the
process of moving more sewing operations off-shore. The Company has established
four Honduran subsidiaries which operate three sewing plants in that country,
primarily for men's and boys' underwear and outerwear T-shirts. With respect to
women's and girls' underwear, Ithaca sources certain products from the Far East.
The Company's ability to utilize foreign sourcing is dependent on the absence of
political or economic disruptions, quotas, labor disruptions, embargoes or
currency fluctuations in the countries in which the Company sources its
products.

      Less than 1% of the Company's sales for the 52-week period ended January
31, 1998 were made to firms outside the United States. The Company believes that
changes in the level of sales outside of the United States would not have a
material adverse effect on Ithaca's Results of Operations.

Environmental Matters

      The Company believes that its facilities and operations are substantially
in compliance with current federal, state and local regulations regarding
safety, health and environmental pollution. Ithaca generally has experienced no
difficulty in complying with these regulations and such compliance has not had a
material adverse effect on the Company's capital expenditures, earnings or
competitive position.


                                     Page 6
<PAGE>

Employees

      The Company employed approximately 5,500 people as of March 31, 1998, of
which approximately 5,020 were engaged in manufacturing and approximately 480
were engaged in managerial, administrative or sales and marketing functions.
None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relations with employees to be satisfactory
and has never experienced any interruption of operations due to labor disputes.

ITEM 2. Properties

      The Company owns its corporate headquarters in Wilkesboro, North Carolina.
The Company leases sales offices in New York City and Dallas, Texas. The Company
manufactures and distributes its women's and girls' underwear at its owned
facilities in Cairo, Georgia. Cutting and distribution for men's and boys'
underwear and T-shirt products takes place at an owned centralized distribution
and cutting facility in Vidalia, Georgia. Men's and boys' underwear and
outerwear T-shirts are sewn in two owned plants in the southeastern United
States and at three facilities leased by the Company in Honduras. The Company
manufactures and distributes its women's hosiery products at two owned
facilities in North Carolina. Fabric for use in the Company's underwear and
T-shirt products is knit and finished at the Company's owned facility in
Gastonia, North Carolina and narrow fabrics, such as waistbands, are
manufactured at an owned facility in Graham, North Carolina. The Company also
utilizes leased storage facilities at several plant locations. All of the
Company's facilities are kept in good repair and have well-maintained equipment.

ITEM 3. Legal Proceedings

      From time to time the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company believes that there are no material legal proceedings pending or
threatened against the Company or any of its properties.

ITEM 4. Submission of Matters to a Vote of Holders of the Common Stock

      No matters have been submitted to a vote of the holders of Common Stock
during the fourth quarter of the Registrant's 1998 fiscal year.


                                     PART II

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

      Through the date hereof, there has been no established public trading
market for the Common Stock. Application was made to list the Common Stock on
NASDAQ National Market. This application was withdrawn because the Company was
advised by NASDAQ that it would not qualify. The company intends to reapply as
soon as it believes it meets the criteria. There can be no assurance that this
will occur or that any active trading market will develop or will be sustained
for the Common Stock or as to the price at which the Common Stock may trade or
that the market for the Common Stock will not be subject to disruptions.


                                     Page 7
<PAGE>

      On December 16, 1996, 10,000,000 shares of Common Stock were issued in
reliance upon the exemption provided by 11 USC 1145. These shares were
registered under the Securities Act of 1934, as amended, by means of a
Registration Statement on Form S-1 declared effective on April 4, 1997. An
additional 400,000 shares were issued on March 24, 1998 as part of the purchase
agreement for Glendale Hosiery, Co.

      As of April 24, 1998, there were approximately 11 holders of record of
Common Stock and there were no outstanding options or warrants to purchase, or
securities convertible into, Common Stock or Preferred Stock other than options
to purchase 927,679 shares of Common Stock, including the options granted to
Alvarez & Marsal, Inc., issuable under the Company's 1996 Long Term Stock
Incentive Plan (the "LTIP"), of which options to purchase 486,049 shares are
currently exercisable.

      The Company has not paid any cash dividends on the Common Stock and does
not anticipate that it will do so in the foreseeable future. The Credit
Agreement restricts the Company's ability to pay dividends on the Common Stock.
Any determination to pay cash dividends in the foreseeable future will be at the
discretion of the Company's Board of Directors (the "Board" or the "Board of
Directors") and will be dependent upon the Company's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
by the Board. The Company presently intends to retain earnings for working
capital and to fund capital expenditures. Accordingly, there is no present
intention to pay cash dividends on any shares of the Common Stock.


                                     Page 8
<PAGE>

ITEM 6. Selected Financial Data

      The following table sets forth selected financial information with respect
to the Company for the year ended January 31, 1998, the 10-week period ended
February 1, 1997, the 42-week period ended November 22, 1996 and each of the
three fiscal years prior to the fiscal year ended February 1, 1997 and is
derived from and should be read in conjunction with the Company's audited
Consolidated Financial Statements and related notes included in Item 8 of this
report. Net income per share for periods prior to November 22, 1996 is not
meaningful because during such periods the Company was a wholly owned subsidiary
of Ithaca Holdings, Inc.

      The selected financial information set forth below is qualified by and
should be read in conjunction with Item 8 the "Financial Statements" and the
notes thereto and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this report. The Company's
Results of Operations for the 10-week period ended February 1, 1997 and the
42-week period ended November 22, 1996 reflect the consummation of the Plan of
Reorganization and the transactions contemplated thereby and the application of
Fresh Start Reporting rules and procedures. Results of Operations of the Company
for the year ended January 31, 1998 and the 10-week period ended February 1,
1997 will generally not be comparable to the prior periods due to the effects of
the Plan of Reorganization.

<TABLE>
<CAPTION>
                                        Post-Confirmation                                     Preconfirmation
                                        -----------------            --------------------------------------------------------------
                                  
                                                     10-Week            42-Week                     Fiscal Year Ended
                                   Year Ended     Period Ended       Period Ended                       January 31,
                                  January 31,      February 1,       November 22,      --------------------------------------------
                                     1998             1997               1996             1996            1995            1994
                                     ----             ----               ----             ----            ----            ----
                                                         (Dollars in thousands)
<S>                               <C>              <C>               <C>                <C>             <C>             <C>     
Statement of Operations Data:
Net sales                          $237,021         $42,708             $297,603        $398,819        $414,800        $414,671
Gross profit                         34,653           4,487               42,060          44,882          72,859          68,072
Selling, general and                 26,052           7,354               27,670          43,486          37,075          39,711 (1)
  administrative expenses
(Recovery of) provision for              --              --               (2,964)         51,591 (2)          --              --
  asset write-downs and
  restructuring
Operating income (loss)               8,601          (2,867)              17,354         (50,195)         35,784          28,361
Interest expense - net(3)             6,875           1,385               17,489          26,905          23,147          23,455
Reorganization items                     --              --               (1,176) (4)         --              --              --
Income (loss) before income taxes     2,339          (4,157)               1,666         (76,802)         13,166           4,968
and extraordinary items
Income tax (expense) benefit          (803)           1,400               (4,218)         27,157          (5,653)         (2,086)
Income (loss) before                  1,536          (2,757)              (2,552)        (49,644)          7,513           2,882
  extraordinary item
Extraordinary item (5)                   --              --               67,924              --              --              --
Net income (loss)                  $  1,536         $(2,757)            $ 65,372        $(49,644)       $  7,513        $  2,882
                                   ========         =======             ========        ========        ========        ========
Net income (loss) per              $    .15         $ (0.28)                 n/a             n/a             n/a             n/a
                                   ========         =======             ========        ========        ========        ========
                                                                                     
Balance Sheet Data (at end
 of period) (7) :                              Post-Confirmation                                    Preconfirmation
                                               -----------------                       --------------------------------------------
Working capital (deficit)          $ 51,496        $ 63,523             $ 75,591       $(145,909)       $113,028        $123,222
Total assets                        115,990         133,687              155,993         208,642         224,471         235,997
Long-term debt exclusive of          53,519          66,069               77,255             n/a (6)     221,819         242,785
  current maturities
Total stockholders' equity           20,895          19,359               22,116         (93,558)        (43,914)        (51,427)
(deficit)
</TABLE>


                                     Page 9
<PAGE>

(1)   Includes a bad debt provision of $4 million to cover the bankruptcy of a
      major T-shirt customer during the second quarter of fiscal 1994.

(2)   In fiscal 1996 the Company initiated a restructuring plan to improve
      operating performance and reduce costs. In connection with this plan, the
      Company recorded charges totaling $51,591,000 ($33,379,000 after related
      income tax benefits). Such charges related to (i) the closing and
      consolidation of certain manufacturing and distribution facilities, (ii)
      the write-down of certain equipment associated with closed facilities,
      (iii) the write-off and establishment of reserves for inventory and
      accounts receivable associated with customers, product lines, and specific
      products that the Company elected to discontinue manufacturing and
      distributing, (iv) severance and other costs associated with plant
      closures and overhead reductions, and (v) the write-off of certain
      impaired intangible assets.

(3)   Principally includes interest expense on long-term debt and amortization
      of deferred debt expense, offset by interest income from the short-term
      investment of excess cash. During the period from August 29, 1996 through
      November 22, 1996, the Company did not accrue interest on the Senior
      Subordinated Notes due 2002 which were canceled in connection with the
      Plan of Reorganization.

(4)   Reorganization items for the 42-week period ended November 22, 1996
      include $3,765,000 of adjustments to record assets and liabilities at fair
      value in connection with the application of Fresh Start Reporting.

(5)   Gain on debt discharge (net of income tax expense of $23,056,000) pursuant
      to confirmation of Plan of Reorganization at November 22, 1996.

(6)   Due to continuing covenant violations, temporary waivers granted and
      events of default, as further discussed in "Management's Discussion and
      Analysis," all of the Company's outstanding debt was classified as current
      at February 2, 1996.

(7)   Amounts prior to November 22, 1996 do no reflect the consummation of the
      Plan of Reorganization.

(8)   Net income (loss) per share amounts for periods prior to the Plan of
      Reorganization effective date of November 22, 1996 are not presented since
      they do not reflect the new capitalization using fresh start reporting.


                                    Page 10
<PAGE>

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation

General

      The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related notes included in Item 8 of
this report.

      The following table sets forth the percentage relationship to total net
sales of certain items included in the Company's Statements of Operations:

<TABLE>
<CAPTION>
                                            Post-Confirmation                                       Preconfirmation                
                                            -----------------                                       ---------------                
                                 Fiscal Year Ended      10-Week Period Ended        42-Week Period Ended         Fiscal Year Ended
                                 January, 31, 1998        February 1, 1997            November 22, 1996          January 31, 1996
                                 -----------------        ----------------            -----------------          ----------------
<S>                              <C>                    <C>                         <C>                          <C>  
Net sales:                       
    Men's & boys' underwear            61.8%                    51.2%                       56.4%                      52.0%
     and T-shirts                
    Women's and girls'                 13.5                     17.1                        17.2                       18.7
       underwear                 
    Women's hosiery                    21.3                     28.6                        24.5                       27.3
    Other                               3.4                      3.1                         1.9                        2.0
                                 --------------------- ------------------------   --------------------------  ---------------------
       Total                          100.0%                   100.0%                      100.0%                     100.0%
    Cost of sales                      85.4%                    89.5%                       85.9%                      88.7%
                                 --------------------- ------------------------   --------------------------  ---------------------
Gross profit                           14.6                     10.5                        14.1                       11.3
                                 
Selling, general and                   11.0                     17.2                         9.3                       10.9
    administrative expenses      
(Recovery of) provisions for             --                       --                        (1.0)%                     12.9%
    asset write-downs and        
    restructuring                
                                 --------------------- ------------------------   --------------------------  ---------------------
Operating income (loss)                 3.6                     (6.7)                        5.8                      (12.6)
Interest expense-net                   (2.9)                    (3.2)                       (5.9)                      (6.6)
Other net                               0.3                      0.2                         0.2                         --
Reorganization items                     --                       --                         0.4                         --
                                 --------------------- ------------------------   --------------------------  ---------------------
Income (loss) before                    1.0                     (9.7)                        0.5                      (19.2)
    income taxes and             
    extraordinary items          
Income tax (expense)                   (0.4)                     3.3                        (1.4)                       6.8
    benefit                          
Extraordinary item-gain                 --                       --                         22.8                        --
    on debt discharge            
                                 --------------------- ------------------------   --------------------------  ---------------------
    Net income (loss)                   0.6%                    (6.4)%                      21.9%                     (12.4)%
                                 ===================== ========================   ==========================  =====================
</TABLE>


                                    Page 11
<PAGE>

Results of Operations

Comparison of fiscal 1998 to the combined 10-week period ended February 1, 1997
and the 42-week period ended November 22, 1996.

