<PAGE>
                      SECURITIES AND EXCHANGE COMMISSION 

                            WASHINGTON, D.C. 20549 
----------------------------------------------------------------------------- 

                                  FORM 10-K 

(MARK ONE) 

 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 
     ACT OF 1934 [FEE REQUIRED] 

For the fiscal year ended December 31, 1996 

                                      OR 

 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 

For the transition period from        to 

                        COMMISSION FILE NUMBER 0-21940 

                               DONNKENNY, INC. 
            (Exact name of registrant as specified in its charter) 

<TABLE>
<CAPTION>
                   DELAWARE                                   51-022889 
  <S>                                            <C>
       (State or other jurisdiction of           (I.R.S. Employer Identification No.) 
        incorporation or organization) 

                1411 BROADWAY 
              NEW YORK, NEW YORK                                10018 
  (Address of principal executive offices)                    (Zip Code) 
</TABLE>

                                (212) 730-7770 
              REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 

         SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: 

                            NAME OF EACH EXCHANGE 
  TITLE OF EACH CLASS        ON WHICH REGISTERED 
-----------------------  ------------------------- 
          NONE                      NONE 

         SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: 

                         COMMON STOCK, $.01 PAR VALUE 
                               (Title of Class) 

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

   Indicate by check mark if disclosure of delinquent filers pursuant to Item 
405 of Regulation S-K is not contained herein, and will not be contained, to 
the best of registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this Form 10-K or any 
amendment to this Form 10-K.  [X] 

   The aggregate market value of the shares of Common Stock held by 
non-affiliates of the Registrant, based on a closing sale price of the Common 
Stock on the Nasdaq National Market on March 31, 1997 of $2.75 per share, was 
<F1>
approximately $38,409,635 (1). As of March 31, 1997, 14,069,940 shares of 
Common Stock of Registrant were outstanding. 

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

 For purposes of this Report, the number of shares held by non-affiliates was 
 determined by aggregating the number of shares held by Officers and 
 Directors of Registrant, and by others who, to Registrant's knowledge, own 
 more than 10% of Registrant's Common Stock, and subtracting those shares 
 from the total number of shares outstanding. 

<PAGE>
                                    PART I 

ITEM 1. BUSINESS 

   Donnkenny, Inc. (together with its subsidiaries, "Registrant" or the 
"Company") was incorporated in Delaware in 1978 and is a holding company with 
four subsidiaries, three of which are operating subsidiaries, Donnkenny 
Apparel, Inc. ("Donnkenny Apparel"), Beldoch Industries Corporation 
("Beldoch") and MegaKnits, Inc. ("MegaKnits"). The Company designs, 
manufactures, imports and markets a broad line of moderately priced women's 
sportswear and sleepwear. In addition, the Company manufactures, imports and 
markets men's, women's and children's sportswear and intimate apparel 
featuring various licensed cartoon character images. 

   The fiscal year of the Company ended December 31, 1996 ("Fiscal 1996") 
covers the fifty-two weeks then ended. 

SIGNIFICANT FINANCIAL AND BUSINESS DEVELOPMENTS 

Regulatory Reviews and Investigations 

   SEC 

   By letter dated August 15, 1996, the Company was notified by the 
Securities and Exchange Commission (the "SEC") that it was the subject of an 
informal investigation concerning alleged inaccuracies in the reporting of 
revenues and expenses by the Company for certain reporting periods. On or 
about November 10, 1996, the Company learned that the SEC had entered a 
formal order of investigation in the matter. The Company is cooperating fully 
with the SEC's ongoing investigation. 

   The Nasdaq Stock Market, Inc. 

   On December 6, 1996, the Company received notification that the Nasdaq 
Stock Market, Inc. (the "NASD") was commencing a review of the Company's 
eligibility for continued listing on the Nasdaq Stock Market. On February 13, 
1997, a hearing was held by a Nasdaq Listing Qualifications Panel (the 
"Panel"). By letter dated February 28, 1997, the Company was notified that 
the Panel determined to allow the Company to remain listed on the Nasdaq 
Stock Market pending the completion of (i) audits of the Company's financial 
statements for the 1994 through 1996 fiscal years by the Company's auditors 
and (ii) an internal investigation which had been commenced by the Audit 
Committee of the Company's Board of Directors. See "Certain Company 
Activities" infra. The Company was directed to provide the NASD with 
additional information, including information concerning the results of the 
above-mentioned audits as well as restated financial statements for certain 
reporting periods, on or before March 31, 1997. The Panel recommended that in 
the event the Company fails to provide such information, the Company be 
delisted. 

   On March 31, 1997, the Company supplied the NASD with a report containing 
certain information which the NASD had requested. The report stated, among 
other things, that the audits had not yet been completed and that the 
restated financial statements would be contained in the Company's Annual 
Report on Form 10-K, a copy of which would be provided to the NASD on or 
before April 15, 1997. On April 1, 1997, the NASD notified the Company that 
due to the Company's failure to provide certain requested information, 
including the results of the audits, the common stock of the Company would be 
removed from the Nasdaq Stock Market on April 8, 1997. On April 2, 1997, the 
Company requested that the NASD hold an oral hearing with respect to its 
decision to delist the Company. That hearing will be held on April 23, 1997. 
The common stock of the Company will remain listed on the Nasdaq National 
Market pending the outcome of the hearing. 

   On April 10, 1997, the Company was notified that the Nasdaq Hearing Review 
Committee (the "Review Committee") has called for review of the Panel's 
February 28, 1997 decision. The Review Committee's decision will be made on 
the basis of the written record. No oral hearing will be held with respect 
thereto. The Review Committee has indicated that its decision will be issued 
subsequent to the next general meeting of the NASD Board of Governors, which 
is currently scheduled for June 26, 1997. 

                                1           
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Certain Company Activities 

   On August 20, 1996, the Company's Board of Directors authorized its Audit 
Committee to commence an investigation into the issues raised by the SEC's 
informal investigation. The Board also authorized the Audit Committee to 
retain independent legal counsel and a financial adviser in connection with 
the investigation. 

   In September, 1996, the Company announced that it was changing its fiscal 
year from one ending on the first Saturday of each year on or after November 
30 to a fiscal year ending on December 31 of each year. 

   In September, 1996, the Company announced that it would be restating its 
quarterly reports for the first, second and third quarters of fiscal 1995 and 
the first and second quarters of fiscal 1996 to correct the recording of 
revenues and income for those periods. 

   In October, 1996, the Company announced that previously issued financial 
statements covering its 1994 and 1995 fiscal years should no longer be relied 
on and that the Company would be amending its Annual Report on Form 10-K for 
those years. 

   On or about November 4, 1996, based on preliminary findings and 
recommendations of the Audit Committee, the Company relieved Edward Creevy, 
Ronald Hollandsworth and Kym Kulis, who were Chief Financial Officer, 
Corporate Controller and Assistant Corporate Controller, respectively, of 
their financial duties for the Company. On that same date, Stuart S. Levy was 
appointed the new Chief Financial Officer of the Company. 

   On November 4, 1996, the Company's then auditors, KPMG Peat Marwick LLP 
("KPMG"), informed the Company that they were resigning. They informed the 
Company that they would no longer be able to rely on representations of 
financial management and that they did not have access to sufficient, 
credible information from others within the Company to enable them to 
continue as auditors. The Company thereafter engaged Deloitte & Touche LLP to 
serve as its new auditors. 

