<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
                                   FORM 10-Q

          (X)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
                        SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended  January 2, 1998
                                ---------------


         ( )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                333-24189
                       ------------------------

                                  GFSI, INC.
                                  ----------
            (Exact name of registrant as specified in its charter)
<TABLE> 
<CAPTION> 
<S>                                               <C> 
             Delaware                                         74-2810748
--------------------------------------------------------------------------------------
(State or other jurisdiction of incorporation      (I.R.S. Employer Identification No.)
         or organization)
</TABLE> 

                             9700 Commerce Parkway
                             Lenexa, Kansas 66219
                   (address of principal executive offices)

       Registrant's telephone number, including area code (913) 888-0445
                                                          --------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                   (1)      Yes     (X)               No       ( )
                   (2)      Yes     (X)               No       ( )

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

Common stock, $0.01 par value per share - 10,000 shares issued and outstanding
as of February 1, 1998
<PAGE>
 
                                  GFSI, INC.
                         Quarterly Report on Form 10-Q
                     For the Quarter Ended January 2, 1998
                                     INDEX

<TABLE> 
<CAPTION> 
<S>                                                                                    <C> 
                                                                                         Page
                                                                                         ----
PART I - FINANCIAL INFORMATION

         ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
                  Balance Sheets                                                           3
                  Statements of Income                                                     4
                  Statements of Cash Flows                                                 5
                  Notes to Financial Statements                                            6

         ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                     FINANCIAL CONDITION AND RESULTS OF
                     OPERATIONS                                                            9

PART II - OTHER INFORMATION                                                               15

SIGNATURE PAGE                                                                            16
</TABLE> 


                                    Page 2
<PAGE>
 
GFSI, INC. 
BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)
<TABLE> 
<CAPTION> 

                                                                    June 27,      January 2,
                                                                      1997           1998
                                                                   ----------   ------------
<S>                                                                <C>          <C> 
Assets
Current assets:
  Cash & cash equivalents                                             $1,117           $607
  Accounts receivable, net                                            23,687         31,233
  Inventories, net                                                    37,562         33,861
  Prepaid expenses and other current assets                            1,286            716
  Deferred income taxes                                                  926            797
                                                                   ----------   ------------
Total current assets                                                  64,578         67,214

Property, plant and equipment, net                                    21,548         20,668

Other assets:
  Deferred financing costs, net                                        9,661          9,081
  Other                                                                    4              4
                                                                   ----------   ------------
Total assets                                                         $95,791        $96,967
                                                                   ==========   ============

Liabilities and stockholders' equity (deficit) 
Current liabilities:
  Accounts payable                                                   $12,199         $7,017
  Accrued interest expense                                             4,236          5,298
  Accrued expenses                                                     5,543          6,933
  Income taxes payable                                                   338          1,338
  Current portion of long-term debt                                    3,375          4,750
                                                                   ----------   ------------
Total current liabilities                                             25,691         25,336

Deferred income taxes                                                  1,436          1,436
Revolving credit agreement                                             3,000         ---
Other long-term obligations                                              450            450
Long-term debt, less current portion                                 186,625        183,000

Stockholders' equity (deficit):
  Common stock, $.01 par value, 10,000                                ---            ---
    shares authorized, issued and outstanding
    at January 2, 1998 and June 27, 1997
  Additional paid-in capital                                          49,939         50,727
  Accumulated deficit                                               (171,350)      (163,982)
                                                                   ----------   ------------
Total stockholders' deficit                                         (121,411)      (113,255)
                                                                   ----------   ------------
Total liabilities and stockholders' deficit                          $95,791        $96,967
                                                                   ==========   ============
</TABLE> 
NOTE: The balance sheet at June 27, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to financial statements.

                                    Page 3


<PAGE>
 
GFSI, INC. 
STATEMENTS OF INCOME
(UNAUDITED)
(In thousands)

<TABLE> 
<CAPTION> 

                                                    Quarter Ended                                   Six Months Ended
                                          December 31,               January 2,             December 31,             January 2,
                                             1996                      1998                    1996                    1998
                                   -----------------------   -----------------------   -------------------     -------------------
<S>                                <C>                       <C>                       <C>                     <C> 
Net sales                                         $51,439                   $56,541              $104,811                $116,903
Cost of sales                                      29,362                    32,748                59,458                  66,287
                                   -----------------------   -----------------------   -------------------     -------------------
Gross profit                                       22,077                    23,793                45,353                  50,616