      Net sales declined 30% to $237.0 million. This decline reflected, in part,
the Company's previously announced decision to exit unprofitable lines of
business. Sales of continuing products also decreased reflecting lower sales to
the Company's major customers. The 1998 fiscal year's revenue included $5.3
million in sales of discontinued products compared to $45.5 million in the
comparable period last year. Men's and boys' underwear and T-shirt sales were
down 22.8%, women's and girls' underwear sales were down 45.3% and women's
hosiery sales were down 40.6%. Unit volume was down 35.3% with men's and boys'
underwear and T-shirts down 23.7%, women's and girls' underwear down 48.6% and
women's hosiery down 41.1%. The average selling price per dozen for fiscal 1998
was $21.89 versus $20.32 in the comparable period last year, primarily
reflecting a change in the mix among product lines. There were no significant
pricing changes to the Company's customers during fiscal 1998.

      Gross profit declined $11.9 million or 25.6% as compared to the comparable
period last year as a direct result of the lower sales volume. Gross profit
margins for fiscal 1998 improved to 14.6% of net sales from 13.7% in the prior
period. The improved margins resulted from the elimination of revenues with low
gross margins, the continuing emphasis of moving production to lower-cost,
offshore locations, and decreased depreciation expense as a result of fresh
start reporting.

      Selling, general and administrative expenses decreased by $9.0 million or
25.7% in fiscal 1998 versus the comparable period last year. This decrease was a
result of reduced employee related costs and reduced overhead support cost for
the discontinued sales revenues. As a percentage of net sales, selling, general
and administrative expense increased to 11.0% in fiscal 1998 against 10.3% in
the comparable period last year reflecting the impact of lower sales on
operating leverage.

      Net interest expense fell to $6.9 million for fiscal 1998, a decrease of
$12.0 million or 63.4% for the comparable period last year. This decrease
resulted from the conversion of $125 million of senior subordinated notes into
common stock as part of the Company's financial restructuring, which was
recorded on November 22, 1996, and lower average levels of borrowings.

      The income tax expense for fiscal 1998 was 34% of income before income
taxes compared to a benefit of 34% on the pre-tax loss incurred in the prior
year's post confirmation period.

Comparison of the 10-week period ended February 1, 1997 to the 10-week period
ended February 2, 1996.

      Net sales declined 33.0% to $42.7 million in the 10-week period ended
February 1, 1997, from $63.7 million in the 10-week period ended February 2,
1996. Men's and boys' underwear and T-shirt sales were down 30.8%, women's and
girls' underwear sales were down 34.2% and women's hosiery sales were down
36.4%. Unit volume was down 29.8% with men's and boys' underwear and T-shirts
down 20.3%, women's and girls' underwear down 39.8% and women's hosiery down
32.0%. The average selling price per dozen in the 10-week period ended February
1, 


                                    Page 12
<PAGE>

1997 decreased to $18.75 from $19.63 in the comparable prior period, primarily
reflecting a change in the mix among product lines.

      The sales declines reflect, in part, the implementation of the Company's
Business Plan, which was designed in part to eliminate unprofitable products.
While the Company does not consider its business to be seasonal, the relative
level of sales for the 10-week period ended February 1, 1997, proportionate to
the Company's sales in other periods, is consistent with the Company's past
experience as that period is traditionally a period of relatively low sales
activity. The sales level is not believed to be representative of the Company's
sales level and financial results on an annualized basis. Net sales in the
10-week period ended February 1, 1997 included approximately $3.8 million of
sales resulting from the wind-down of discontinued products, which will not
recur in future periods. Sales of discontinued products were not included in the
projections made in the Business Plan as it only included sales of products
which the Company intended to sell in future periods.

      Gross profit, excluding provisions for asset write-down and restructuring
charges incurred in the 10-week period ended February 2, 1996, increased by $4.7
million from ($0.2) million to $4.5 million during the 10-week period ended
February 1, 1997, compared to the 10-week period ended February 2, 1996; with
gross margin improving to 10.5% of sales from (0.3%) in the comparable prior
period, as product costs fell proportionately faster than the sales decline. The
improved gross margin was principally attributable to lower costs of production
resulting from the offshore sourcing of men's and boys' underwear and outerwear
T-shirts and women's and girls' underwear and improved efficiencies in hosiery
operations.

      The Company recorded provisions for workforce reductions and asset
write-downs of $37.4 million in the 10-week period ended February 2, 1996. There
were no provisions for workforce reductions and asset write-downs in the 10-week
period ended February 1, 1997.

      Selling, general, and administrative expenses, excluding the provisions
for workforce reductions and asset write-downs incurred in the 10-week period
ended February 2, 1996, decreased by $2.3 million (23.2%) in the 10-week period
ended February 1, 1997 to $7.3 million from $9.5 million in the 10-week period
ended February 2, 1996. Shipping expense was $1.6 million lower in the 10-week
period ended February 1, 1997 as compared to the 10-week period ended February
2, 1996. Lower shipping costs were realized, in part, because during the 10-week
period ended February 1, 1997 the Company's consolidated distribution centers
were fully operational, while in the comparable prior period, the Company's
consolidated distribution centers could not be fully utilized. In addition, the
Company experienced lower sales levels in the current period compared to the
comparable prior period. Selling costs were $1.4 million lower in the current
period, reflecting staffing reductions implemented early in fiscal 1997.

      Interest expense, net of interest income, decreased to $1.4 million in the
10-week period ended February 1, 1997 compared to $4.9 million in the 10-week
period ended February 2, 1996. The decrease in the 10-week period ended February
1, 1997, compared to the 10-week period ended February 2, 1996, was due to lower
average borrowings, including the effect of the retirement of the Notes pursuant
to the Plan of Reorganization, partially offset by higher interest rates.


                                    Page 13
<PAGE>

      The income tax benefit in the 10-week period ended February 1, 1997 was
34% of the loss before income taxes, compared to a benefit of 46% of the loss
before income taxes in the 10-week period ended February 2, 1996.

Comparison of 42-week period ended November 22, 1996 to 43-week period ended
November 24, 1995.

      Net sales declined 11.2% to $297.6 million in the 42-week period ended
November 22, 1996 from $335.1 million in the 43-week period ended November 24,
1995. Men's and boys' underwear sales were up 1.2%; women's and girls' underwear
sales were down 19.5% and women's hosiery sales were down 18.8%. Outerwear
T-shirts sales decreased 16.6%. Unit volume was down 12.9% with men's and boys'
underwear down 3.3%, women's and girls' underwear down 18.6% and women's hosiery
down 17.3%, and outerwear T-shirt volume down 18.7%. The average selling price
per dozen in the 42-week period ended November 22, 1996 increased to $20.57 from
$20.18, primarily reflecting a mix change among product lines.

      The sales declines reflected, in part, the implementation of the Company's
Business Plan which was designed, among other objectives, to eliminate
unprofitable products. Net sales in the 42-week period ended November 22, 1996
included $39.9 million of sales resulting from the wind-down of discontinued
products, which will not recur in future periods. These sales of discontinued
products were not included in the Business Plan which reflected only sales of
products that the Company intends to continue selling.

      Gross profit declined $3.0 million or 6.6% during the 42-week period ended
November 22, 1996 compared to the 43-week period ended November 24, 1995;
however, gross margin improved to 14.1% of sales from 13.4% in the prior period,
as product costs fell proportionately faster than the sales decline. The
improved gross margin was attributable to lower costs from offshore sourcing of
men's and boys' underwear and women's and girls' underwear. In the 42-week
period ended November 22, 1996, the Company reduced its excess domestic
manufacturing capacity in the men's and boys' underwear, women's and girls'
underwear and outerwear T-Shirt divisions by closing plants. Approximately 1,500
manufacturing and overhead jobs were eliminated by these closings in the 42-week
period ended November 22, 1996. Women's hosiery was favorably impacted by
improved production efficiency and progress in eliminating unprofitable
products.

      The Company recorded a reversal in the 42-week period ended November 22,
1996 of $3.0 million of asset writedowns taken during fiscal 1996 (related to
recovery of receivables previously identified as impaired assets) compared to
provisions for workforce reductions and assets writedown of $14.2 million in the
43-week period ended November 24, 1995.

      Selling, general and administrative expenses decreased by $6.3 million
(18.5%) in the 42-week period ended November 22, 1996 to $27.7 million from
$34.0 million in 43-week period ended November 24, 1995, which represented a
decrease from 10.9% as a percentage of sales in the 43-week period ended
November 24, 1995 to 9.3% as a percentage of sales in the 42-week period ended
November 22, 1996. The primary component of this decrease was lower employee
related costs, resulting from headcount reductions early in fiscal 1997.
Shipping expense was $2.0 million lower in the current period reflecting
operation of the consolidated distribution centers in the current period
compared with the transition to these distribution centers in the prior period


                                    Page 14
<PAGE>

and lower sales levels in the 42-week period ended November 22, 1996 as compared
to the 43-week period ended November 24, 1995.

      Interest expense, net of interest income, decreased to $17.5 million for
the 42-week period ended November 22, 1996 compared to $22.0 million in fiscal
1996. The decrease in the 42-week period ended November 22, 1996 was due to
nonaccrual of bondholder interest after August 29, 1996 ($3.2 million lower than
the 43-week period ended November 24, 1995) and lower average borrowings in
fiscal 1997, partially offset by higher interest rates during the period.

      Income tax expense in the 42-week period ended November 22, 1996 was
253.3% of income before income taxes, compared to 35.3% in full year fiscal
1996. The increase is due primarily to the provision for deferred tax
liabilities resulting from tax bases reductions in connection with the gain from
the debt discharge associated with the confirmation of the Plan of
Reorganization and to the non-deductibility of certain restructuring charges.

Liquidity and Capital Resources

      On March 24, 1998, the Company completed the acquisition of Glendale
Hosiery Company for a combination of stock, cash and the assumption of certain
indebtedness. In conjunction with the acquisition, the Company's existing Credit
Agreement was replaced by a $110.0 million new credit facility. One part of the
new facility provides for a term loan ("Term Loan") of $25.0 million and a
revolving loan facility of up to $70.0 million. A separate part of the new
credit facility provides for an additional $15.0 million term loan. The
revolving loan facility includes a sub-limit of $15.0 million for the issuance
of letters of credit. As of April 15, 1998, the Company had $39.8 million of
Term Loans outstanding, $29.5 million of borrowings under the revolving loan
facility, and $5.0 million of outstanding letters of credit. The Company at
April 15, 1998 had $ 21.9 million of availability under its revolving loan
facility.