   On December 17, 1996, the Company's Audit Committee reported its final 
findings and recommendations to the Company's Board of Directors. Based on 
these findings and recommendations, the Board concluded that Messrs. Creevy 
and Hollandsworth and Ms. Kulis should no longer be employees of the Company. 
The Board also requested Mr. Richard Rubin's resignation from the Board of 
Directors and as an officer of the Company. 

   On December 18, 1996, at a continuation of the December 17 Board of 
Directors meeting, Mr. Rubin's resignation was tendered and was accepted by 
the Board. Harvey Appelle was then appointed Chairman of the Board and Chief 
Executive Officer of the Company. 

   On December 18, 1996, the Company and Mr. Rubin entered into a Settlement 
Agreement in settlement of any claims which Mr. Rubin may have had in 
connection with his employment agreement. Such employment agreement was 
scheduled to run through December 1, 1998. Pursuant to the Settlement 
Agreement, the Company agreed to make payments to Mr. Rubin, for the period 
of time from January 1, 1997 through December 31, 1997, totalling $660,000, 
plus a $15,000 non-accountable expense allowance. The Company also agreed, 
for a limited period of time, to provide to Mr. Rubin certain benefits, 
including certain life, health, dental, medical, hospitalization and 
disability insurance benefits. In consideration for such payments and 
benefits, Mr. Rubin agreed to provide consulting services to the Company 
during the aforementioned period. 

   On April 14, 1997, Lynn Siemers-Cross was elected as a director and as 
President and Chief Operating Officer of the Company. 

New Credit Facility 

   The Facility 

   On April 15, 1997, the Company received a signed commitment letter (the 
"Commitment Letter") for a new credit facility (the "Facility") to amend its 
existing credit facility. The Facility would be extended 

                                2           
<PAGE>
to Donnkenny Apparel, Beldoch and MegaKnits, as borrowers, and would consist 
of a term loan (the "Term Loan"), a revolving credit (the "Revolving 
Credit"), and a factoring facility (the "Factoring Facility"). The purpose of 
the Facility would be to continue to finance the acquisition of the stock of 
Beldoch and the purchase of certain assets of Oak Hill Sportswear Corp. and 
for general working capital purposes including the issuance of letters of 
credit. The Facility would expire on March 31, 1999. Under the Facility, The 
Chase Manhattan Bank would serve as agent (and would hold a 35.0762% 
interest), The CIT Group/Commercial Services Inc. would serve as collateral 
agent (and hold a 14.8148% interest), and each of Fleet Bank, N.A. and The 
Bank of New York would be co-lenders (each holding a 25.0545% interest). The 
definitive agreements relating to the Facility have not yet been finalized. 

   The Term Loan 

   The Term Loan would be continued at its current balance at April 1, 1997 
of $16,250,000. The interest rate would be equal to the prime rate plus 1 
1/2% per annum. The amortization schedule calls for quarterly payments of 
$1,250,000. A balloon payment of $7,500,000 would be due on March 31, 1999. 
An excess cash flow recapture would be payable annually within 15 days after 
receipt of the Company's audited fiscal year-end financial statements. In 
addition, any tax refunds received in excess of $2,000,000 applicable to 
Fiscal 1996 or prior fiscal years would be applied to reduce the balloon 
payment. The default interest rate would be equal to 2% above the otherwise 
applicable rate. The Term Loan would not carry any prepayment penalty. 

   The Revolving Credit 

   The commitment under the Revolving Credit would be $85,000,000, with 
sublimits of $70,000,000 for direct debt and $35,000,000 for letters of 
credit. The interest rate would be equal to the prime rate plus 1 1/2% per 
annum. Borrowings in excess of an allowable overadvance would bear interest 
at the prime rate plus 3 1/2% per annum. Advances and letters of credit (in 
the aggregate) would be limited to (i) up to 85% of eligible accounts 
receivable of the borrowers plus (ii) up to 60% of eligible inventory of the 
borrowers, plus (iii) an allowable overadvance. The default interest rate 
would be equal to 2% above the otherwise applicable rate. 

   The Factoring Facility 

   The factoring commission would be equal to 0.45% of the gross amount of 
sales, plus certain customary surcharges and 0.20% on takeover accounts 
receivable. One collection day would be charged at a per annum rate equal to 
the prime rate plus 1 1/2% on all factored transactions. 

   Collateral; General Covenants and Conditions 

   Collateral for the Facility includes (i) a first priority lien on all 
accounts receivable, machinery, equipment, trademarks, intangibles, inventory 
and factor credit balances, (ii) a first mortgage on all real property, (iii) 
a pledge of the Company's stock in Beldoch, and (iv) a pledge of the 
Company's stock in Donnkenny Apparel and MegaKnits. The Facility would be 
guaranteed by the Company and each of its subsidiaries. The Facility would 
(i) require the Company to make usual and customary representations and 
warranties, (ii) provide for certain standard events of default, (iii) 
provide certain affirmative covenants, and (iv) provide certain negative 
covenants, including limitations on debt, liens, restricted payments, 
dividends, mergers, acquisitions, consolidations, asset sales, and other 
usual and customary negative covenants. 

   See also "Management's Discussion and Analysis of Financial Condition and 
Results of Operations" and note 8 to the Consolidated Financial Statements of 
the Company and its Subsidiaries. 

PRODUCTS 

   The Company designs, manufactures, imports and markets a broad line of 
moderately priced sportswear and sleepwear for women under the Victoria 
Jones, Casey & Max(Registered Trademark), Beldoch Popper(Registered 
Trademark), Pierre Cardin(Registered Trademark), Donnkenny Classics, Mickey & 
Co.(Registered Trademark), and Lewis Frimel(Registered Trademark) brand 
names. The Company also manufactures, or contracts for the manufacture of, 
and markets certain items of women's, men's and children's sportswear and 
women's and girls' sleepwear featuring various licensed cartoon character 
images. 

                                3           
<PAGE>
Oak Hill Sportswear Division 

   The Company acquired its Oak Hill Sportswear product line in 1995. Oak 
Hill Sportswear manufactures and imports novelty woven shirts, sweaters, 
cotton knits and sportswear under the brand names Casey & Max and Victoria 
Jones. The Casey & Max label represents novelty woven tops and sportswear. 
The Victoria Jones label represents novelty sweaters, cotton knits and 
sportswear as well as all special size product. These moderate-priced 
products are sold to department stores, specialty stores and chains including 
Belk, Mercantile, Kohl's, Dillard's, Federated, Profitt's, Stage Stores, 
Catherine's, J.C. Penney and Sears. The division's products are marketed for 
missy, large sizes and petites. Approximately 90% of these products are 
imported, predominately from Hong Kong, China and India. 