Operating expenses:
  Selling                                           4,856                     5,341                10,406                  11,846
  General and administrative                        6,924                     7,500                12,828                  14,340
                                   -----------------------   -----------------------   -------------------     -------------------
                                                   11,780                    12,841                23,234                  26,186
                                   -----------------------   -----------------------   -------------------     -------------------
Operating income                                   10,297                    10,952                22,119                  24,430

Other income (expense):
  Interest expense                                   (726)                   (5,135)               (1,465)                 (9,974)
  Other, net                                           17                       (29)                   43                     (29)
                                   -----------------------   -----------------------   -------------------     -------------------
                                                     (709)                   (5,164)               (1,422)                (10,003)
                                   -----------------------   -----------------------   -------------------     -------------------
Income before income taxes                          9,588                     5,788                20,697                  14,427

Provision for income taxes                         ---                        2,376                  ---                    5,918
                                   -----------------------   -----------------------   -------------------     -------------------

Net income                                         $9,588                    $3,412               $20,697                  $8,509
                                   =======================   =======================   ===================     ===================
</TABLE> 

See notes to financial statements.

                                    Page 4


<PAGE>
 
GFSI, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

<TABLE> 
<CAPTION> 
                                                                                        Six Months Ended
                                                                             December 31,               January 2,
                                                                                 1996                      1998
                                                                        -----------------------   -----------------------
<S>                                                                     <C>                       <C> 
Cash flows from operating activities:
Net income                                                                             $20,697                    $8,509
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation and amortization                                                        1,668                     1,468
    Amortization of deferred financing costs                                                 4                       580
    (Gain) loss on sale or disposal  of property,
      plant and equipment                                                                  (24)                       30
    Deferred income taxes                                                               ---                          129
    Increase in cash value of life insurance                                              (718)                   ---
Changes in operating assets and liabilities:
      Accounts receivable, net                                                          (3,569)                   (7,546)
      Inventories, net                                                                    (291)                    3,701
      Prepaid expenses, other current assets and other assets                             (105)                      570
      Income taxes payable                                                              ---                        1,000
      Accounts payable, accrued expenses and other
        long-term obligations                                                            1,336                    (2,730)
                                                                        -----------------------   -----------------------
Net cash provided by operating activities                                               18,998                     5,711

Cash flows from investing activities:
  Proceeds from sales of property, plant and equipment                                      48                       267
  Purchases of property, plant and equipment                                            (2,132)                     (885)
                                                                        -----------------------   -----------------------
Net cash used in investing activities                                                   (2,084)                     (618)

Cash flows from financing activities:
  Net changes to short-term borrowings                                                  (1,000)                   (3,000)
  Proceeds from long-term debt                                                           2,000                    ---
  Payments on long-term debt                                                              (898)                   (2,250)
  Capital contribution from GFSI Holdings, Inc.                                         ---                          788
  Distributions to GFSI Holdings, Inc.                                                  ---                       (1,141)
  Distributions to Winning Ways Inc. shareholders                                      (17,831)                   ---
  Proceeds from sale of treasury stock                                                   1,402                    ---
                                                                        -----------------------   -----------------------
Net cash used in financing activities                                                  (16,327)                   (5,603)
                                                                        -----------------------   -----------------------
Net increase (decrease) in cash and cash equivalents                                       587                      (510)

Cash and cash equivalents at beginning of period                                           140                     1,117
                                                                        -----------------------   -----------------------
Cash and cash equivalents at end of period                                                $727                      $607
                                                                        =======================   =======================

Supplemental cash flow information:
  Interest paid                                                                         $1,483                    $8,343
                                                                        =======================   =======================
  Income taxes paid                                                                      $ ---                    $4,788
                                                                        =======================   =======================
</TABLE> 
See notes to financial statements.

                                    Page 5
<PAGE>
 
                                  GFSI, INC.
                         NOTES TO FINANCIAL STATEMENTS
                                  (Unaudited)
                                January 2, 1998

1.       Basis of Presentation
         ---------------------

         The accompanying unaudited financial statements of GFSI, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statement reporting purposes. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the financial position and operations of the Company have
been included. Operating results for the interim periods are not necessarily
indicative of the results that may be expected for the entire fiscal year. For
further information, refer to the financial statements and footnotes thereto for
the year ended June 27, 1997, included in the Company's Annual Report on Form
10-K.