      At January 31, 1998 the Company's net working capital was $51.5 million
and the current ratio was 2.8:1. At February 1, 1997 the Company's net working
capital was $63.5 million and the current ratio was 2.9:1. The Company reported
a working capital deficit at the end of fiscal 1996 because of the presentation
of substantially all outstanding debt as currently payable. The calculation of a
current ratio under such circumstance would not be meaningful.

      Capital additions were $ 4.2 million for the fiscal year ended January 31,
1998 and were related primarily to purchases of machinery and equipment. Capital
additions of the comparable prior year period were $ 4.0 million and were also
primarily related to purchases of machinery and equipment. In fiscal year 1996,
capital additions of $ 13.9 million related principally to the Company's new
centralized distribution facilities.

      The Company's cash on hand as of January 31, 1998 was $0.7 million
compared with $0.1 million at February 1, 1997. The increase in cash was due to
slightly higher bank balances from outstanding bank borrowings.

      Inflation has had only a minimal impact on the Company in the past. The
Company has minimized the impact of inflation on costs and expenses through cost
controls and increased manufacturing efficiency. The Company has at times
experienced some increase in the cost of labor, supplies, raw materials and
administrative expenses. The Company is not always able to 


                                    Page 15
<PAGE>

promptly pass on cost increases to its customers, principally due to time of raw
materials purchases and customer orders as well as competitive pressures.

Impact of Year 2000 ("Y2K")

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

      The Company's focus and goal has been to identify all Y2K issues and to
develop plans to resolve those issues. The primary plan for remediation of the
Company's legacy systems, is to replace those systems as part of its overall
implementation of its Enterprise Resource Planning ("ERP") system. The ERP
project is supervised and supported by senior management. Areas outside the
scope of the ERP project such as time clocks, phone systems and manufacturing
machines, are also being addressed.

      The project is estimated to be completed not later than March 31, 1999,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and a conversion to new
software, the Y2K issue will not pose significant operational problems for its
computer systems. However, if such modifications and conversions are not made,
or are not completed timely, the Y2K issue could have a material impact on the
operations of the Company.

      The Company has had formal communications with its major customers and
suppliers regarding standardizing systems for Y2K compliance. There is no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.

      The incremental cost of the Y2K project is not material and the date on
which the Company believes it will complete the Y2K modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and costs of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.

Financial Condition

      On October 8, 1996 the company filed a voluntary petition for
reorganization under Chapter 11 with the Bankruptcy Court. The filing of the
voluntary petition resulted from a sequence of events stemming from the
Company's default under the Credit Agreement.

      The Company emerged from bankruptcy on December 16, 1996 and a final order
was issued by the Bankruptcy Court on April 7, 1997. Pursuant to the Plan of
Reorganization, the Company has repaid all of the secured and unsecured claims
allowed by the Bankruptcy Court as 


                                    Page 16
<PAGE>

follows: general unsecured claims were satisfied in the ordinary course of
business. Noteholder claimants received the right to a pro rata share of
10,000,000 shares of Ithaca Common Stock (representing, in the aggregate, all of
the outstanding shares of Ithaca Common Stock except for Common Stock issued
pursuant to the LTIP). Prior equity interests in the Company were canceled,
annulled and extinguished. Administrative claims were paid in full, in cash, in
the ordinary course of business. Tax claims were paid in full. Priority claims
were paid in full. The Credit Agreement was amended and restated. General
secured claims were paid in full. Each holder of an allowed general secured
claim was either paid in full on December 16, 1996 (or the date upon which there
is a final order allowing such claim as an allowed secured claim), or was
otherwise to be rendered unimpaired.

Business Plan

      In the third and fourth quarters of fiscal 1996 the Company undertook an
extensive review of its manufacturing capacity, overhead structure, product
lines and customer base. The Company analyzed its strategic plans in connection
with the utilization of its plants located in Honduras, as well as obtaining
products from other foreign sources. These efforts resulted in the promulgation
of the Business Plan. In general, to enhance its performance and reduce overhead
expenses, the Company consolidated its distribution centers and production
capacity to increase efficiencies, consolidated certain plants to off-shore
facilities and accelerated the process of moving more sewing operations
off-shore. As part of the implementation of the Business Plan, the Company
terminated certain real property leases and unprofitable license agreements, and
made certain payments in connection therewith. In addition, the Company reduced
the number of styles and products it produced, eliminated certain unprofitable
customers and product lines, began the process of establishing Far East
outsourcing capability and closed selected plants. Beginning in fiscal 1998, the
Company has been unable to obtain the level of sales revenue anticipated by the
Business Plan and was unable to achieve the Operating Results set forth in the
Business Plan. The Company believes this resulted from customers' reluctance to
place new or additional programs with the Company while it was implementing its
financial restructuring as well as increased pressure from the Company's
competitors to place programs with both existing and potential new customers.

      The Company has previously made its Business Plan, which contained
projections regarding the Company's future net sales and operating income,
publicly available. Projections contained in the Business Plan were not prepared
with a view to complying with published guidelines of the Commission nor with
the accounting profession's principles regarding projections. In addition, such
information was based on a number of assumptions and was subject to significant
uncertainties and contingencies, many of which are beyond the Company's control.
Further, the Business Plan did not reflect any tax expense or credits during the
projection period, and utilized asset and liability valuations from the
Company's Historical Financial Statements, modified for the impact of the
exchange of the Notes for equity and the resultant elimination of bondholder
interest during the projection period. Such information does not reflect the
impact of Fresh Start accounting rules, does not conform to generally accepted
accounting principles, and constitutes Forward Looking Statements under the
Reform Act as discussed on the first page of this report.


                                    Page 17
<PAGE>

      ITEM 8. Financial Statements and Supplementary Data


                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                          Index to Financial Statements

                                                                            Page
                                                                            ----

Independent Auditors' Report................................................  19

Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997.....  20

Consolidated Statements of Operations for the Year ended January 31, 
    1998; the 10-Week Period ended February 1, 1997; the 42-Week 
    Period ended November 22, 1996; and for the Year ended February 
    2, 1996.................................................................  21

Consolidated Statements of Stockholders' Equity (Deficit) for the Year 
    ended January 31, 1998; the 10-Week Period ended February 1, 1997; 
    the 42-Week Period ended November 22, 1996; and for the Year ended 
    February 2, 1996........................................................  22

Consolidated Statements of Cash Flows for the Year ended January 31, 1998; 
    the 10-Week Period ended February 1, 1997; the 42-Week Period ended
    November 22, 1996; and for the Year ended February 2, 1996..............  23

Notes to Consolidated Financial Statements..................................  25


                                    Page 18
<PAGE>


                          Independent Auditors' Report


The Board of Directors
Ithaca Industries, Inc.:


We have audited the accompanying consolidated balance sheets of Ithaca
Industries, Inc. and subsidiaries as of January 31, 1998 and February 1, 1997,
and the related consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the year ended January 31, 1998; the 10-week
period ended February 1, 1997; the 42-week period ended November 22, 1996; and
the year ended February 2, 1996. In connection with our audits, we have also
audited the related financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ithaca Industries,
Inc. and subsidiaries as of January 31, 1998 and February 1, 1997, and the
results of their operations and their cash flows for the year ended January 31,
1998; the 10-week period ended February 1, 1997; the 42-week period ended
November 22, 1996; and the year ended February 2, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.

On December 16, 1996, the Company emerged from bankruptcy. As described in note
1 to the consolidated financial statements, the Company accounted for the
reorganization as of November 22, 1996 and adopted fresh-start reporting in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7, Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code. As a result, the consolidated financial statements as of
January 31, 1998 and the year then ended and as of February 1, 1997 and for the
ten-week period then ended present the financial position, results of
operations, and cash flows of the reorganized entity and are, therefore, not
comparable to the consolidated financial statements for periods prior to the
Company's emergence from bankruptcy.

                                                           KPMG PEAT MARWICK LLP

Atlanta, Georgia
March 27, 1998


                                    Page 19
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
                           Consolidated Balance Sheets
                      January 31, 1998 and February 1, 1997
                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                                  January 31,    February 1,
                        Assets (Note 5)                               1998           1997
                                                                  -----------    -----------
<S>                                                               <C>            <C>        
Current assets:
  Cash and cash equivalents                                       $       680    $        66
  Trade accounts receivable, net of allowance for
    doubtful accounts of $765 at January 31, 1998
    and $1,256 at February 1, 1997 (note 8)                            21,561         26,486
  Inventories (note 3)                                                 57,036         65,680
  Prepaid expenses and other current assets                               454            876
  Assets held for disposition, net of estimated
    reserves  (notes 3 and 12)                                            213          3,755
                                                                  -----------    -----------
           Total current assets                                        79,944         96,863
                                                                  -----------    -----------

Net property, plant, and equipment (note 4)                            34,115         35,531

Other assets:
  Intangible assets, net of accumulated amortization
    of $374 and $91 at January 31, 1998 and February 1,
    1997, respectively                                                    980            362
  Other, net                                                              951            931
                                                                  -----------    -----------
                                                                  $   115,990    $   133,687
                                                                  ===========    ===========

                  Liabilities and Stockholders' Equity
  Current liabilities:

    Current installments of long-term debt (notes 5, 9, and 13)   $        13    $        70
    Accounts payable                                                   10,102         10,742
    Accrued payroll and related expenses                                7,860         11,396
    Accrued restructuring costs (note 12)                                 995          2,106
    Income taxes payable (note 6)                                       3,667          3,073
    Deferred income taxes (note 6)                                      4,424          2,255
    Other accrued expenses                                              1,387          3,698
                                                                  -----------    -----------
           Total current liabilities                                   28,448         33,340
Long-term debt, excluding current installments, due to
    related parties (notes 5, 9, and 13)                               20,036          9,710
Long-term debt, excluding current installments (notes 5, 9,
    and 13)                                                            33,483         56,359
Deferred income taxes (note 6)                                         13,128         14,919
                                                                  -----------    -----------
           Total liabilities                                           95,095        114,328
                                                                  -----------    -----------
Stockholders' equity (deficit):
    Preferred stock, $.01 par value 2,500,000 shares
      authorized, none issued                                              --             --
    Common stock of $.01 par value; authorized 27,500,000
      shares; issued and outstanding 10,000,000 shares at
      January 31, 1998 and February 1, 1997                               100            100
    Additional paid-in capital                                         22,016         22,016
    Accumulated deficit                                                (1,221)        (2,757)
                                                                  -----------    -----------
           Total stockholders' equity                                  20,895         19,359
                                                                  
      Commitments and contingencies (notes 5, 8, 10, and 11)      -----------    -----------
                                                                  $   115,990    $   133,687
                                                                  ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                    Page 20
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

                   Year ended January 31, 1998; 10-Week Period
                  ended February 1, 1997; 42-Week Period ended
               November 22, 1996; and Year ended February 2, 1996

                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                     Post-confirmation               Preconfirmation
                                                                     -----------------               ---------------
                                                                   Year          10-Week          42-Week
                                                                   ended      Period ended     Period ended    Year ended
                                                                January 31,    February 1,     November 22,    February 2,
                                                                   1998            1997            1996            1996
                                                                   ----            ----            ----            ----
<S>             <C>                                            <C>             <C>             <C>             <C>         
Net sales (note 8)                                             $    237,021    $     42,708    $    297,603    $    398,819
Cost of sales (note 3)                                              202,368          38,221         255,543         353,937
                                                               ------------    ------------    ------------    ------------
           Gross profit                                              34,653           4,487          42,060          44,882