Beldoch Industries 

   The Beldoch division of the Company manufactures and imports knitwear 
selling to moderately priced department and specialty stores across the 
nation. The Beldoch Popper division, within the Beldoch division, sells 
sweaters and cut and sewn women's sportswear to stores such as J.C. Penney, 
Belk, Macy's, Mercantile, Dillards, Frederick Atkins and Carson Pirie Scott. 
The Knitmaker's division, within the Beldoch division, is a private label 
division selling exclusive private label products to QVC, J.C. Penney and 
Spiegel. A vast majority of the Knitmaker's products are manufactured in the 
Company's facility located in West Hempstead, New York. The Beldoch division 
also manufactures women's wear under the Pierre Cardin label pursuant to a 
license. The Pierre Cardin product is sold to the better knitwear departments 
of department stores and specialty stores. Its major accounts include 
Federated Stores, Macy's, Belk, Mercantile, Yonkers and Frederick Atkins 
stores and the Spiegel and Chadwick's Catalogs. 

Donnkenny Classics 

   Donnkenny Classics are fabricated predominantly from synthetic/natural 
fiber blends and 100% synthetic materials and are manufactured in petite, 
missy and large sizes. The market for these products is primarily women over 
the age of 35. Donnkenny has been an established brand name for over 60 
years. 

   The Donnkenny Classics label represents all of the Company's core products 
for career and casual coordinated merchandise as well as fashion products 
including (i) pull-on stretch gabardine pants and skirts and coordinated 
gabardine jackets, which are manufactured year round in both basic and 
fashion colors with coordinated blouses, and which except for color 
selection, remain substantially unchanged from season to season, and (ii) 
tops, blouses, pants, skirts and jackets in styles which vary from season to 
season. 

Mickey & Co.(Registered Trademark) 

   Pursuant to non-exclusive licenses granted the Company by Disney 
Enterprises, Inc. ("Disney"), the Company manufactures, produces and sells a 
Mickey & Co.(Registered Trademark) line of sportswear collections for women, 
men and children and other product classifications including sweat shirts, 
tee shirts, jackets, activewear, novelty bottoms and tops, sweaters and bras 
and underpants. The products produced under these Disney licenses are both 
domestically manufactured and imported and are imprinted, embroidered or 
appliqued with the standard Disney characters, including Mickey 
Mouse(Registered Trademark), Minnie Mouse(Registered Trademark), Donald 
Duck(Registered Trademark), Daisy Duck(Registered Trademark), 
Pluto(Registered Trademark) and Goofy(Registered Trademark) and the Mickey & 
Co.(Registered Trademark) trademark. In 1996, The Walt Disney Company Asia 
Pacific Ltd granted the Company a non-exclusive license, which the Company 
has sublicensed to a third party, to manufacture a product line and 
distribute the product in the Peoples' Republic of China. Pursuant to the 
terms of the Company's sublicense agreement, the Company will not realize any 
income from sales activities until the sublicensee recoups initial 
expenditures. The Company does not anticipate it will receive income under 
this arrangement through the end of the term of the license which is 
scheduled to expire in August, 1997. The Company does not intend to seek 
renewal of the China license. 

Lewis Frimel/Flirts 

   The Company acquired its Lewis Frimel/Flirts product line in 1977. During 
1996, the product line consisted of women's intimate apparel products, 
including sleepwear, dorm shirts, boxer shorts, pajamas, panties and bras 
with various character images licensed to the Company. Sales of the Lewis 
Frimel/Flirts 

                                4           
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product line was primarily to the mass merchant market. Licensed images used 
on this product line included characters in the Garfield comic strip, Peanuts 
characters, classic muppet characters and various Looney Tunes characters. 
Gross sales for this product line in 1996 were $16,256,500. Most of the 
licenses for the characters mentioned above expire during 1997. The Company 
is in the process of seeking additional licenses to add to its product line. 

Custom and Private Label Products 

   The Company also manufactures products on a contract basis utilizing the 
Company's manufacturing facilities. The customers include, among others, 
Cross Creek, Basset Walker and Tultex. 

MANUFACTURING AND IMPORTING 

   Approximately 46% of the Company's products sold in Fiscal 1996 were 
manufactured in the United States, as compared with 51% in the Company's 
fiscal year ended December 2, 1995 ("Fiscal 1995"). The Company's 
domestically produced products are manufactured at the Company's production 
facilities in Virginia and West Hempstead, New York and at other facilities 
by several outside contractors. 

   The Company's Electronic Data Interchange computer system ("EDI") connects 
the Company to approximately 33 of its large customers and, in Fiscal 1996, 
was used to place approximately 34% of the Company's orders. Through EDI, the 
Company has established a "quick response" program to shorten its lead and 
response times for production and delivery of its domestically manufactured 
women's sportswear lines. The Company is also linked by EDI to several of its 
major suppliers, which allows the Company to review purchase orders for 
fabric on a weekly basis. 

   The remaining 54% of the Company's products sold in Fiscal 1996 were 
produced abroad and imported into the United States, principally from China, 
India, Guatemala, Turkey and Bangladesh. Such products include some or all of 
the Company's products sold under the brand names Victoria Jones, Casey & 
Max, Beldoch Popper, Lewis Frimel/Flirts, panties and boxer shorts featuring 
Looney Tunes characters, underpants and underpant sets featuring Disney 
characters, and certain of the Company's products which have ornamental 
design requirements. The percentage of the Company's products which are 
manufactured in the United States is expected to decrease further during the 
Company's 1997 fiscal year ("Fiscal 1997"). 

   The Company's purchases from its foreign suppliers are effected through 
individual purchase orders specifying the price and quantity of the items to 
be produced. Generally, the Company does not have any long-term, formal 
arrangements with any of the suppliers which manufacture its products. The 
Company continually seeks additional suppliers throughout the world for its 
sourcing needs. No one domestic or foreign contractor manufactured more than 
10% of the Company's products in Fiscal 1996. 

   Virtually all of the Company's merchandise imported into the United States 
is subject to United States duties. In addition, bilateral agreements between 
the major exporting countries and the United States impose quotas that limit 
the amount of certain categories of merchandise that may be imported into the 
United States. Because the United States may, from time to time, impose new 
quotas, duties, tariffs or other import controls or restrictions, the Company 
monitors import and quota-related developments. 

   Attendant with the Company's increased reliance on foreign manufacturing 
is a risk of excess inventory. The Company must commit to its foreign 
manufacturers and suppliers up to six months in advance of its selling 
season, usually before the Company has received its orders from its 
customers. Thus, there exists the risk that the purchase orders by the 
Company's customers will be less than the amount manufactured. The Company 
believes that this risk is outweighed by the cost savings to the Company by 
manufacturing such products abroad. Conversely, in the event there exists 
excess demand for the Company's products, the lengthy production time for 
imported goods makes it impossible for the Company to return to the market to 
purchase additional goods for the same selling season. The Company's 
arrangements with foreign suppliers are also subject to the additional risks 
of doing business abroad, including currency fluctuations and revaluations, 
restrictions on the transfer of funds and in certain parts of the world, 
political instability. The Company's operations have not been materially 
affected by any of such factors to date. However, due to the large portion of 
the Company's products 

                                5           
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which are produced abroad, any substantial disruption of its relationships 
with its foreign suppliers could have a material adverse effect on the 
Company's operations and financial condition. 

CUSTOMERS 

   In Fiscal 1996, the Company shipped orders to approximately 23,500 stores 
in the United States. This customer base represents approximately 8,300 
accounts. Of the Company's net sales for Fiscal 1996, chain stores accounted 
for approximately 26.3%, specialty retailers for approximately 32.7%, 
department stores for approximately 20.4%, mass merchants for approximately 
11.2%, catalogue customers for approximately 3.8%, and other customers for 
approximately 5.6%. 