2.       Recapitalization Transaction
         ----------------------------

     On October 31, 1996, the Board of Directors of Winning Ways, Inc. ("Winning
Ways") executed a letter of intent to enter into a transaction with The Jordan
Company. The Transaction included the formation of a holding company, GFSI
Holdings, Inc. ("Holdings") and the Company, a wholly owned subsidiary of
Holdings, to effect the acquisition of Winning Ways. On February 27, 1997,
pursuant to the acquisition agreement, Holdings and the Company acquired all of
the issued and outstanding capital stock of Winning Ways, and immediately
thereafter merged Winning Ways with and into the Company with the Company as the
surviving entity. All of the capital stock of Winning Ways acquired by Holdings
in connection with the acquisition was contributed to the Company along with the
balance of the Equity Contribution, as described below.

     The aggregate purchase price for Winning Ways was $242.3 million,
consisting of $173.1 million in cash at closing, a post closing payment at April
30, 1997 of $10.0 million and the repayment of $59.2 million of Winning Ways'
existing indebtedness. To finance the Acquisition, including approximately $11.5
million of related fees and expenses: (i) The Jordan Company, its affiliates and
MCIT PLC (collectively the "Jordan Investors") and certain members of management
(the "Management Investors") invested $52.2 million in Holdings and Holdings
contributed $51.4 million of this amount to the Company (the "Equity
Contribution"); (ii) the Company entered into a credit agreement (the "New
Credit Agreement") which provides for borrowings of up to $115.0 million, of
which approximately $68.0 million was outstanding at closing and approximately
$22.9 million was utilized to cover outstanding letters of credit at closing;
and (iii) the Company issued $125.0 million of Senior Subordinated Notes (the
"Senior Subordinated Notes") which were purchased by institutional investors
through a Rule 144A private placement. The Equity Contribution was comprised of
(i) a contribution of $13.6 million from the Jordan Investors to Holdings in
exchange for Holdings Preferred Stock and approximately 50% of the Common Stock
of Holdings; (ii) a contribution of $13.6 million from the Management Investors
to Holdings in exchange for Holdings Preferred Stock and approximately 50% of
the Common Stock of Holdings, and (iii) a contribution of $25.0 million 

                                    Page 6
<PAGE>
 
from a Jordan Investor to Holdings in exchange for subordinated notes of
Holdings (the "Holdings Subordinated Notes"). Approximately $0.8 million of the
contribution from the Management Investors was financed by loans from Holdings.

     The transactions are reflected in the accompanying unaudited financial
statements of the Company as of and for the quarter ended January 2, 1998 as a
leveraged recapitalization under which the existing basis of accounting for
Winning Ways was continued for financial accounting and reporting purposes. The
historical financial information presented herein includes the operations and
activities of Winning Ways through February 27, 1997 and the merged entity,
GFSI, Inc., subsequent thereto as a result of the merger and the leveraged
recapitalization.

     Subsequent to the recapitalization transactions described above, the
Company is a wholly owned subsidiary of Holdings. Holdings is dependent upon the
cash flows of the Company to provide funds to enable Holdings to pay
consolidated income taxes, fees payable under a consulting agreement and certain
other ordinary course expenses incurred on behalf of the Company. In addition,
Holdings is dependent upon the cash flows of the Company to provide funds to
service the indebtedness represented by $50.0 million of Holdings Subordinated
Discount Notes (the "Discount Notes") which were issued by Holdings in
September, 1997 and purchased by institutional investors through a Rule 144A
private placement (the "Old Offering"). In the Old Offering certain holders of
the Holdings Subordinated Notes and Holdings Preferred Stock issued and sold
units (the "Units") consisting of 11.375% Subordinated Discount Notes (the
"Subordinated Discount Notes") due 2009 and 11.375% Series D Preferred Stock due
2009 (the "Preferred Stock") which were exchangeable at the option of Holdings
any time on or after September 29, 1997 into 11.375% Series A Senior Discount
Notes due 2009 (the "Old Notes"). On October 23, 1997, the Units were exchanged
into Old Notes (the "Old Exchange"). The Company did not receive any proceeds
from the sale or exchange of the Units. Holdings Registration Statement on Form
S-4 was declared effective on December 30, 1997, providing for the exchange of
the Discount Notes registered under the Securities Act, for the Old Notes. The
Discount Notes were issued to repay $25 million of Holdings Subordinated Notes
and $25.0 million of Holdings Preferred Stock and accrued dividends. The
Discount Notes will accrete at a rate of 11.375%, compounded semi-annually to an
aggregate principal amount of $108.5 million at September 15, 2004. Thereafter,
the Discount Notes will accrue interest at the rate of 11.375% per annum,
payable semi-annually, in cash on March 15 and September 15 of each year,
commencing on March 15, 2005. Holdings will be dependent on the Company to
provide funds to service the indebtedness. Additionally, the remaining
cumulative Holdings Preferred Stock will accrue dividends totaling approximately
$427,000 annually. Holdings Preferred Stock may be redeemed at stated value
(approximately $3.6 million) plus accrued dividends with mandatory redemption in
2009.