Selling, general, and administrative expenses
    (notes 7, 10, and 11)                                            26,052           7,354          27,670          43,486
(Recovery of) provision for asset write-downs and
    restructuring (note 12)                                              --              --          (2,964)         51,591
                                                               ------------    ------------    ------------    ------------
           Operating income (loss)                                    8,601          (2,867)         17,354         (50,195)
                                                               ------------    ------------    ------------    ------------

Other income (deductions):
    Interest expense - related parties (contractual interest
      of $3,252 at November 22, 1996)                                (1,781)           (196)         (2,597)         (3,918)
    Interest and other, net of interest income of $95,
      $81, $164, and $237, at January 31, 1998;
      February 1, 1997; November 22, 1996; and
      February 2, 1996, respectively (contractual
      interest of $17,512 at November 22, 1996)                      (5,094)         (1,189)        (14,892)        (22,987)
    Other, net                                                          613              95             625             299
                                                               ------------    ------------    ------------    ------------
                                                                     (6,262)         (1,290)        (16,864)        (26,606)
                                                               ------------    ------------    ------------    ------------
           Income (loss) before reorganization items,
               income taxes, and extraordinary item                   2,339          (4,157)            490         (76,801)

Reorganization items:
    Adjustments to fair value                                            --              --           3,765              --
    Professional fees and other                                          --              --          (2,589)             --
                                                               ------------    ------------    ------------    ------------
           Income (loss) before income taxes
               and extraordinary item                                 2,339          (4,157)          1,666         (76,801)

Income tax (expense) benefit (note 6)                                  (803)          1,400          (4,218)         27,157
                                                               ------------    ------------    ------------    ------------
           Income (loss) before extraordinary item                    1,536          (2,757)         (2,552)        (49,644)

Extraordinary item - gain on debt discharge of $90,980
    before income taxes of $23,056 at November 22,
    1996 (notes 1 and 6)                                                 --              --          67,924              --
                                                               ------------    ------------    ------------    ------------

           Net income (loss)                                   $      1,536    $     (2,757)   $     65,372    $    (49,644)
                                                               ============    ============    ============    ============

Basic and dilutive net income (loss) per common share          $        .15    $       (.28)                               
                                                               ============    ============                                

Weighted-average common shares outstanding                       10,000,000      10,000,000                                
                                                               ============    ============                                
</TABLE>


See accompanying notes to consolidated financial statements.


                                    Page 21
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

            Consolidated Statements of Stockholders' Equity (Deficit)

                   Year ended January 31, 1998; 10-Week Period
                  ended February 1, 1997; 42-Week Period ended
               November 22, 1996; and Year ended February 2, 1996

                        (In thousands, except share data)

<TABLE>
<CAPTION>
                                                         Shares                                                         Total
                                             ----------------------------                Additional     Retained     stockholders'
                                                                  Post-       Common       paid-in      earnings       equity
                                             Preconfirmation  confirmation    stock        capital      (deficit)     (deficit)
                                             ---------------  ------------    -----        -------      ---------     ---------
<S>                                          <C>              <C>           <C>          <C>           <C>           <C>
Balance at January 27, 1995                           1,000            --   $       --   $    9,000    $  (52,914)   $  (43,914)
Net loss                                                 --            --           --           --       (49,644)      (49,644)
                                             --------------    ----------   ----------   ----------    ----------    ----------
Balance at February 2, 1996                           1,000            --           --        9,000      (102,558)      (93,558)

Net income for 42-week period ended
    November 22, 1996 (Preconfirmation)                  --            --           --       65,372        65,372
Effect of reorganization:
    Elimination of accumulated deficit                   --            --           --       37,186        37,186
    Cancellation of preconfirmation shares           (1,000)           --           --       (9,000)           --        (9,000)
    Issuance of post-confirmation shares                 --    10,000,000          100       22,016            --        22,116
                                             --------------    ----------   ----------   ----------    ----------    ----------
Balance at November 22, 1996
    (Post-Confirmation)                                  --    10,000,000          100       22,016            --        22,116

Net loss for 10-week period ended
    February 1, 1997                                     --            --           --           --        (2,757)       (2,757)
                                             --------------    ----------   ----------   ----------    ----------    ----------
Balance at February 1, 1997                              --    10,000,000          100       22,016        (2,757)       19,359

Net income for year ended January 31, 1998               --            --           --           --         1,536         1,536
                                             --------------    ----------   ----------   ----------    ----------    ----------

Balance at January 31, 1998                              --    10,000,000   $      100   $   22,016    $   (1,221)   $   20,895
                                             ==============    ==========   ==========   ==========    ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.


                                    Page 22
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                   Year ended January 31, 1998; 10-Week Period
                  ended February 1, 1997; 42-Week Period ended
               November 22, 1996; and Year ended February 2, 1996

                                 (In thousands)

<TABLE>
<CAPTION>
                                                                 Post-confirmation                Preconfirmation
                                                             --------------------------    --------------------------
                                                                              10-Week        42-Week
                                                             Year ended    Period ended    Period ended    Year ended
                                                             January 31,    February 1,    November 22,   February 2,
                                                                1998           1997           1996           1996
                                                             -----------    -----------    -----------    -----------
<S>                                                          <C>            <C>            <C>            <C>         
Cash provided by operating activities:
    Net income (loss)                                        $     1,536    $    (2,757)   $    65,372    $   (49,644)
    Adjustments to reconcile net income (loss) to net
      cash provided by operations:
        (Recovery of) provision for asset write-downs
          and restructuring                                           --             --         (2,964)        40,623
        Gain on debt discharge                                        --             --        (90,980)            --
        Net adjustments in accounts for fair value                    --             --         (3,765)            --
        Provision for reorganization items                            --             --          2,589             --
        Depreciation and amortization of property,
          plant, and equipment                                     5,038            853          6,936          8,713
        Provision for (recovery of) doubtful accounts               (491)          (252)           293             --
        Amortization of intangible assets, deferred debt
          expense, and discount on subordinated notes                374             91          1,568          5,521
        Provision for deferred taxes                                 378         (1,396)        31,578        (15,486)
        (Gain) loss on sale of property, plant, and
          equipment                                                 (153)            --           (292)            22
        Changes in operating assets and liabilities before
          the effects of restructuring reclassifications:
            Trade accounts receivable                              5,416         19,108        (13,011)         4,668
            Inventories                                            8,644          3,026           (646)        12,071
            Prepaid expenses and other assets                       (590)          (264)        14,204        (13,495)
            Assets held for disposition                            3,542           (781)        18,523             --
            Accounts payable                                        (640)        (1,744)        (3,928)          (725)
            Accrued payroll and related expenses                  (3,536)        (3,347)         4,408           (941)
            Other accrued expenses                                (2,828)        (1,811)         1,469          6,390
                                                             -----------    -----------    -----------    -----------
               Net cash provided by (used in)
                  operating activities                            16,690         10,726         31,354         (2,283)
                                                             -----------    -----------    -----------    -----------

Cash flows from investing activities:
    Proceeds from sale of property, plant, and equipment             740             59            949            219
    Additions to property, plant, and equipment                   (4,209)          (797)        (3,248)       (13,887)
    Decrease (increase) in other assets                               --             --             --          1,251
                                                             -----------    -----------    -----------    -----------
               Net cash used in investing activities              (3,469)          (738)        (2,299)       (12,417)
                                                             -----------    -----------    -----------    -----------
</TABLE>


                                    Page 23
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                                 (In thousands)

<TABLE>
<CAPTION>
                                                           Post-confirmation              Preconfirmation
                                                      --------------------------    --------------------------
                                                                       10-Week        42-Week
                                                      Year ended    Period ended   Period ended    Year ended
                                                      January 31,    February 1,    November 22,   February 2,
                                                          1998           1997           1996           1996
                                                      -----------    -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>            <C>         
Cash flows from financing activities:
    Repayment of long-term debt                       $   (12,607)   $   (11,251)   $   (38,095)   $   (19,462)
    Proceeds from long-term debt                               --             --             --         37,000
                                                      -----------    -----------    -----------    -----------
               Net cash (used in) provided by
                  financing activities                    (12,607)       (11,251)       (38,095)        17,538
                                                      -----------    -----------    -----------    -----------

               Net increase (decrease) in cash and
                  cash equivalents                            614         (1,263)        (9,040)         2,838

Cash and cash equivalents at beginning of period               66          1,329         10,369          7,531
                                                      -----------    -----------    -----------    -----------

Cash and cash equivalents at end of period            $       680    $        66    $     1,329    $    10,369
                                                      ===========    ===========    ===========    ===========

Supplemental disclosures - net cash paid (received)
    during the period for:
      Income taxes                                    $      (165)   $      (360)   $   (16,835)   $     1,224
                                                      ===========    ===========    ===========    ===========

      Interest paid to related parties                $     1,782    $       301    $       379    $     2,654
                                                      ===========    ===========    ===========    ===========

      Interest paid to others                         $     4,450    $     1,690    $     7,632    $    16,309
                                                      ===========    ===========    ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.


                                    Page 24
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                      January 31, 1998 and February 1, 1997

                        (In thousands, except share data)


(1)   Reorganization and Emergence from Chapter 11 Bankruptcy

      On December 16, 1996 (the "Effective Date"), Ithaca Industries, Inc. (the
      "Company") emerged from proceedings under Chapter 11 of the United States
      Bankruptcy Code ("Chapter 11") pursuant to a Prepackaged Chapter 11 Plan
      of Reorganization (the "Plan"), which was confirmed by United States
      Bankruptcy Court for the District of Delaware (the "Bankruptcy Court") on
      November 22, 1996 (the "Confirmation Date"). The Plan implemented a
      financial restructuring whereby approximately $125,000 ($124,625, net of
      original issue discount) of previously outstanding Senior Subordinated
      Notes (the "Notes") and related accrued interest, which were subject to
      settlement under the Plan were exchanged for approximately 10,000,000
      shares of new common stock (the "Common Stock") issued by the Company in
      connection with the reorganization. Additionally, the Company's Credit
      Agreement was amended and restructured. The restructured long-term debt
      outstanding after consummation of the Plan is secured by substantially all
      of the assets of the Company. All previously outstanding common stock was
      canceled, annulled, and extinguished.

      Pursuant to the Plan, the Company's certificate of incorporation and
      bylaws were amended and restated in their entirety by the Amended and
      Restated Certificate of Incorporation (the "Certificate") and the Amended
      and Restated Bylaws (the "Bylaws") to provide, among other things, for the
      restructuring of the Company's equity capitalization under the Plan. As of
      the Effective Date of the Plan, the Company was authorized to issue
      27,500,000 of the Company's $.01 par value, common stock of which an
      aggregate of 10,000,000 shares was issued and distributed pursuant to the
      Plan. An aggregate of 928,962 shares of common stock was reserved for
      issuance pursuant to the 1996 Long-Term Stock Incentive Plan (the "Stock
      Plan").

      The Company's Certificate authorized 2,500,000 shares of preferred stock
      with $.01 par value. The Board of Directors is authorized, upon two-thirds
      affirmative vote, to issue preferred stock subject to restrictions
      contained in the Amended and Restated Credit Agreement ("Amended
      Agreement"), in one or more series, for any purpose permitted by law, and
      is authorized to fix the designations, power, rights, and preferences of
      the preferred stock. The Certificate provides that the Company will not
      issue any nonvoting equity securities to the extent prohibited by the
      Bankruptcy Code. The Certificate may be amended in accordance with
      applicable law to remove the prohibition.