   The Company markets its Oak Hill Sportswear division products to major 
department stores, including Dillard's, Federated Stores, May Company, J. C. 
Penney and Sears and to specialty retailers. Beldoch Popper products are sold 
to department stores, chain stores and specialty retailers, including J. C. 
Penney, Belk and Frederick Atkins. Knitmaker's, Beldoch's private label 
division, sells exclusive products to catalog and specialty retailers 
including QVC and Spiegel. Pierre Cardin products are sold to department and 
specialty stores and catalogs, including Federated Stores, Macy's, Frederick 
Atkins, Mercantile Stores, Spiegel and Chadwick's of Boston. Donnkenny 
Classics markets its moderately priced related separates to departments 
stores, specialty stores and a variety of catalog retailers, including J. C. 
Penney, Sears, Stage Stores, Frederick Atkins, Catherines, Lane Bryant Direct 
and Roamans. In addition, the Company manufactures products exclusively for 
J. C. Penney under its D.K. Gold label. The Lewis Frimel/Flirts products are 
marketed to mass merchant retailers including Wal-Mart, K-mart and Target 
Stores. The Mickey & Co.(Registered Trademark) product line is distributed to 
J. C. Penney, selected specialty retailers including Mercantile Stores, 
department stores including Dillard's, Dayton-Hudson and May Department 
Stores, novelty stores and Disney theme parks. 

   In Fiscal 1996, consolidated net sales to J.C. Penney accounted for 19.4% 
of the Company's net sales. The loss of, or significantly decreased sales to, 
this customer could have a material adverse effect on the Company's 
consolidated financial condition. 

   In Fiscal 1996, the Company experienced a seasonal sales peak during the 
third and fourth quarters of Fiscal 1996. The Company expects the bulk of its 
business during Fiscal 1997 also to be during the third and fourth quarters. 

SALES AND MARKETING 

   At March 15, 1997, the Company had a 91 person sales force, of whom 32 
were Company employees and 60 were independent commissioned sales 
representatives. These sales representatives are located in 43 cities and 
provide nationwide coverage to retailers ranging from individual specialty 
shops to national chain stores and catalogues. 

   The Company's principal showrooms are in New York City. In addition, the 
Company's sales representatives operate showrooms in Atlanta, Charlotte, 
Dallas, Denver, Elmont (NY), Chicago, Los Angeles, Miami, Minneapolis and 
Seattle. 

RAW MATERIALS SUPPLIERS 

   The Company's sources of fabric and trim supply are well established. As a 
result of the large, steady purchases each year by the Company of fabrics and 
trim for its production of certain styles, the Company is a major customer of 
several of the larger synthetic textile producers. The Company typically 
experiences little difficulty in obtaining raw materials and believes that 
the current and potential sources of fabric and trim supply are sufficient to 
meet its needs for the foreseeable future. 

TRADEMARKS AND PROPRIETARY RIGHTS 

   The Company owns and has registered in the United States, and in certain 
foreign jurisdictions, the following trademarks under which a variety of the 
Company's products are sold: Donnkenny(Registered Trademark), Victoria 

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Jones(Registered Trademark), Victoria Sport(Registered Trademark), Casey & 
Max(Registered Trademark), Beldoch Popper(Registered Trademark), Lewis 
Frimel(Registered Trademark), Flirts(Registered Trademark), 
Knitmaker's(Registered Trademark), Private Stock(Registered Trademark) and 
Alberoy(Registered Trademark). Upon compliance with the trademark statutes of 
the United States and the relevant foreign jurisdictions, these trademark 
registrations may be renewed. 

   The Company holds licensing rights to manufacture, import and sell women's 
sportswear in the United States and the U.S. Virgin Islands with the Pierre 
Cardin trademark, including sweaters, pants, skirts, knitwear, jeans, 
swimwear and activewear. Such license currently is automatically continued 
from year to year at the Company's option provided net sales equal specified 
minimums. The Company's sales during Fiscal 1996 surpassed the minimum 
requirements of this license, and the Company intends to renew this license 
for an additional one year period. 

   The Company holds license rights to manufacture and market products with 
recognizable character images. The Company has rights to use the Mickey & 
Co.(Registered Trademark) trademark and certain Walt Disney characters 
including Mickey Mouse(Registered Trademark), Minnie Mouse(Registered 
Trademark), Donald Duck(Registered Trademark), Daisy Duck(Registered 
Trademark), Pluto(Registered Trademark) and Goofy(Registered Trademark) on 
certain products. The Company also has license rights to manufacture and 
market certain products using fictional character images and trade names, 
including, but not limited to, various Looney Tunes characters, Garfield, the 
Peanuts characters and the Muppets. 

   Under the current term of the material licenses, such licenses will expire 
during 1997 and 1998. The Company has the option to renew certain of its 
licenses, while other licenses do not have renewal options as explicit 
contractual provisions. The Company believes it has satisfied the 
requirements of its licenses; however, no assurance can be given that the 
Company will be able to renew any of the licenses on commercially acceptable 
terms. The Company is in the process of seeking additional licenses. 

   The licenses generally require the Company to make minimum annual royalty 
payments and provide for maintenance of quality control. Furthermore, the 
licenses give the licensor the right to approve products offered by the 
Company using its characters and to terminate the license if the Company does 
not satisfy its contractual obligations in any material respect. Pursuant to 
the licenses, royalties range up to 16% of net sales of products sold. 

BACKLOG 

   At March 15, 1997, the Company had unfilled, confirmed customer orders of 
approximately $64 million, compared to approximately $42 million of such 
orders at March 15, 1996, with such orders generally scheduled for delivery 
within three to six months of confirmation, although some extend until the 
end of the fiscal year. The amount of unfilled orders at a particular time is 
affected by a number of factors, including the scheduling of the production 
and shipment of garments, which in some instances may be delayed or 
accelerated at the customer's request. Accordingly, a comparison of unfilled 
orders from period to period is not necessarily meaningful and may not be 
indicative of eventual actual shipments. There can be no assurance that 
cancellations, rejections and returns will not reduce the amount of sales 
realized from the backlog of orders. 

COMPETITION 

   The women's apparel business is highly competitive and consists of many 
manufacturers and distributors, none of which accounts for a significant 
percentage of total sales in the overall market, but many of which are larger 
and have substantially greater resources than the Company. The Company 
competes with both domestic manufacturers and importers, primarily on an 
item-by-item basis, with respect to brand name recognition, price, quality 
and availability. 

EMPLOYEES 

   As of March 15, 1997, the Company had 1,566 full-time employees, of whom 
242 were salaried and 1,324 were paid on an hourly basis. As of March 15, 
1997, the Company had 37 part time employees, all of whom work on an hourly 
basis. 

   The Company's hourly labor force is non-union. The Company believes 
relations with its employees are good. 

                                7           
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ENVIRONMENTAL MATTERS 

   The Company believes that it is in material compliance with all applicable 
federal, state and local environmental laws. The Company does not currently 
anticipate the need to make material capital expenditures to remain in 
compliance with applicable federal, state and local environmental laws. 

ITEM 2. PROPERTIES 

   The Company currently operates ten facilities in Virginia, one in 
Charleston, South Carolina, two in New York state and one in Hong Kong. 