3.       Commitments and Contingencies
         -----------------------------

         The Company, in the normal course of business, is threatened with or
named as a defendant in various lawsuits. It is not possible to determine the
ultimate disposition of these matters, however, management is of the opinion
that there are no known claims or known contingent claims that are likely to
have a material adverse effect on the results of operations, financial
condition, or cash flows of the Company.


4.       New Accounting Standards
         ------------------------

                                    Page 7
<PAGE>
 
         SFAS No. 130, "Reporting Comprehensive Income," was issued in June
1997. This Statement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This Statement will
become effective for fiscal years beginning after December 15, 1997.

         SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was issued in June 1997. This Statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company is in the process of evaluating the impact or applicability of this
new standard on the presentation of the financial statements and the disclosures
therein. This statement will become effective for fiscal years beginning after
December 15, 1997.


                                    Page 8
<PAGE>
 
                ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                -----------------------------------------------
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                 ---------------------------------------------

         The discussions set forth in this Form 10-Q should be read in
conjunction with the financial information included herein and the Company's
Annual Report on Form 10-K for the year ended June 27, 1997. The discussions set
forth within and comments made by the Company from time to time may contain
forward-looking comments based on current expectations that involve a number of
risks and uncertainties. Actual results could differ materially from those
projected or suggested in the forward-looking comments. Factors that could cause
the Company's actual results in future periods to differ materially include, but
are not limited to, those which may be discussed herein, as well as those
discussed or identified from time to time in the Company's filings with the
Commission.

Overview

     The Company is a leading designer, manufacturer and marketer of high
quality, custom designed sportswear and activewear bearing names, logos and
insignia of resorts, corporations, colleges and professional sports leagues and
teams. The Company, which was founded in 1974, custom designs and decorates an
extensive line of high-end outerwear, fleecewear, polo shirts, T-shirts, woven
shirts, sweaters, shorts, headwear and sports luggage. The Company markets its
products to over 13,000 active customer accounts through its well-established
and diversified distribution channels, rather than through the price sensitive
mass merchandise, discount and department store distribution channels.

     On February 27, 1997, GFSI Holdings, Inc. ("Holdings") acquired all of the
issued and outstanding capital stock of Winning Ways, Inc. ("Winning Ways") and
immediately thereafter merged Winning Ways with and into the Company, with the
Company as the surviving entity. All of the capital stock of Winning Ways
acquired by Holdings in connection with the acquisition was contributed to the
Company along with the balance of equity contributions. See Note 2 -
Recapitalization Transaction, included herein, for further information.

     EBITDA represents operating income plus depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income or a
better indicator of liquidity than cash flow from operating activities, which
are determined in accordance with generally accepted accounting principles, it
is included herein to provide additional information with respect to the ability
of the Company to meet its future debt service, capital expenditure and working
capital requirements. In addition, the Company believes that certain investors
find EBITDA to be a useful tool for measuring the ability of the Company to
service its debt. EBITDA is not necessarily a measure of the Company's ability
to fund its cash needs. See the Statements of Cash Flows of the Company herein
for further information.

Sales Divisions

     The Company markets its products, which include custom designed fleecewear,
jackets, polo shirts, T-shirts, woven shirts, sweaters, shorts, headwear and
sports luggage, through four sales divisions.

                                    Page 9
<PAGE>
 
     The Resort Division (29.4% of year-to-date fiscal 1998 net sales) is a
     leading marketer of custom logoed sportswear and activewear to destination
     resorts, family entertainment companies, hotel chains, golf clubs, cruise
     lines, casinos and United States military bases.