      During fiscal 1996, as a result of diminished operating performance and
      profitability, the Company incurred covenant defaults under the Credit
      Agreement. In addition, the Company did not make the December 15, 1995 and
      June 15, 1996 scheduled interest payments due on the Notes or scheduled
      quarterly principal payments due under the Credit Agreement on January 31,
      April 30, and July 31, 1996. As a result of negotiations between the
      Company's creditors, owners, and management, the parties agreed to effect
      a financial restructuring and, accordingly, on October 8, 1996 (the
      "Petition Date"), the Company filed a voluntary petition for relief under
      Chapter 11 in the Bankruptcy Court. The Company filed the Plan to
      consummate a financial restructuring that had been negotiated among the
      Company, its Noteholders and parties to the Credit Agreement, and the sole
      stockholder of the Company's outstanding stock. The Company was operated
      as a debtor-in-possession subject to the supervision of the Bankruptcy
      Court until December 16, 1996.


                                    Page 25
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


      The Company continued to pay its trade creditors and other debt
      obligations in the ordinary course of business while under the supervision
      of the Bankruptcy Court.

      Fresh-Start Reporting

      For financial reporting purposes, the effective date of the Company's
      emergence from Chapter 11 was assumed to be November 22, 1996. In
      accordance with AICPA Statement of Position 90-7, Financial Reporting by
      Entities in Reorganization Under the Bankruptcy Code ("SOP 90-7"), the
      Company adopted "Fresh-Start Reporting," including the terms of the
      Amended Agreement and reflected the effects of such adoption in the
      consolidated financial statements as of November 22, 1996. The
      Post-Confirmation consolidated financial statements have been separated
      from the Preconfirmation amounts by a bold line to signify that the
      Post-Confirmation consolidated financial statements are those of a new
      reporting entity and have been prepared on a basis not comparable to prior
      periods.

      The Company adopted Fresh-Start Reporting because holders of existing
      voting shares before filing and confirmation of the Plan received less
      than 50% of the voting shares of the emerging entity and its
      reorganization value was less than its post-petition liabilities and
      allowed claims. The adjustments to reflect the consummation of the Plan,
      include the pretax gain on debt discharge of $90,980 (principally accrued
      interest and principal of the Notes) and the adjustment of $3,765 to
      record assets and liabilities at their estimated fair values, have been
      reflected in the accompanying consolidated statements of operations for
      the 42-week period ended November 22, 1996. Deferred taxes of
      approximately $23,056 were provided as a result of the debt discharge and
      the resulting reductions to the tax bases of assets in accordance with
      Section 108 of the Internal Revenue Code.

      The reorganization value of the Company was determined by management
      utilizing several factors and various valuation methods, including
      discounted cash flows, cash flow multiple ratios, and other applicable
      ratios. Reorganization value generally approximates fair value of the
      entity before considering liabilities and approximates the amount a
      willing buyer would pay for the assets of the entity after the
      restructuring. The primary valuation methodology employed to determine the
      reorganization value of the Company was a net present value approach. The
      estimated unleveraged reorganization value of the Company was computed
      using a discounted cash flow analysis. This analysis included the present
      values of (i) the discounted projected free cash flows of the Company
      through fiscal year 1999, (ii) the discounted terminal value of the
      Company at the end of that 1999 fiscal year, and (iii) projected excess
      cash on hand at the Confirmation Date. For purposes of discounting values,
      a discount rate of 9.5% was utilized throughout the analysis. The terminal
      value was based upon a 3.5% growth factor in perpetuity with a 6% terminal
      discount rate.


                                    Page 26
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


      Based on information from parties-in-interest and from the Company's
      financial advisors, the total reorganization value of the Company was
      estimated to be $155,993 at November 22, 1996. The estimated
      reorganization value of the Company was allocated to specific asset
      categories as follows:

            Current assets                                $  118,858
            Property and equipment                            35,647
            Other noncurrent assets                            1,488
                                                          ----------

                                                          $  155,993
                                                          ==========

      All payments and distributions required by the Plan to be made by the
      Company with respect to prepetition claims against the Company have been
      made or provided for at November 22, 1996, and no further material
      recourse to the Company is available to any person with respect to any
      prepetition claims.

      The effect of the Plan and the implementation of Fresh-Start Reporting on
      the Company's consolidated balance sheet as of November 22, 1996 was as
      follows:

<TABLE>
<CAPTION>
                                                                                                          Post-
                                                Preconfirmation     Adjustments                       confirmation
                                               balance sheet at    to record the                    balance sheet at
                                                 November 22,         Plan at        Fair value       November 22,
                                                     1996         confirmation(a)  adjustments(b)         1996
                                                     ----         ------------     -----------            ----
<S>                                              <C>                  <C>             <C>               <C>  
         Cash                                    $    1,329                 -                -            1,329
         Other current assets                       117,802           (13,549)          13,276          117,529
                                                                                                    
         Property, plant, and equipment             139,026                 -         (103,379)          35,647
         Accumulated depreciation                    89,876                 -           89,876               -
                                                 ----------          --------         --------          -------
              Net property, plant, and equipment     49,150                 -          (13,503)          35,647
                                                 ----------          --------         --------          -------
                                                                                                    
         Other long-term assets                       1,035                 -                -            1,035
         Other intangible assets                      3,042            (2,589)               -              453
                                                 ----------          --------         --------          -------
                                                                                                    
                                                 $  172,358           (16,138)            (227)         155,993
                                                 ==========          ========         ========          =======
                                                                                                    
         Current long-term debt                  $  202,016          (201,881)               -              135
         Other current liabilities                   55,847            (8,723)          (3,992)          43,132
         Long-term debt                                   -            77,255                -           77,255
         Noncurrent deferred income taxes             6,651             5,198            1,506           13,355
         Stockholders' equity (deficit)             (92,156)          112,013            2,259 (c)       22,116
                                                 ----------          --------         --------          -------
                                                                                                    
                                                 $  172,358           (16,138)            (227)         155,993
                                                 ==========          ========         ========          =======
</TABLE>  

      (a)   To record the forgiveness of the notes, the issuance of common
            stock, and the related income tax effects pursuant to the Plan.
      (b)   To record the adjustments to assets and liabilities to their
            estimated fair value.
      (c)   Net adjustment to equity consists of net fair value adjustments of
            $3,765 less related income tax effects of $1,506.


                                    Page 27
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


(2)   Summary of Significant Accounting Policies and Practices

      (a)   Description of Business and Basis of Presentation

            The Company is a manufacturer of private-label underwear and women's
            hosiery products, operating distribution and manufacturing
            facilities in the Southeastern United States and off-shore
            manufacturing facilities in Central America. Additionally, the
            Company sources some of its production from various contractors
            worldwide. The Company has two principal product lines: men's and
            women's underwear and outerwear T-shirts and women's hosiery. The
            Company markets its products through a wide range of national and
            regional retail distribution channels, including discount stores,
            department stores, specialty stores, drug stores, and supermarkets.
            The majority of the Company's raw materials are readily available
            and are not dependent upon a single supplier.

      (b)   Principles of Consolidation

            These consolidated financial statements include the financial
            statements of Ithaca Industries, Inc. and its wholly owned
            subsidiaries. All significant intercompany balances and transactions
            have been eliminated.

      (c)   Cash and Cash Equivalents

            Cash balances at year-end reflect short-term interest-earning
            deposits, net of outstanding checks. Cash balances also include
            overdraft amounts for which the right of offset with other accounts
            exists. For purposes of the statement of cash flows, the Company
            considers all highly liquid debt instruments purchased with an
            initial maturity of three months or less to be cash equivalents.
            Cash and cash equivalents include interest-earning deposits of $680
            and $66 at January 31, 1998 and February 1, 1997, respectively.

      (d)   Inventories

            Inventories consist of raw materials, work in process, and finished
            goods relating to manufacturing operations and are valued at the
            lower of cost or market with cost determined using the last-in,
            first-out (LIFO) method.

      (e)   Property, Plant, and Equipment

            Property, plant, and equipment acquired after November 22, 1996 are
            stated at cost. Upon emergence from Chapter 11, the Company adopted
            Fresh-Start Reporting effective November 22, 1996 and, accordingly,
            all property, plant, and equipment at November 22, 1996 was recorded
            at its estimated fair value and historical accumulated depreciation
            was eliminated. Depreciation and amortization expense of property,
            plant, and equipment is calculated using the straight-line method
            over the estimated remaining useful lives of the assets as follows:

                  Buildings                                 25 - 30 years
                  Property improvements                      5 - 10 years
                  Machinery and equipment                     3 - 8 years
                  Vehicles                                        3 years


                                    Page 28
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


      (f)   Intangibles and Other Assets

            Intangible and other assets consist of patents, organizational
            costs, deferred debt expense, and deferred acquisition costs and are
            amortized over their respective remaining terms. On an ongoing
            basis, management reviews the valuation and amortization of
            intangible assets. As part of the review, management estimates fair
            values based upon recent historical results and expected future
            results, taking into consideration events or circumstances which
            might affect their fair values.

            Deferred debt expenses are amortized over the term of the loans to
            which the expenses relate. As a result of the adoption of
            Fresh-Start Reporting and the related amendment of the Credit
            Agreement, the unamortized balance of deferred debt expense was
            included in reorganization expense for the 42-week period ended
            November 22, 1996.

      (g)   Revenue Recognition

            Sales are recognized at the time the related goods are shipped.

      (h)   Income Taxes

            Income taxes are accounted for under the asset and liability method.
            Deferred tax assets and liabilities are recognized for the future
            tax consequences attributable to differences between the financial
            statement carrying amounts of existing assets and liabilities and
            their respective tax bases. Deferred tax assets and liabilities are
            measured using enacted tax rates expected to apply to taxable income
            in the years in which those temporary differences are expected to be
            recovered or settled. The effect on deferred tax assets and
            liabilities of a change in tax rates is recognized in income in the
            period that includes the enactment date.

            Prior to its emergence from Chapter 11, the Company was included in
            an affiliated group and the Company's Federal taxable income was
            included in such group's consolidated tax return. Pursuant to a tax
            sharing agreement with the former Parent, the Company recognized
            income tax expense or benefit as if it were to file separate
            Federal, state, or local income tax returns. The Company entered
            into the Intercompany Compromise and Settlement Agreement which
            included a provision that terminated the tax sharing agreement
            effective November 22, 1996.


                                    Page 29
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


      (i)   Stock Option Plan

            Effective November 22, 1996, with the adoption of its stock option
            plan, the Company adopted Statement of Financial Accounting
            Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
            Compensation, which permits the Company to recognize as expense over
            the vesting period the fair value of all stock-based awards on the
            date of grant. Alternatively, SFAS No. 123 also permits the Company
            to apply the provisions of APB Opinion No. 25 where compensation
            expense would be recorded on the date of grant only if the current
            market price of the underlying stock exceeded the exercise price of
            the option and provide pro forma net income and pro forma income per
            share disclosures for stock option grants made in future years as if
            the fair-value based method defined in SFAS No. 123 had been
            applied. The Company has elected to apply the provisions of APB
            Opinion No. 25 and provide the pro forma disclosures required by
            SFAS No. 123.

      (j)   Fiscal Year

            The Company's fiscal year ends on the Saturday closest to the end of
            January. The results of operations for the year ended January 31,
            1998 reflect a 52-week period (fiscal 1998). The results of
            operations for fiscal 1997 include the 10-week period ended February
            1, 1997 (post-confirmation) and the 42-week period ended November
            22, 1996 (preconfirmation). The results of operations for the year
            ended February 2, 1996 reflect a 53-week period (fiscal 1996).