<TABLE>
<CAPTION>
                                   APPROXIMATE                                        OWNED OR 
LOCATION                          SQUARE FOOTAGE FUNCTION                              LEASED 
-------------------------------  --------------  ---------------------------------  ---------- 
<S>                              <C>             <C>                                <C>
Christiansburg, Virginia  ......      109,000    Finishing                          Owned 
Dryden, Virginia ...............       28,850    Sewing                             Owned 
Floyd, Virginia ................       79,600    Fabric warehouse, cutting          Owned 
Floyd, Virginia ................       12,200    Sewing                             Owned 
Haysi, Virginia(1) .............       30,200    Sewing                             Leased 
Christiansburg, Virginia(1)  ...       66,000    Imperial warehouse                 Leased 
Independence Grayson, Virginia         70,350    Sewing, warehouse                  Owned 
Independence Kendon, Virginia  .       37,550    Warehouse, distribution            Owned 
Rural Retreat, Virginia ........       61,230    Sewing, distribution               Owned 
Wytheville, Virginia ...........      161,800    Distribution, administration       Owned 
Charleston, South Carolina(2)  .      200,000    Distribution center                Leased 
West Hempstead, New York  ......      150,000    Distribution, knitting and sewing  Leased 
New York, New York(3) ..........       62,500    Offices and principal showrooms    Leased 
Medallion Heights, Hong Kong  ..        1,000    Administration and sourcing        Leased 
                                 -------------- 
TOTAL...........................    1,070,280 
                                 ============== 
</TABLE>

------------ 
(1)    The Company owns all of its facilities in Virginia other than the Haysi 
       and Christianburg facilities. With respect to the Haysi facility, the 
       Company has entered into a lease purchase agreement with the Industrial 
       Development Authority of Dickenson County, Virginia and The County of 
       Dickenson, Virginia pursuant to which the Company is making monthly 
       payments of $4,241.75 until September 1, 2012, at which time the 
       Company will be entitled to purchase the Haysi facility for a nominal 
       purchase price. With respect to the Christianburg facility, the annual 
       rental payments are $44,400, and the lease expires in August 1997. 
(2)    This facility is leased, with annual rental payments totaling $450,000, 
       and is subject to a 3% annual rental escalation, until March 19, 2006, 
       at which time the lease expires. 
(3)    Annual rental payments for the New York office/showroom space are 
       approximately $2,200,000 in the aggregate. The leases for the New York 
       office/showrooms expire in 2000, 2006 and 2008. 

   Management believes that its current facilities are sufficient to meet its 
needs for the foreseeable future. 

RETAIL OUTLETS 

   The Company operates 12 outlet stores in which it markets out-of-season 
and irregular merchandise in order to reduce its exposure to excess inventory 
and limit brand name deterioration as a result of sales to off-price 
retailers. The outlet stores are located primarily in Virginia, with 
additional locations in Alabama, Florida, North Carolina and Tennessee. Five 
of these stores are adjacent to the Company's manufacturing facilities, while 
the remaining seven stores are generally located in areas in which the 
Company's customers do not sell its products. The size of these stores ranges 
from 1,600 to 3,500 square feet. The annual minimum rental payments range 
from approximately $15,000 to $45,000, and the leases 

                                8           
<PAGE>
terminate between 1997 and 1998. The Company expects to be able to renew or 
replace each of these leases upon its expiration on terms comparable to the 
existing terms. The Company is currently considering the desirability of 
continuing to sell products through its own outlet stores. 

ITEM 3. LEGAL PROCEEDINGS 

   IN RE DONNKENNY, INC. SECURITIES LITIGATION, 96 Civ. 8452 (MGC): Beginning 
in November 1996, ten putative class action complaints were filed in the 
United States District Court for the Southern District of New York. The 
complaints name as defendants the Company, as well as Edward T. Creevy, 
Ronald Hollandsworth and Richard Rubin, all of whom are former officers 
and/or directors of the Company. The complaints allege that the defendants 
violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and 
Rule 10b-5 promulgated thereunder by failing to disclose, among other things, 
that the Company's financial statements for certain reporting periods 
allegedly overstated sales and revenues. The complaints seek compensatory 
damages, prejudgment interest, attorneys' fees and costs. 

   In December 1996 and January 1997, several groups of plaintiffs and 
putative class members filed motions for (i) consolidation of the 
aforementioned actions and (ii) the appointment of one or more lead 
plaintiffs pursuant to the Private Securities Litigation Reform Act of 1995. 

   On January 31, 1997, the court issued an Order that the actions be 
consolidated. Pursuant to the Order, the plaintiffs have until May 17, 1997 
in which to file a consolidated complaint or designate one of the existing 
complaints as the operative complaint. In addition, the defendants' time to 
answer or otherwise respond to the complaints has been extended until after 
the time that a previously designated complaint is designated as the 
operative complaint or a consolidated complaint is filed. 

   On April 2, 1997, the Court appointed Emanon Partners, L.P. ("Emanon") as 
the lead plaintiff in the action and ruled that Emanon may select the law 
firms of Wolf Popper, LLP and Milberg Weiss Bershad Hynes & Lerach, LLP as 
co-lead counsel. 

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

   No matters were submitted to a vote of stockholders during the fourth 
quarter of Fiscal 1996. 

                                9           
<PAGE>
                                   PART II 

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

   Registrant's Common Stock is traded on the Nasdaq National Market under 
the symbol "DNKY." The Common Stock began trading on the Nasdaq National 
Market on June 17, 1993. 

   In November 1995, the Board of Directors of the Company declared a 
two-for-one stock split to all holders of its common stock in the form of a 
100% stock dividend payable to stockholders of record on December 4, 1995. 
Additional shares reflecting the stock split were distributed on December 18, 
1995. 

   The following table sets forth the quarterly high and low closing prices 
of a share of Common Stock as reported by the Nasdaq National Market for the 
period commencing with the trading of the Common Stock on December 4, 1993 
and ending on March 31, 1997. Information with respect to periods prior to 
December 19, 1995 has been retroactively restated to reflect the 
above-described stock split. 

<TABLE>
<CAPTION>
 PERIOD                 HIGH      LOW 
-------------------  --------  ------- 
<S>                  <C>       <C>
Fiscal 1994 
 First Quarter .....      9 15/16  8 13/16 
 Second Quarter  ...     11 7/8    9 5/16 
 Third Quarter .....     13 1/8   11 1/8 
 Fourth Quarter  ...     12 13/16  6 1/16 
Fiscal 1995 
 First Quarter .....      9 1/16   6 3/4 
 Second Quarter  ...      9 5/8    7 9/16 
 Third Quarter .....     14 5/16   9 17/32 
 Fourth Quarter  ...     17 1/8   12 25/32 
Fiscal 1996 
 First Quarter .....     18       10 1/8 
 Second Quarter  ...     20 5/8   13 3/4 
 Third Quarter .....     21 3/8   16 
 Fourth Quarter  ...     17 1/8    3 5/8 
Fiscal 1997 
 First Quarter .....      5 3/8    2 1/8 
</TABLE>

   On March 31, 1997, the closing price for a share of Common Stock, as 
reported by the Nasdaq National Market, was $2.75. 

   The number of holders of record for Registrant's Common Stock as of March 
15, 1997 was 96 and the approximate number of beneficial holders of the 
Common Stock was 2,500. 