     The Corporate Division (32.8% of year-to-date fiscal 1998 net sales) is a
     leading marketer of corporate identity sportswear and activewear for use by
     a diverse group of corporations in incentive and promotional programs as
     well as for office casual wear and uniforms.

     The College Bookstore Division (25.6% of year-to-date fiscal 1998 net
     sales) is a leading marketer of custom designed, embroidered and
     silk-screened sportswear and activewear products to nearly every major
     college and university in the United States.

     The Sports Specialty Division (6.4% of year-to-date fiscal 1998 net sales),
     established in 1994, has entered into licensing agreements to design,
     manufacture and market sportswear and activewear bearing the names, logos
     and insignia of professional sports leagues and teams as well as major
     sporting events. The Company's licensors include, among others, Major
     League Baseball, the National Basketball Association, the National Hockey
     League and NASCAR.

         The following sets forth the amount and percentage of net sales for
each of the periods indicated (dollars in thousands):
<TABLE> 
<CAPTION> 

                                     Quarter Ended                              Six Months Ended
                       December 31, 1996      January 2, 1998       December 31, 1996      January 2, 1998
                      -------------------    -----------------     -------------------    ----------------
<S>                   <C>           <C>      <C>         <C>       <C>           <C>      <C>          <C> 
Resort                   $17,099    35.4%     $15,744    27.9%       $36,000     34.3%      $34,428    29.4%
Corporate                 15,669    22.8%      21,717    38.4%        27,861     26.6%       38,286    32.8%
Bookstore                  9,550    33.3%      10,646    18.8%        27,331     26.1%       29,988    25.6%
Sports Specialty           2,848     4.8%       3,849     6.8%         5,386      5.1%        7,450     6.4%
Other                      6,273     3.7%       4,585     8.1%         8,233      7.9%        6,751     5.8%
                         -------              --------               -------                -------
Total                    $51,439              $ 56,541             $ 104,811              $ 116,903
                         =======              ========               =======                ========
</TABLE> 
Results of Operations

     The following table sets forth certain historical financial information of
the Company, expressed as a percentage of net sales, for the quarters and six
month periods ended December 31, 1996 and January 2, 1998:
<TABLE> 
<CAPTION> 
                                   Quarter Ended                          Six Months Ended
                           December 31,     January 2,            December 31,        January 2,
                               1996           1998                    1996              1998
                             --------       --------                --------          --------
<S>                          <C>            <C>                     <C>               <C> 
Net sales                      100.0%         100.0%                  100.0%            100.0%
Gross profit                    42.9           42.1                    43.3              43.3
EBITDA                          21.8           20.7                    22.7              22.2
Operating income                20.0           19.4                    21.1              20.9
</TABLE> 

                                    Page 10
<PAGE>
 
Comparison of Operating Results for the Quarters and Six Month Periods Ended
January 2, 1998 and December 31, 1996.

     Net Sales. Net sales for the second quarter of fiscal 1998, the three
months ended January 2, 1998, increased 9.9% to $56.5 million from $51.4 million
in the second quarter of fiscal 1997. Net sales for the first six months of
fiscal 1998 increased 11.5% to $116.9 million from $104.8 million in the first
six months of fiscal 1997. The increase in net sales for both periods primarily
reflects increases in net sales at the Company's Corporate, Sports Specialty and
Bookstore divisions for the six months of 37.4%, 38.3% and 9.7%, respectively,
and was partially offset by a 4.4% decrease in net sales for the six month
period at the Resort division. These increases were driven primarily by volume
increases in both periods due to continued account expansion and the
introduction of new product lines through each distribution channel. The
decrease in the resort division was due to fluctuations in business with our top
10 customers within this market.

     Gross Profit. Gross profit for the second quarter of fiscal 1998 increased
7.7% to $23.8 million from $22.1 million in the first quarter of fiscal 1997.
Gross profit for the first six months of fiscal 1998 increased 11.5% to $50.6
million from $45.4 million in the first six months of fiscal 1997. The increase
in gross profit is primarily a result of the net sales increase described above.
For the second quarter of fiscal 1998, gross profit as a percentage of net sales
slightly decreased to 42.1% compared to 42.9% in the second quarter of fiscal
1997. For the first six months of fiscal 1998, gross profit as a percentage of
net sales was 43.3%, consistent with the first six months of fiscal 1997. The
slight decrease in margin for the second quarter reflects an increase in
embroidery costs compared to the second quarter of fiscal 1997. The Company
anticipates margins during the second half of the fiscal year to be below
unusually high margins recorded during the third and fourth quarters of fiscal
1997.