      (k)   Use of Estimates

            Management of the Company has made a number of estimates and
            assumptions relating to the reporting of assets and liabilities and
            the disclosure of contingent assets and liabilities at period-end
            and revenues and expenses for the periods ended to prepare these
            financial statements in conformity with generally accepted
            accounting principles. Actual results could differ from those
            estimates.

      (l)   Net Income Per Share

            In fiscal 1998, the Company adopted Statement of Financial
            Accounting Standards No. 128, Earnings Per Share, which established
            new standards for computing and presenting earnings per share
            information. Basic earnings per share are calculated based upon the
            weighted-average number of common shares outstanding during the
            year. Diluted earnings per share are based upon the weighted-average
            number of common shares and dilutive common equivalent shares
            outstanding during the year. All potential dilutive common
            equivalent shares relate to the Company's stock option plan.
            Potential dilutive common equivalent shares are excluded from
            weighted-average shares outstanding where their impact is
            antidilutive.


                                    Page 30
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


(3)   Inventories

      Inventories consist of the following:

                                                       January 31,   February 1,
                                                          1998          1997
                                                          ----          ----

        Raw materials and supplies                    $  13,142        15,607
        Work-in-process                                  14,625        12,381
        Finished goods                                   29,519        41,278
                                                      ---------        ------
                                                         57,286        69,266
        Less excess of FIFO over LIFO cost                  250             -
        Less inventory included in assets held for
          disposition, net (note 13)                          -         3,586
                                                      ---------        ------

                                                      $  57,036        65,680
                                                      =========        ======

      Upon adoption of Fresh-Start Reporting at November 22, 1996, the excess of
      first-in, first-out (FIFO) over LIFO cost was adjusted to zero as
      inventories were restated to their estimated fair value. The adjustment
      has been included in fair value adjustments in note 1.

      During the year ended January 31, 1998, the 42-week period ended November
      22, 1996, and the year ended February 2, 1996, LIFO inventory layers were
      liquidated. This liquidation resulted in charging lower inventory costs
      prevailing in prior years to cost of sales, thus reducing cost of sales by
      $71, $1,367, and $271, respectively, which is lower than the amount that
      would have resulted from replacing the liquidated inventory at end of
      period prices on those dates.

(4)   Property, Plant, and Equipment

      Property, plant, and equipment consist of the following:

                                                       January 31,  February 1,
                                                          1998         1997
                                                          ----         ----

        Land                                              1,276         1,306
        Buildings and improvements                       18,104        18,359
        Machinery and equipment                          18,974        16,288
        Vehicles                                             99           104
        Construction in progress                          1,372           327
                                                       --------        ------
                                                         39,825        36,384
        Less accumulated depreciation and amortization    5,710           853
                                                       --------        ------

                                                       $ 34,115        35,531
                                                       ========        ======


                                    Page 31
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)

(5)   Long-Term Debt

      A summary of long-term debt follows:

                                                       January 31,  February 1,
                                                          1998         1997
                                                          ----         ----

        Borrowings under credit agreements:
          Revolving loans - base rate loans           $  17,500        13,000
          Term loans - base rate loans                   35,963        53,000
        9.0% to 10.5% notes, maturing through 1998           69           139
                                                      ---------        ------
                                                         53,532        66,139
        Less current installments of long-term debt          13            70
                                                      ---------        ------

                                                      $  53,519        66,069
                                                      =========        ======

      Pursuant to the Plan, the Credit Agreement was amended and restated and
      the Notes were canceled and exchanged for all of the Company's outstanding
      common stock on the Effective Date. The following is a summary description
      of the Amended and Restated Credit Agreement ("Amended Agreement") issued
      on the Effective Date.

      Revolving Credit Commitment

      The total Revolving Credit Commitment ("Revolving Loan") under the Amended
      Agreement is $77,200 which is inclusive of (i) any outstanding unpaid
      balance of prepetition revolving credit loans and post-petition
      debtor-in-possession financing, (ii) $22,185 transferred from the
      Preconfirmation term loan balance, and (iii) a $25,000 letter of credit
      subfacility. For a 30-day period beginning in May and December of each
      year, commitments under the Revolving Loan are required to be reduced to
      $63 million and $68 million, respectively.

      The total outstanding Revolving Loan including letters of credit may not
      exceed a borrowing base determined by specified percentages of eligible
      accounts receivable and inventory as defined by the Amended Agreement. A
      commitment fee of 0.5% of the unused Revolving Loan is due each year. A
      letter of credit fee of 2.5% per annum of the daily stated amount of all
      letters of credit and facing fees of 1/4 of 1% per annum of the daily
      stated amount of all standby and trade letters of credit is payable
      quarterly in arrears. The Revolving Loan expires August 31, 1999.

      At January 31, 1998 and February 1, 1997, there was $17,500 and $13,000
      outstanding under the Revolving Loan provisions and $5,209 and $6,825
      issued under the trade and standby letters of credit provisions of the
      Amended Agreement, respectively. The availability as calculated under the
      provisions of the Amended Agreement at January 31, 1998 was $28,358.


                                    Page 32
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


      Term Loan Commitment

      The total Term Loan Commitment ("Term Loan") under the Amended Agreement
      is $55,000 which was reduced to $35,963 and $53,000 as a result of
      payments during fiscal 1998 and the 10-week period ended February 1, 1997,
      respectively. The remaining amounts are payable in installments of $4,000
      on January 31, 1999 and $31,963 on August 31, 1999. At January 31, 1998,
      $4,000 of the outstanding term loan balance has been excluded from current
      installments of long-term debt as this amount could be repaid using the
      Revolving Loan.

      The Term Loan contains mandatory prepayment provisions which require that
      certain excess cash flows, proceeds from the sale of assets for
      disposition, other proceeds outside the ordinary course of business, and
      tax refunds as defined must be used to pay down the outstanding term loan
      balance in reverse order of maturity. Once repaid, Term Loans may not be
      reborrowed. The Term Loan Commitment expires August 31, 1999.

      Except in certain limited circumstances, the Revolving Loan and the Term
      Loan will bear interest at 150 basis points above the base rate which is
      defined as the higher of (i) 1/2 of 1% in excess of the adjusted
      certificate of deposit rate, (ii) the prime lending rate, or (iii) 1/2 of
      1% in excess of the overnight federal funds rate. Interest is due in
      arrears on the last day of each month. The interest rate is subject to
      cumulative increases in the event the Company (i) does not achieve certain
      earnings before interest taxes and depreciation (EBITDA) targets or (ii)
      fails to make annual principal payments, other than regularly scheduled
      term loan amortization payments, of at least $5,000. In addition, default
      interest is payable at the base rate plus 2%. On January 29, 1997, the
      Company entered into a rate protection agreement which limits the base
      interest rate payable on the first $45 million outstanding term loan
      principal to 9.5% through July 28, 1998.

      Borrowings under the Amended Agreement are secured by a lien against all
      assets of the Company and subsidiaries. The Amended Agreement contains
      certain financial and nonfinancial covenants. As of January 31, 1998, the
      Company was in compliance with such covenants.

(6)   Income Taxes

      Components of income tax benefit (expense) consist of:

                          Post-confirmation                Preconfirmation
                      -------------------------     --------------------------
                                      10-week          42-week
                      Year ended   period ended     period ended   Year ended
                      January 31,   February 1,     November 22,   February 2,
                         1998          1997             1996          1996
                         ----          ----             ----          ----

        Current:
            Federal   $   (326)            4            3,113        10,302
            State          (99)            1            1,191         1,369
        Deferred          (378)        1,395           (8,522)       15,486
                      --------         -----           ------        ------
                                                                    
                      $   (803)        1,400           (4,218)       27,157
                      ========         =====           ======        ======


                                    Page 33
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


      Income tax benefit (expense) for the year ended January 31, 1998; the
      10-week period ended February 1, 1997; the 42-week period ended November
      22, 1996; and the year ended February 2, 1996 amounted to $(803), $1,400,
      $(4,218), and $27,157, an effective rate of 34.3%, 33.7%, 253.0%, and
      35.3%, respectively, which differs from the "expected" income tax expense
      (computed by applying the U.S. Federal corporate income tax rate of 34% to
      income (loss) before income taxes and extraordinary item) as follows:

<TABLE>
<CAPTION>
                                                        Post-confirmation                 Preconfirmation
                                                    --------------------------     ---------------------------
                                                                     10-week          42-week
                                                    Year ended    period ended     period ended     Year ended
                                                    January 31,    February 1,     November 22,     February 2,
                                                       1998           1997             1996            1996
                                                       ----           ----             ----            ----
        <S>                                         <C>           <C>              <C>              <C> 
        Computed "expected" income tax
             (expense) benefit                      $   (795)         1,455              (583)         26,881
        State and local taxes, net of Federal
            income tax benefit                           (73)           175               (45)          2,090
        Amortization of intangible assets               (127)             -                 -          (1,632)
        Nondeductible expenses relating to
            reorganization                                 -           (216)             (744)              -
        Provision for resolution of tax audits and
            adjustments to refund receivable               -              -            (2,727)              -
        Other, net                                       192            (14)             (119)           (182)
                                                    --------          -----            ------          ------

                                                    $   (803)         1,400            (4,218)         27,157
                                                    ========          =====            ======          ======
</TABLE>

      The tax effect of temporary differences that give rise to significant
      portions of the deferred tax assets and deferred tax liabilities at
      January 31, 1998 and February 1, 1997 are presented below:

<TABLE>
<CAPTION>
                                                                                 Post-confirmation
                                                                          ------------------------------
                                                                            January 31,      February 1,
                                                                               1998             1997
                                                                               ----             ----
        <S>                                                               <C>                <C> 
        Deferred tax assets:
            Nondeductible accruals                                        $    2,631             3,387
            Inventory write-downs                                                  -             1,349
            Accounts receivable reserves and allowances                           45               173
            Other                                                                  2                 -
                                                                          ----------           ------- 
                 Deferred tax assets                                           2,678             4,909
                                                                          ----------           ------- 

        Deferred tax liabilities:
            Tax attribute reductions of inventory, receivables,
              and property, plant, and equipment                             (17,090)          (21,090)
            Restructuring related reserves and write-downs
              of inventory, receivables, and property, plant,
              and equipment                                                     (259)                -
            State taxes                                                         (451)             (579)
            Inventory write-downs                                               (543)                -
            Other                                                             (1,887)             (414)
                                                                          ----------           ------- 
                 Deferred tax liabilities                                    (20,230)          (22,083)
                                                                          ----------           ------- 

                 Net deferred tax liability                               $  (17,552)          (17,174)
                                                                          ==========           ======= 
</TABLE>


                                    Page 34
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


(7)   Related Party Transactions

      During the 42-week period ended November 22, 1996 and the year ended
      February 2, 1996, the Company engaged in transactions with related
      parties, including (income) expenses incurred on behalf of the former
      Parent company of approximately $(299) and $325 for those periods,
      respectively.

      Prior to November 22, 1996, long-term debt to related parties consisted of
      notes held by parties which were stockholders, or their affiliates, of the
      former Parent. After November 22, 1996, long-term debt due to related
      parties consists of borrowings under the Amended Agreement held by a
      stockholder of the Company.

      In accordance with the Plan, the equity interests of the former Parent
      were canceled, extinguished, and annulled. Additionally, the Company
      entered into the Intercompany Compromise and Settlement Agreement as of
      the Effective Date which included a provision to terminate a license
      agreement.