   The Company paid a $3.0 million cash dividend to its stockholders in 
February 1992. The Company currently anticipates that it will retain all its 
earnings for use in the operation and expansion of its business and, 
therefore, does not anticipate that it will pay any cash dividends in the 
foreseeable future. In addition, the Company's existing credit facilities and 
the proposed facility each prohibit the Company from declaring or paying 
dividends. 

ITEM 6. SELECTED FINANCIAL DATA 

   The selected consolidated financial data as of December 3, 1994, December 
2, 1995 and December 31, 1996 and for the years then ended have been derived 
from the Company's consolidated financial statements included elsewhere in 
this Form 10-K which have been audited by Deloitte & Touche LLP, independent 
auditors, whose report thereon is also included herein. The selected 
consolidated financial data as of December 4, 1993 and December 5, 1992 and 
for the years then ended have been derived from the Company's consolidated 
financial statements, which are not included herein, and were audited by 
other auditors. The information set forth below should be read in conjunction 
with "Management's Discussion and Analysis of Financial Condition and Results 
of Operations" and the Consolidated Financial Statements of the Company and 
its Subsidiaries and related notes thereto incorporated by reference herein. 

                               10           
<PAGE>
<TABLE>
<CAPTION>
                                YEAR ENDED     YEAR ENDED     YEAR ENDED     YEAR ENDED      YEAR ENDED 
                                DECEMBER 5,    DECEMBER 4,    DECEMBER 3,    DECEMBER 2,    DECEMBER 31, 
                                   1992           1993           1994           1995            1996 
                              -------------  -------------  -------------  -------------  -------------- 
                                                             (AS RESTATED)  (AS RESTATED) 
                                                (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 
<S>                           <C>            <C>            <C>            <C>            <C>
CONSOLIDATED STATEMENT OF 
 OPERATIONS DATA(1): 
 Net sales ..................    $126,490       $144,080       $151,147       $193,306        $255,179 
 Cost of sales ..............      88,052        100,321        106,389        142,128         202,580 
                              -------------  -------------  -------------  -------------  -------------- 
 Gross profit ...............      38,438         43,759         44,758         51,178          52,599 
 Selling, general and 
  administrative expenses  ..      22,480         25,298         26,772         34,000          57,603 
 Amortization of goodwill 
  and other related 
  acquisition costs .........       1,412          1,317          1,145            985           1,449 
 Restructuring Charge .......          --             --             --          2,815              -- 
 Gain on sale of license  ...          --             --         (1,116)            --              -- 
                              -------------  -------------  -------------  -------------  -------------- 
 Operating profit ...........      14,546         17,144         17,957         13,378          (6,453) 
 Interest expense ...........      (6,943)        (5,312)        (2,870)        (4,135)         (5,154) 
                              -------------  -------------  -------------  -------------  -------------- 
 Income before income taxes 
  and extraordinary charge  .       7,603         11,832         15,087          9,243         (11,607) 
 Income taxes ...............       3,090          4,615          6,034          3,996          (3,319) 
                              -------------  -------------  -------------  -------------  -------------- 
 Income before extraordinary 
  charge ....................       4,513          7,217          9,053          5,247          (8,288) 
 Extraordinary charge 
  related to early 
  extinguishment of debt, 
  net of taxes ..............          --            453            295             --              -- 
                              -------------  -------------  -------------  -------------  -------------- 
 Net income .................    $  4,513       $  6,764       $  8,758       $  5,247        $ (8,288) 
                              =============  =============  =============  =============  ============== 
INCOME (LOSS) PER COMMON 
 SHARE(4): 
 Income before extraordinary 
  charge.....................    $    .61(2)    $    .74       $    .68       $    .38        $    .59 
 Extraordinary item .........          --       $   (.05)      $   (.02)            --              -- 
                              -------------  -------------  -------------  -------------  -------------- 
 Net income..................    $    .61       $    .69       $    .66       $    .38        $   (.59) 
                              =============  =============  =============  =============  ============== 
 Cash dividend paid per 
  common share ..............    $    .40(3)          --             --             --              -- 
                              =============  =============  =============  =============  ============== 
 Weighted average shares 
  outstanding................       7,468          9,816         13,330         13,910          14,012 
                              =============  =============  =============  =============  ============== 
CONSOLIDATED BALANCE SHEET 
 DATA: 
 Working capital ............    $ 24,103       $ 28,814       $ 54,292       $ 80,357        $ 16,917 
 Total assets ...............      79,669         93,112        109,179        157,664         139,549 
 Long-term debt, including 
  current portion ...........      57,882         32,110         28,315         62,611          50,761 
 Stockholders' equity .......       3,361         39,782         57,826         65,234          55,278 
</TABLE>

------------ 
(1)    References herein to years through fiscal 1995 are to the Company's 
       52-or 53-week fiscal year. Data for the fiscal years ended November 30, 
       1991, December 5, 1992, December 4, 1993, December 3, 1994 and December 
       2, 1995 include the results of operations for 52, 53, 52, 52 and 52 
       weeks, respectively. 

                               11           
<PAGE>
(2)    Earnings per share would have approximated $.48 if the Offering had 
       taken place at the beginning of the fiscal year ended December 5, 1992. 
(3)    In February, 1992, the Company paid a cash dividend of $3.0 million. 
(4)    All per share amounts and the weighted average shares outstanding of 
       the Company's common stock have been retroactively restated to reflect 
       the stock split. 

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

INTRODUCTION 

   In the fall of fiscal 1996, the Company announced that it would be 
restating its financial statements for fiscal 1994 and fiscal 1995. The 
discussion below, and information contained elsewhere in this Form 10-K with 
respect to fiscal 1994 and fiscal 1995, reflect the restated amounts for 
those periods. 

RESULTS OF OPERATIONS 

   The following table sets forth selected operating data of the Company as a 
percentage of net sales, for the periods indicated below: 

<TABLE>
<CAPTION>
 FISCAL YEAR ENDED                             1996      1995      1994      1993 
------------------------------------------  --------  --------  --------  -------- 
<S>                                         <C>       <C>       <C>       <C>
Net sales..................................   100.0%    100.0%    100.0%    100.0% 
Cost of goods sold ........................    79.4      73.5      70.4      69.6 
Gross profit...............................    20.6      26.5      29.6      30.4 
Selling, general and administrative .......    22.6      17.6      17.7      17.6 
Amortization of goodwill and other related 
 acquisition costs ........................     0.6       0.5       0.8       0.9 
Restructuring charge.......................      --       1.5        --        -- 
Gain on sale of license....................      --        --       0.7        -- 
Operating Income/(Loss)....................    (2.5)      6.9      11.9      11.9 
Interest expense...........................     2.0       2.1       1.9       3.7 
Income/(Loss) before income taxes and 
 Extraordinary Item........................    (4.5)      4.8      10.0       8.2 
Income tax provision (Benefit).............    (1.3)      2.1       4.0       3.2 
Income/(Loss) before 
Extraordinary Item.........................    (3.2)      2.7       6.0       5.0 
Extraordinary Item.........................      --        --       0.2       0.3 
Net Income/(Loss) .........................    (3.2%)     2.7%      5.8%      4.7% 
</TABLE>

COMPARISON OF FISCAL 1996 WITH FISCAL 1995 

Net Sales 

   Net sales increased by $61.9 million, or 32.0%, from $193.3 million in 
fiscal 1995 to $255.2 million in fiscal 1996. Fiscal 1996 includes net sales 
for Beldoch and Oak Hill for a full year as compared to net sales for six 
months and five months, respectively, in fiscal 1995. The inclusion of first 
half sales from these two divisions accounted for $52.2 million of the 
increase. The balance of the net sales increase was achieved in each of the 
Company's other divisions, other than the Lewis Frimel Division where net 
sales declined by $3.8 million. The Company continues to stress its strategy 
of diversifying its product mix while selling to a broad range of retail 
stores. Sportswear accounted for approximately 70% of 1996 net sales while 
the licensed character business accounted for the remaining 30%. 