     Operating Expenses. Operating expenses for the second quarter of fiscal
1998 increased 8.5% to $12.8 million from $11.8 million in the second quarter of
fiscal 1997. For the first six months, operating expenses increased 12.9% to
$26.2 million from $23.2 million in the first six months of fiscal 1997.
Operating expenses for both periods increased due primarily to increased sales
and staffing levels. Operating expenses as a percentage of net sales decreased
to 22.7% from 23.0% in the prior year second quarter. For the first six months,
operating expenses increased to 22.4% from 22.1% in the prior year period. The
increase in operating expenses for the first six months, as a percentage of net
sales, is primarily due to an increase in selling expenses as the Company
continues to aggressively expand its Corporate and Sports Specialty divisions.

     EBITDA. EBITDA for the second quarter of fiscal 1998 increased 4.5% to
$11.7 million from $11.2 million in the second quarter of fiscal 1997. For the
first six months, EBITDA increased 8.8% to $25.9 million from $23.8 million in
the first six months of fiscal 1997. The increase for both periods is primarily
a result of the net sales and related gross profit increase partially offset by
the increase in operating expenses, as described above. EBITDA as a percentage
of net sales decreased to 20.7% from 21.8% in the second quarter of fiscal 1997.
For the first six months of fiscal 1998, EBITDA decreased to 22.2% from 22.7% in
the first six months of fiscal 1997. The decrease in margin for both periods
reflects the changes in gross profit and an increase in operating expenses, as
described above.

                                    Page 11
<PAGE>
 
     Operating Income. Operating income for the second quarter of fiscal 1998
increased 6.8% to $11.0 million from $10.3 million in the second quarter of
fiscal 1997. For the first six months, operating income increased 10.4% to $24.4
million from $22.1 million in the first six months of fiscal 1997. The increase
for both periods is primarily a result of the net sales increase described
above. Operating income as a percentage of net sales decreased for the first
quarter of fiscal 1998 to 19.4% from 20.0% in fiscal 1997, and to 20.9% for the
six month period of fiscal 1998 from 21.1% in the first six months of fiscal
1997. The decrease as a percentage of net sales is due to the decrease in margin
as a percentage of sales for the second quarter as noted above in addition to
the increase in operating expenses as a percentage of net sales.

     Other Income (Expense). Other expense for the second quarter of fiscal 1998
increased to $5.2 million from $709,000 in the second quarter of fiscal 1997.
For the first six months of fiscal 1998, other expense increased to $10.0
million from $1.4 million in the first six months of fiscal 1997. The increase
for both periods is primarily a result of increased interest expense associated
with the Company's recapitalization and subsequent issuance of $125 million
Senior Subordinated Notes and borrowings under the Company's $115 million New
Credit Agreement. The effect of derivative financial instruments serves to
minimize unplanned changes in interest expense due to changes in interest rates.
As such, interest rate fluctuations and their effect were immaterial for the
periods presented. A reasonable likely change in the underlying rate, price or
index would not have a material impact on the financial position of the Company.

     Income Taxes. An income tax provision of $2.4 million was recorded for the
second quarter of fiscal 1998 and $5.9 million for the first six months due to
the Company's change in tax status from an S-Corporation to a C-Corporation for
income tax reporting purposes which was effective February 27, 1997. Company
earnings subsequent to February 27, 1997 are subject to corporate income taxes.

     Net Income. Net income for the second quarter of fiscal 1998 was $3.4
million compared to $9.6 million in the second quarter of fiscal 1997. For the
first six months of fiscal 1998, net income was $8.5 million compared to $20.7
million in the first six months of fiscal 1997. The decrease in net income for
both periods is primarily the result of interest expense and income taxes, as
mentioned above.


Liquidity and Capital Resources

     Cash provided by operating activities for the first six months of fiscal
1998 was $5.7 million compared to $19.0 million in the first six months of
fiscal 1997. The decrease in cash provided by operating activities between the
two periods resulted from a decrease in net income, as previously discussed, in
addition to increased accounts receivable due to a 11.5% increase in sales
compared to the prior year period.