(8)   Credit Concentrations

      Most of the Company's sales are concentrated with national retailers. For
      the year ended January 31, 1998; the 10-week period ended February 1,
      1997; and the 42-week period ended November 22, 1996, one customer
      individually accounted for 52%, 48%, and 47%, respectively, of net sales.
      For the year ended February 2, 1996, two customers accounted for 42% and
      11% of net sales, respectively.

      At February 1, 1997, the Company had $659 of trade accounts receivable due
      from customers that were believed to be moderate to high credit risks.
      These accounts were factored under a nonrecourse non-notification
      factoring arrangement which reduces the credit risk to the Company subject
      to performance by the factor. There were no amounts factored at January
      31, 1998.

(9)   Fair Value of Financial Instruments

      At January 31, 1998 and February 1, 1997, the fair value of the Company's
      debt is equal to the carrying amount as it was subject to restructuring
      and is based upon variable market rates. The carrying values of all other
      financial instruments in the consolidated balance sheets approximate fair
      values.

(10)  Commitments and Other Matters

      The Company leases certain equipment and warehousing facilities under
      operating leases expiring at various dates through 2010. Total rent
      expense under these leases amounted to approximately $3,844, $790, $3,881,
      and $3,414, for the year ended January 31, 1998; the 10-week period ended
      February 1, 1997; the 42-week period ended November 22, 1996; and the year
      ended February 2, 1996, respectively. In addition, the Company is
      responsible for payment of applicable real estate taxes, insurance, and
      maintenance expenses.


                                    Page 35
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


      At January 31, 1998, future minimum annual rentals under these leases are
      as follows:

                  Fiscal years ending in:

                           1999                             $  3,528
                           2000                                2,794
                           2001                                1,677
                           2002                                1,287
                           2003                                1,055
                           Thereafter                          1,319
                                                            --------

                                                            $ 11,660
                                                            ========
                                                            

      The Company has royalty agreements for certain licensed products. The
      total royalty expense under these agreements amounted to approximately
      $630, $92, $479, and $2,541 for the year ended January 31, 1998, the
      10-week period ended February 1, 1997, the 42-week period ended November
      22, 1996, and the year ended February 2, 1996, respectively. At January
      31, 1998, the future minimum royalty expense for the fiscal year ending in
      1999 is approximately $553.

(11)  Employee Benefit Plans

      In fiscal 1997, the Company adopted an incentive compensation plan under
      which certain employees may receive discretionary bonus awards from a
      bonus pool calculated based on achievement of specified targets
      established by the Board of Directors. Bonus amounts expensed for the year
      ended January 31, 1998; the 10-week period ended February 1, 1997; and the
      42-week period ended November 22, 1996 were $489, $560, and $1,740,
      respectively. No bonuses were earned for the year ended February 2, 1996.

      On the Effective Date, the Company adopted the Stock Plan which permits
      the Company's Board of Directors to grant stock options to officers and
      key employees. The Stock Plan initially reserved 928,962 shares of
      authorized but unissued common stock. Total shares available for grant may
      be increased by the Board of Directors at their discretion. Stock options
      may be granted at an exercise price equal to or less than fair market
      value as stipulated in the applicable option agreement. Excluding a grant
      of 109,290 options to certain outside consultants, certain options vest
      one-third on the date of grant and one-third on the subsequent first and
      second anniversaries from the date of grant. The remaining options are
      performance based and vest in equal amounts based upon the achievement of
      certain performance targets for each of the next three years.


                                    Page 36
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


      The following table summarizes stock option activity during each of the
      last two reporting periods:

                                                                       Weighted-
                                                                        average
                                                       Number of       exercise
                                                        shares           price
                                                        ------           -----

         Options outstanding at November 22, 1996             --       $    --
           Options granted                               901,014          6.00
           Options cancelled                                  --            --
                                                      ----------
         Options outstanding at February 2, 1997         901,014          6.00
           Options granted                                17,500          6.00
           Options cancelled                             (36,668)         6.00
                                                      ----------

         Options outstanding at January 31, 1998         881,846          6.00
                                                      ==========

      During the year ended January 31, 1998, 17,500 options were granted at $6
      per share; of the 881,846 options outstanding, 492,718 were vested and
      exercisable at January 31, 1998. The weighted-average contractual life of
      options outstanding at January 31, 1998 is eight years. If the Company had
      recognized compensation expense for the "fair value" of option grants
      under the provisions of SFAS No. 123, the pro forma net income and net
      income per share for the year ended January 31, 1998 would have been
      $1,336 and $.13, respectively, based upon the following assumptions
      related to the options: risk-free interest rate of 5.5%; dividend yield of
      0%; expected volatility of 33%; and three-year expected lives.

      During the 10-week period ended February 1, 1997, 901,014 options were
      granted at $6 per share; of the 901,014 options outstanding, 240,994 were
      vested and exercisable at February 1, 1997. The weighted-average
      contractual life of options outstanding at February 1, 1997 is nine years.
      Had compensation cost for the Company's stock option plan been determined
      based upon the fair value at the grant date for awards under this plan
      consistent with SFAS 123, the effect on the Company's net income and
      income per share would not be material, based upon the following
      assumptions related to the options: risk-free interest rate of 6.2%;
      dividend yield of 0%; expected volatility of 33%; and three-year expected
      lives.

      The Company maintains a medical benefits plan and trust which covers
      substantially all employees of the Company. The plan is funded currently
      by contributions from the Company and employees based on anticipated
      claims costs and administrative expenses. Company contributions to the
      plan were $4,645, $1,250, $5,604, and $8,585, for the year ended January
      31, 1998; the 10-week period ended February 1, 1997; the 42-week period
      ended November 22, 1996; and the year ended February 2, 1996,
      respectively. Net assets available for plan benefits held in trust were
      $777 at January 31, 1998 and $1,037 at February 1, 1997.

      The Company sponsors a defined contribution retirement plan for its
      employees. Company contributions are based upon a percentage of the
      employees' contributions. Contributions and administrative expenses
      incurred by the Company on behalf of the plan totaled approximately $226,
      $53, $319, and $456, for the year ended January 31, 1998; the 10-week
      period ended February 1, 1997; the 42-week period ended November 22, 1996;
      and the year ended February 2, 1996, respectively.


                                    Page 37
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)


(12)  Restructuring

      In the third quarter of fiscal 1996, in response to operating losses
      resulting from decreasing sales as well as high manufacturing and
      distribution costs, the Company initiated a restructuring to improve
      operating performance and reduce costs. In connection with this
      restructuring, the Company recorded charges totaling $51,591 ($33,379
      after related income tax benefits), of which $14,153 ($9,157 net of income
      tax benefits), and $37,438 ($24,222 after related income tax benefits)
      were charged to operating expenses in the third and fourth quarters of
      fiscal 1996, respectively. Such charges related to (i) the closing and
      consolidation of certain manufacturing and distribution facilities; (ii)
      the write-down of certain equipment associated with closed facilities to
      net realizable value; (iii) the write-off and establishment of reserves to
      reduce inventory and accounts receivable to estimated net realizable value
      for amounts associated with customers, product lines, and specific
      products that the Company elected to discontinue manufacturing and
      distributing; (iv) severance and other costs associated with plant
      closures and overhead reductions resulting from a total domestic work
      force reduction in fiscal 1998, fiscal 1997, and fiscal 1996 of
      approximately 4,900 employees, of which approximately 1,900, 1,900, and
      1,100 occurred during fiscal 1998, fiscal 1997, and fiscal 1996,
      respectively; and (v) the write-off of certain impaired intangible assets,
      principally deferred debt expenses of $2,672 and goodwill of $2,395.

      As of January 31, 1998 and February 1, 1997, assets held for disposition
      consist of the following:

                                                         January 31, February 1,
                                                            1998        1997
                                                            ----        ----
       Property, plant, and equipment, net of estimated
          reserve of $4,642 at January 31, 1998 and
          $4,800 at February 1, 1997                     $    213        169
       Inventory, net of obsolescence reserve of
          $2,044 at February 1, 1997                            -      3,586
                                                         --------      -----

                                                         $    213      3,755
                                                         ========      =====

      The reserves reflect management's estimates of the recoverability of the
      related assets.

(13)  Subsequent Events (Unaudited)

      On March 24, 1998, the Company completed the acquisition of Glendale
      Hosiery Company (Glendale), an entity with annual revenues of
      approximately $45 million. Consideration paid includes a cash payment
      based upon Glendale's closing net worth plus $1.5 million in cash,
      issuance of $2 million of Ithaca common stock (not to exceed 400,000
      shares), subordinated notes, or a combination thereof. In addition, Ithaca
      will refinance up to $9 million of Glendale's bank indebtedness. The
      transaction, which will be accounted for using the purchase method of
      accounting, was financed with the proceeds from the refinancing of the
      Company's existing Credit Agreement with $110 million in new credit
      facilities. The new credit facilities include $25 million and $15 million
      term loans plus up to $70 million in revolving credit facilities.


                                    Page 38
<PAGE>

                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                        (In thousands, except share data)

(14)  Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
                                                                         Post-confirmation
                                                          ----------------------------------------------
                                                           First       Second        Third       Fourth
                                                          quarter      quarter      quarter      quarter
                                                          -------      -------      -------      -------
<S>                                                      <C>            <C>          <C>          <C>   
       Year ended January 31, 1998:
          Net sales                                      $ 58,743       60,934       63,184       54,160
          Gross profit                                      8,216        9,747        9,577        7,113
          Net income (loss)                                  (148)       1,004          793         (113)
                                                         ========     ========      =======      =======

       Basic and dilutive net income (loss) per
          common share                                       (.01)         .10          .08         (.01)
                                                              ===          ===          ===          ===

<CAPTION>
                                                                                                 Preconfirmation   Post-confirmation
                                                                                                 ---------------   -----------------
                                                                                                           Fourth quarter - 1997
                                                                   Preconfirmation               -----------------------------------
                                                         ----------------------------------        3 weeks ended     10 weeks ended
                                                           First       Second        Third         November 22,        February 1,
                                                          quarter      quarter      quarter            1996               1997
                                                          -------      -------      -------            ----               ----
<S>                                                      <C>          <C>           <C>              <C>                <C>   
       Year ended February 1, 1997:
          Net sales                                      $ 97,619       78,883       98,624           22,477             42,708
          Gross profit                                     12,691       11,707       13,367            4,295              4,487
          Net income (loss) from continuing
             operations before extraordinary item          (1,298)         641       (1,303)            (592)            (2,757)
          Extraordinary item                                    -            -            -           67,924                  -
          Net income (loss)                                (1,298)         641       (1,303)          67,332             (2,757)
                                                         ========     ========      =======           ======             ======

       Basic and dilutive net loss per common
         share(1)                                                                                                        $ (.28)
                                                                                                                         ====== 
</TABLE>

      (1)   Net income (loss) and per share amounts for periods prior to
            November 22, 1996 have not been presented because they are not
            meaningful due to the implementation of Fresh-Start Reporting and
            the substantial change in the number of shares outstanding
            subsequent to the consummation of the Plan.


                                    Page 39
<PAGE>

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

      None.

                                    PART III

ITEM 10. Directors and Executive Officers of the Registrant

      The information required by this Item 10 is incorporated by reference
herein from the material under the headings "Business Experience of Directors
and Executive Officers," "Proposal 1: Election of Directors - Meetings of the
Board of Directors," and "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the Company's definitive proxy statement filed with the
Commission relating to the annual meeting of stockholders to be held on June 10,
1998.