Gross Profit 

   Gross profit for fiscal 1996 was $52.6 million, or 20.6% of net sales, 
compared to $51.2 million, or 26.5% of net sales, for fiscal 1995. In the 
fourth quarter of fiscal 1996, management undertook a program 

                               12           
<PAGE>
to reduce excess inventories and balance quantities on hand with the 
Company's near term needs. As a result, the Company recorded markdowns of 
$11.4 million. The Company also recorded, in the fourth quarter, 
approximately $5.1 million applicable to sales returns and allowances. The 
decline in the gross profit margin was primarily the result of these 
markdowns, and to a lesser extent, sales returns and allowances. 

Selling, General and Administrative Expenses 

   Selling, general and administrative expenses increased from $34.0 million 
in fiscal 1995 to $57.6 million in fiscal 1996. As a percentage of net sales, 
these costs increased from 17.6% in fiscal 1995 to 22.6% in fiscal 1996. 
Included in fiscal 1996 are charges totaling $4.2 million, or 1.7% of net 
sales related to the following: the rescission of the Fashion Avenue 
acquisition of $0.5 million; severance relating to departing employees caused 
by the events as described in Part 1, Item 1 of $0.9 million; litigation 
expenses related to the events as described in Part 1, Item 1 of $1.2 
million; and professional fees for the events as described in Part 1, Item 1 
and special investigation of $1.6 million. Excluding these charges, the 
balance of SG&A for fiscal 1996 is $53.4 million or 20.9% of net sales. Of 
the $19.4 million year to year change, as adjusted, $12.9 million (excluding 
distribution expenses) or 5.1% of net sales, relates to Beldoch and Oak Hill 
which were only included for six months and five months, respectively, in 
fiscal 1995. Additionally, distribution expense increased by $3.8 million to 
$7.8 million in fiscal 1996 or 3.1% of net sales, a 1.0 percentage point 
increase over 1995. The increase is related to the opening of a new 
distribution facility in Summerville, South Carolina and the closing of two 
distribution centers in Mississippi and New York. 

Loss From Operations 

   In fiscal 1996 the Company reported a loss from operations of $6.5 million 
versus fiscal 1995 operating income of $13.4 million principally related to 
the inventory adjustments and sales allowances and the $4.2 million of costs 
discussed in the preceding paragraph. 

Interest Expense 

   Interest expense increased by $1.1 million from $4.1 million in fiscal 
1995 to $5.2 million in fiscal 1996. The increase in interest expense was 
primarily due to the increased working capital needs of the Company resulting 
from the acquisitions in 1995, which were funded by the revolving credit 
agreement. These increases in borrowing and interest more than offset the 
decline in interest expense as a result of reduced borrowing under the 
Company's Senior Term Loan. As a percentage of net sales, interest expense 
declined from 2.1% during fiscal 1995 to 2.0% in fiscal 1996. 

Provision For Income Taxes 

   The Company's tax benefit in fiscal 1996 amounts to 28.6% of pre-tax 
losses as compared to a provision of 43.2% for fiscal 1995. The benefit in 
fiscal 1996 is lower than the Company's historical tax rate due to the 
recording of a valuation allowance on a portion of deferred tax assets 
related to state net operating loss carryforwards. 

Net Income 

   In fiscal 1996 the Company reported a net loss of $8.3 million, or ($0.59) 
per share, as a result of the factors described above, versus fiscal year 
1995 net income of $5.2 million, or $0.38 per share. 

COMPARISON OF FISCAL 1995 WITH FISCAL 1994 

Net Sales 

   Net sales increased by $42.2 million, or 27.9%, from $151.1 million in 
fiscal 1994 to $193.3 million in fiscal 1995. This increase was entirely the 
result of sales from Oak Hill Sportswear and Beldoch Industries, 

                               13           
<PAGE>
which were acquired during the third quarter of fiscal 1995 and contributed 
$78.4 million to fiscal 1995 net sales, which more than offset declines in 
the other divisions. The Company continues to stress its strategy of 
diversifying its product mix while selling to a broad range of retail stores. 

Gross Profit 

   Gross profit for fiscal 1995 was $51.2 million, or 26.5% of net sales, 
compared to $44.8 million, or 29.6% of net sales, during fiscal 1994. The 
decline in gross profit margin was due primarily to costs related to the 
discontinuance of certain of the Company's product lines (primarily intimate 
apparel sold only to the mass merchants) totaling $5.1 million, or 2.6% of 
net sales. 

Selling, General And Administrative Expenses 

   Selling, general and administrative expenses increased from $26.8 million 
in fiscal 1994 to $34.0 million in fiscal 1995 primarily as a result of 
increased sales. As a percentage of net sales, these costs declined from 
17.7% in fiscal 1994 to 17.6% in fiscal 1995. 

Restructuring Charge 

   The Company took a restructuring charge of $2.8 million during the fourth 
quarter of fiscal 1995 as described in Note 15 of the Consolidated Financial 
Statements. 

Other Income 

   The Company sold the rights to the Ship 'N Shore trademarks during the 
first quarter of fiscal 1994 resulting in a pre-tax gain of $1.1 million. 

Income From Operations 

   In fiscal 1995 the Company reported income from operations of $13.4 
million versus fiscal 1994 operating income of $18.0 million. 

Interest Expense 

   Interest expense increased from $2.9 million during fiscal 1994 to $4.1 
million during fiscal 1995. The increase was the result of reduced borrowings 
under the Company's Senior Term Loan with The Prudential Insurance Company of 
America, Pruco Life Insurance Company of America, Pruco Life Insurance and 
Prudential Reinsurance Company (The "Prudential Senior Term Loan"), which was 
repaid in full on February 2, 1995, offset by higher average borrowings under 
the Company's Credit Facility required to support higher working capital 
needs and to finance the third quarter acquisitions of Beldoch Industries and 
Oak Hill Sportswear. 

Provision For Income Taxes 

   The Company provided for taxes at an effective rate of 43.2% for fiscal 
1995 and 40.0% for fiscal 1994. The increase was due to an increase in 
non-deductible goodwill amortization. 

Net Income 

   In fiscal 1995 the Company reported net income of $5.2 million, or $0.38 
per share, as a result of the factors described above, versus fiscal 1994 net 
income of $8.8 million, or $0.66 per share. 

COMPARISON OF FISCAL 1994 WITH FISCAL 1993 

Net Sales 

   Net sales increased by $7.1 million, or 4.9%, from $144.1 million in 
fiscal 1993 to $151.1 million in fiscal 1994. Sales increases were achieved 
in the Company's licensed character product lines. The Company continues to 
stress its strategy of diversifying its product mix while selling to a broad 
range of retail stores. 