     Cash used by investing activities in the first six months of fiscal 1998
was $618,000 compared to cash used of $2.1 million in the first six months of
fiscal 1997. The decrease in cash used was a result of a decrease in capital
expenditure purchases from $2.1 million in the first six months of fiscal 1997
to $885,000 in the first six months of fiscal 1998.

     Cash used by financing activities for the first six months of fiscal 1998
was $5.6 million compared to cash used of $16.3 million in the first six months
of fiscal 1997. The decrease in 

                                    Page 12
<PAGE>
 
cash used compared to the prior year period is due to Subchapter S distributions
to Winning Ways shareholders in the prior year period. Due to the
recapitalization transactions, as previously discussed, the Company changed from
S-Corporation status to C-Corporation status for income tax reporting purposes.

     The Company believes that cash flow from operating activities and
borrowings under the New Credit Agreement will be adequate to meet the Company's
short-term and long-term liquidity requirements prior to the maturity of its
credit facilities in 2007, although no assurance can be given in this regard.
While the Company is currently evaluating its future capital requirements, no
material capital commitments existed as of quarter end. Under the New Credit
Agreement, the Revolver provides $50 million of revolving credit availability
(of which no borrowings were outstanding as of January 2, 1998 and approximately
$19.4 million was utilized for outstanding commercial and stand-by letters of
credit).

     The Company anticipates paying dividends to Holdings to enable Holdings to
pay corporate income taxes, fees payable under a consulting agreement and
certain other ordinary course expenses incurred on behalf of the Company.
Holdings is dependent upon the cash flows of the Company to provide funds to
service the indebtedness represented by the $50.0 million of Discount Notes. The
Discount Notes will accrete at a rate of 11.375%, compounded semi-annually to an
aggregate principal amount of $108.5 million at September 15, 2004. Thereafter,
the Discount Notes will accrue interest at the rate of 11.375% per annum,
payable semi-annually, in cash on March 15 and September 15 of each year,
commencing on March 15, 2005. Holdings will be dependent on the Company to
provide funds to service the indebtedness. Additionally, the remaining
cumulative Holdings Preferred Stock will accrue dividends totaling approximately
$427,000 annually. Holdings Preferred Stock may be redeemed at stated value
(approximately $3.6 million) plus accrued dividends with mandatory redemption in
2009.

     The Company monitors market risk with respect to the derivative instruments
entered into by the Company, including the value of such instruments, by
regularly consulting with its senior financial managers. The Company enters into
such agreements for hedging purposes and not with a view toward speculating in
the underlying instruments. Accordingly, any reasonably likely change in the
level of the underlying rate, price or index would not be likely to have either
a favorable or adverse impact on the Company's business, operations or financial
condition, including with respect to interest expense.


Seasonality and Inflation

     The Company experiences seasonal fluctuations in its sales and
profitability, with generally higher sales and gross profit in the first and
second quarters of its fiscal year. The seasonality of sales and profitability
is primarily due to higher volume at the College Bookstore division during the
first two fiscal quarters. This pattern of sales affects working capital
requirements and liquidity, as the Company generally must finance higher levels
of inventory during these periods prior to fully receiving payment from these
customers. Sales and profitability at the Company's Resorts, Corporate and
Sports Specialty divisions typically show no significant seasonal variations. As
the Company continues to expand into other markets in its Resorts, Corporate and
Sports Specialty divisions, seasonal fluctuations in sales and profitability are
expected to decline.

                                    Page 13
<PAGE>
 
     The impact of inflation on the Company's operations has not been
significant to date. However, there can be no assurance that a high rate of
inflation in the future would not have an adverse effect on the Company's
operating results.

                                    Page 14
<PAGE>
 
PART II - OTHER INFORMATION


Item 1.  Legal Proceedings

None

Item 2. Changes in Securities

None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

         (a)      Exhibits. The following exhibits are included with this
                  report:

                  Exhibit 27 - Financial Data Schedule (SEC Use Only)

         (b)      Reports on Form 8-K

                  No reports on Form 8-K were filed by the Registrant during the
                  reporting period.

                                    Page 15
<PAGE>
 
SIGNATURES


Pursuant to the requirements 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.


GFSI, INC.

FEBRUARY 17, 1998               /s/ ROBERT G. SHAW

-----------------             ---------------------------------------
Date                          Robert G. Shaw, Sr. Vice President of Finance and 
                              Principal Accounting Officer

                                    Page 16