ITEM 11. Executive Compensation

      The information required by this Item 11 is incorporated by reference
herein from the material under the headings "Remuneration of Directors and
Executive Officers," and "Compensation and Stock Option Committee Interlocks and
Insider Participation" contained in the Company's definitive proxy statement
filed with the Commission relating to the annual meeting of stockholders to be
held on June 10, 1998.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

      The information required by this Item 12 is incorporated by reference
herein from the material under the heading "Security Ownership of Certain
Beneficial Owners" contained in the Company's definitive proxy statement filed
with the Commission relating to the annual meeting of stockholders to be held on
June 10, 1998.

ITEM 13. Certain Relationships and Related Transactions

      During the Company's last fiscal year there were no reportable
transactions or relationships.


                                    Page 40
<PAGE>

                                     PART IV

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

(a)   Financial Statements, Financial Statement Schedules and Exhibits

      1.    Financial Statements

            A. Independent Auditor's Report

            B. Consolidated Balance Sheets as of January 31, 1998 and February
            1, 1997.

            C. Consolidated Statements of Operations for the year ended January
            31, 1998, the 10-Week Period ended February 1, 1997, the 42-Week
            period ended November 22, 1996, and for the year ended February 2,
            1996.

            D. Consolidated Statements of Stockholders' Equity (Deficit) for the
            year ended January 31, 1998, the 10-Week Period ended February 1,
            1997, the 42-Week Period ended November 22, 1996 and for the year
            ended February 2, 1996.

            E. Consolidated Statements of Cash Flows for the year ended January
            31, 1998, the 10-Week Period ended February 1, 1997, the 42-Week
            Period ended November 22, 1996, and for the year ended February 2,
            1996.

            F. Notes to the Consolidated Financial Statements.

      2.    Financial Statement Schedule                               Page - 45

            Schedule II Valuation and Qualifying Accounts--for the year ended
            January 31, 1998, the 10-Week Period ended February 1, 1997, the
            42-Week Period ended November 22, 1996 and the year ended February
            2, 1996.

      3.    Exhibits

            All Exhibits listed below are filed with this Annual Report on Form
            10-K unless specifically stated to be incorporated by reference to
            other documents previously filed with the Securities and Exchange
            Commission.

Exhibit No.       Description of Exhibits
-----------       -----------------------

      3.1         Amended and Restated Certificate of Incorporation of the
                  Company (incorporated by reference to Exhibit 3.1 of the
                  Company's Registration Statement on Form S-1, dated March 17,
                  1997).

      3.2         Amended and Restated By-Laws of the Company (incorporated by
                  reference to Exhibit F of Exhibit 2.1 to the Company's Form
                  8-K, dated September 3, 1996).


                                    Page 41
<PAGE>

      4           Registration Rights Agreement, between the Company and various
                  stockholders (incorporated by reference to Exhibit H of
                  Exhibit 2.1 to the Company's Form 8-K, dated September 3,
                  1996).

      10.1        Loan and Security Agreement among the Company, various banks,
                  NationsBank, N.A. as agent, NationsBanc Montgomery Securities
                  LLC as syndication agent and arranger and BankAmerica Business
                  Credit, Inc. as documentation agent, dated as of March 24,
                  1998.

      10.2        Loan and Security Agreement among the Company, Foothill
                  Capital Corp. and NationsBank, N.A. as collateral agent, dated
                  as of March 24, 1998.

      10.3        Ithaca Industries 1996 Long Term Stock Incentive Plan
                  (incorporated by reference to Exhibit I of Exhibit 2.1 to the
                  Company's Form 8-K, dated September 3, 1996).

      10.4        Employment Agreement of Jim D. Waller (incorporated by
                  reference to Exhibit 10.4 of the Company's Registration
                  Statement on Form S-1, dated March 17, 1997).

      21          List of Subsidiaries of the Company (incorporated by reference
                  to Exhibit 21 of the Company's Registration Statement on Form
                  S-1, dated March 17, 1997).

      23          Consent of KPMG Peat Marwick LLP.

      24          Power of Attorney (included in the signature page of this
                  report).

      27          Financial Data Schedule for the year ended January 31, 1998.

      (b)         Reports on Form 8-K:

            No reports on Form 8-K have been filed by the Registrant during the
            last quarter of the fiscal year ended January 31, 1998.

            As of the date of the filing of this Annual Report on Form 10-K no
            proxy materials have been furnished directly to security holders.
            Proxy materials will be mailed on or about May 5, 1998 to security
            holders.


                                    Page 42
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Wilkesboro, North
Carolina, on this 1st day of May, 1998.

                       ITHACA INDUSTRIES, INC.


                       By:  /s/ Richard P. Thrush
                            ----------------------------
                            RICHARD P. THRUSH
                            (Secretary, Chief Financial and Accounting Officer)

      We, the undersigned officers and directors of Ithaca Industries, Inc.,
hereby severally constitute Jim D. Waller, and Richard P. Thrush, and each of
them singly, our true and lawful attorneys with full power to them, and each of
them singly, to sign for us and in our names in the capacities indicated below,
any and all reports, with all exhibits thereto and any and all documents in
connection therewith, and generally do all such things in our name and on our
behalf in such capacities to enable Ithaca Industries, Inc. to comply with the
applicable provisions of the Securities Exchange Act of 1934, as amended, and
all requirements of the Securities Exchange Commission, and we hereby ratify and
confirm our signatures as they may be signed by our said attorneys, or either of
them, to any and all such amendments.

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the dates indicated.

     Signature                         Title                      Date(s)
     ---------                         -----                      -------

/s/ Jim D.Waller         Chairman, Chief Executive Officer,     April 23, 1998
------------------------      President and Director         -------------------
    Jim D. Waller             

/s/ Walter J. Branson                Director                   April 23, 1998
------------------------                                     -------------------
    Walter J. Branson                                        

/s/ Marvin B. Crow                   Director                   April 23, 1998
------------------------                                     -------------------
    Marvin B. Crow                                              

/s/ Francis Goldwyn                  Director                   April 23, 1998
------------------------                                     -------------------
    Francis Goldwyn                                              

/s/ Morton E. Handel                 Director                   April 23, 1998
------------------------                                     -------------------
    Morton E. Handel                                             

/s/ David N. Weinstein               Director                   April 23, 1998
------------------------                                     -------------------
    David N. Weinstein                                            

/s/ James A. Williams                Director                   April 23, 1998
------------------------                                     -------------------
    James A. Williams   


                                    Page 43
<PAGE>

                                  Exhibit Index


Exhibit No.       Description of Exhibits
-----------       -----------------------

      3.1         Amended and Restated Certificate of Incorporation of the
                  Company (incorporated by reference to Exhibit 3.1 of the
                  Company's Registration Statement on Form S-1, dated March 17,
                  1997).

      3.2         Amended and Restated By-Laws of the Company (incorporated by
                  reference to Exhibit F of Exhibit 2.1 to the Company's Form
                  8-K, dated September 3, 1996).

      4           Registration Rights Agreement, between the Company and various
                  stockholders (incorporated by reference to Exhibit H of
                  Exhibit 2.1 to the Company's Form 8-K, dated September 3,
                  1996).

      10.1        Loan and Security Agreement among the Company, various banks,
                  NationsBank, N.A. as agent, NationsBanc Montgomery Securities
                  LLC as syndication agent and arranger and BankAmerica Business
                  Credit, Inc. as documentation agent, dated as of March 24,
                  1998.

      10.2        Loan and Security Agreement among the Company, various banks
                  and NationsBank, N.A. as collateral agent, dated as of March
                  24, 1998.

      10.3        Ithaca Industries 1996 Long Term Stock Incentive Plan
                  (incorporated by reference to Exhibit I of Exhibit 2.1 to the
                  Company's Form 8-K, dated September 3, 1996).

      10.4        Employment Agreement of Jim D. Waller (incorporated by
                  reference to Exhibit 10.4 of the Company's Registration
                  Statement on Form S-1, dated March 17, 1997).

      21          List of Subsidiaries of the Company (incorporated by reference
                  to Exhibit 21 of the Company's Registration Statement on Form
                  S-1, dated March 17, 1997).

      23          Consent of KPMG Peat Marwick LLP.

      24          Power of Attorney (included in the signature page of this
                  report).

      27          Financial Data Schedule for the year ended January 31, 1998.

      (b)   Reports on Form 8-K:

            No reports on Form 8-K have been filed by the Registrant during the
            last quarter of the fiscal year ended January 31, 1998.

            As of the date of the filing of this Annual Report on Form 10-K no
            proxy materials have been furnished directly to security holders.
            Proxy materials will be mailed on or about May 5, 1998 to security
            holders.


                                    Page 44
<PAGE>

                                                                     Schedule II


                    ITHACA INDUSTRIES, INC. AND SUBSIDIARIES

                        Valuation and Qualifying Accounts

                          Year ended January 31, 1998;
            10-Week Period ended February 1, 1997, Post-Confirmation;
                     42-Week Period ended November 22, 1996;
                and Year ended February 2, 1996, Preconfirmation

<TABLE>
<CAPTION>
                                                              Balance at     Charged to                 Balance at
                                                             beginning of     cost and                    end of
                    Description                               year/period     expenses     Deductions   year/period
                    -----------                               -----------     --------     ----------   -----------
<S>                                                         <C>              <C>          <C>           <C>    
Year ended January 31, 1998 (post-confirmation):            
   Allowance for doubtful accounts                          $   1,256,137       475,673       966,810       765,000
   Provision for claims and allowances                          1,029,116     2,969,815     3,299,786       699,145
   Provision for assets held for disposition and            
     reserve for plant closures                                 2,106,230             -     1,110,809       995,421
                                                            -------------    ----------    ----------    ----------
                                                            
           Total                                            $   4,391,483     3,445,488     5,377,405     2,459,566
                                                            =============    ==========    ==========    ==========
                                                            
10-week period ended February 1, 1997 (post-confirmation):  
     Allowance for doubtful accounts                        $   1,508,296         2,329       254,488     1,256,137
     Provision for discounts                                        4,760       544,529       549,289             -
     Provision for claims and allowances                        1,244,737       893,886     1,109,507     1,029,116
     Provision for assets held for disposition              
       and reserve for plant closures                          12,204,000             -    10,097,770     2,106,230
                                                            -------------    ----------    ----------    ----------
                                                            
           Total                                            $  14,961,793     1,440,744    12,011,054     4,391,483
                                                            =============    ==========    ==========    ==========
                                                            
42-week period ended November 22, 1996 (preconfirmation):   
     Allowance for doubtful accounts                        $   1,215,000       333,724        40,428     1,508,296
     Provision for discounts                                       99,178     1,925,578     2,019,996         4,760
     Provision for claims and allowances                        1,255,602     4,579,938     4,590,803     1,244,737
     Provision for assets held for disposition              
       and reserve for plant closures                          37,093,000             -    24,889,000    12,204,000
                                                            -------------    ----------    ----------    ----------
                                                            
           Total                                            $  39,662,780     6,839,240    31,540,227    14,961,793
                                                            =============    ==========    ==========    ==========
                                                            
Year ended February 2, 1996 (preconfirmation):              
   Allowance for doubtful accounts                          $   1,215,000        54,965        54,965     1,215,000
   Provision for discounts                                        146,974     2,776,842     2,824,638        99,178
   Provision for claims and allowances                          1,373,208     6,530,524     6,648,130     1,255,602
   Provision for assets held for disposition and            
     reserve for plant closures                                         -    51,591,000    14,498,000    37,093,000
                                                            -------------    ----------    ----------    ----------
                                                            
           Total                                            $   2,735,182    60,953,331    24,025,733    39,662,780
                                                            =============    ==========    ==========    ==========
</TABLE>


                                    Page 45