                               14           
<PAGE>
Gross Profit 

   Gross profit for fiscal 1994 was $44.8 million, or 29.6% of net sales, 
compared to $43.8 million, or 30.4% of net sales, for fiscal 1993. The 
decline in gross profit margin was due primarily to the introduction in 
mid-1994 of intimate apparel which carries a lower gross margin and poor 
winter weather that resulted in the closing of the sewing plants for thirteen 
days during the first quarter of 1994. 

Selling, General And Administrative Expenses 

   Selling, general and administrative expenses increased from $25.3 million 
in fiscal 1993 to $26.8 million in fiscal 1994 primarily as the result of 
increased net sales. As a percentage of net sales, these costs increased from 
17.6% in fiscal 1993 to 17.7% in fiscal 1994. 

Other Income 

   The Company sold the rights to the Ship 'N Shore trademarks during the 
first quarter of fiscal 1994 resulting in a one-time pre-tax gain of $1.1 
million. 

Interest Expense 

   Interest expense declined to $2.9 million during fiscal 1994 as compared 
to $5.3 million during fiscal 1993. This decline was primarily due to reduced 
borrowings under the Prudential Senior Term Loan and reductions of long-term 
indebtedness resulting from the repayment of $27.8 million in indebtedness 
and accrued interest from the proceeds of the Company's initial public 
offering in June 1993 and the repayment of an additional $10.0 million of 
indebtedness with proceeds from the Company's second public offering which 
closed on May 5, 1994, partially offset by higher average borrowings on the 
Company's line of credit to support increased working capital needs. 

Provision For Income Taxes 

   The Company provided for taxes at an effective rate of 40.0% for fiscal 
1994 and 39.0% for fiscal 1993. 

Extraodinary Items 

   The Company wrote off the prepayment penalty associated with the early 
extinguishment of $10.0 million of debt owed pursuant to the Prudential 
Senior Term Loan in the second quarter of fiscal 1994. This extraordinary 
write-off was $491,000 before income taxes, and $295,000 net of taxes. A 
similar write-off was taken in the second quarter of 1993 of $453,000 (net of 
taxes) associated with the early extinguishment of certain subordinated 
loans. 

Net Income 

   In fiscal 1994 the Company reported net income of $8.8 million, or $0.66 
per share, as a result of the factors described above, versus fiscal year 
1993 net income of $6.8 million, or $0.69 per share. 

LIQUIDITY AND CAPITAL RESOURCES 

   The Company's liquidity requirements arise from the funding of working 
capital needs, primarily inventory and accounts receivable, and the interest 
and principal payments related to certain indebtedness, and in fiscal 1995, 
from acquisitions. The Company's borrowing requirements for working capital 
fluctuate throughout the year, with peak borrowing periods between July and 
September. 

   Capital expenditures were $1.0 million for fiscal 1996, and $1.0 million 
for fiscal 1995. The Company is permitted to spend up to $1.5 million 
annually on capital expenditures in accordance with the Chase Manhattan Bank 
(formerly Chemical Bank) Revolving Credit Agreement described below. The 
Company has no material capital expenditure commitments. 

                               15           
<PAGE>
   At the end of fiscal 1996, direct borrowings were $50.8 and included a 
senior term loan of $17.5 million and revolving credit of $33.0 million with 
zero availability. Additionally, the Company had letters of credit 
outstanding of $19.9 million with unused availability of $5.1 million. At the 
end of fiscal 1995, direct borrowings and letters of credit outstanding under 
the prior credit facility were $62.6 million and $11.5 million, respectively. 

   On April 15, 1997, the Company agreed in principle to amend the Credit 
Facility to, among other things, include Donnkenny Apparel, MegaKnits and 
Beldoch as borrowers. The Facility consists of a term loan, a revolving 
credit, and a factoring agreement. The purpose of the Facility is to continue 
to finance increased working capital needs of the Company following the 
Beldoch and Oak Hill Sportswear acquisition and for general working capital 
purposes including the issuance of letters of credit. The Facility will 
expire on March 31, 1999. Under the Facility, The Chase Manhattan Bank would 
serve as agent (and would hold a 35% interest), The CIT Group/Commercial 
Services Inc. would serve as collateral agent (and hold a 15% interest), and 
each of Fleet Bank, N.A. and The Bank of New York would be co-lenders (each 
holding a 25% interest). 

   As of April 1, 1997, the balance of the Term Loan was $16.3 million. The 
interest rate is equal to the prime rate plus 1 1/2 % per annum. The 
amortization schedule calls for quarterly payments of $1.3 million, with a 
balloon payment of $7.5 million due on March 31, 1999. An excess cash flow 
recapture would be payable annually within 15 days after receipt of the 
Company's audited fiscal year-end financial statements. In addition, any tax 
refunds received in excess of $2.0 million applicable to fiscal 1996 or prior 
fiscal years would be applied to reduce the balloon payment. The default 
interest would be equal to 2% above the otherwise applicable rate. The Term 
Loan would carry no prepayment penalty. 

   The commitment under the Revolving Credit would be $85.0 million, with 
sublimits of $70.0 for direct debt and $35.0 for letters of credit. The 
interest rate would be equal to the prime rate plus 1 % per annum. Borrowings 
in excess of an allowable overadvance would bear interest at the default 
interest rate of 2% above the otherwise applicable rate. The Revolving Credit 
would also require the Company to pay certain letter of credit fees and 
unused commitment fees. Advances and letters of credit (in the aggregate) 
would be limited to (i) up to 85% of eligible accounts receivable plus (ii) 
up to 60% of eligible inventory, plus (iii) an allowable overadvance. 

   Under the Factoring Agreement the Company would be charged a factoring 
commission equal to 0.45% of the gross amount of sales, plus certain 
customary surcharges. 

   Collateral for the Facility includes a first priority lien on all accounts 
receivable, machinery, equipment, trademarks, intangibles and inventory, a 
first mortgage on all real property, a pledge of the Company's stock in 
Beldoch, and a pledge of the Company's stock in Donnkenny Apparel and 
MegaKnits. The Facility would (i) require the Company to make usual and 
customary representations and warranties, (ii) provide for certain standard 
events of default, including change-in-control and cross default provisions, 
(iii) provide certain affirmative covenants, and (iv) provide certain 
negative covenants, including limitations on debt, liens, restricted 
payments, dividends, mergers, acquisitions, consolidations, asset sales, and 
other usual and customary negative covenants. 

   The Company's operating activities for Fiscal 1996 generated $5.8 million 
more cash than they used principally as the result of lower net income, 
decreases in accounts receivable of $1.1 million, decreases in inventories of 
$3.5 million and increases in accounts payable of $8.1 million. 

   During fiscal 1994 and fiscal 1995, the Company's operating activities 
used more cash than they generated ($5.6 million in fiscal 1994 and $2.7 
million in fiscal 1995) primarily as the result of increases in inventory and 
receivables. Decreases in accounts payable were offset by decreases in 
inventory and lower net income in fiscal 1995 to produce the $2.7 million use 
of cash. 

   Cash used in fiscal 1996, 1995, and 1994 for the purchase of fixed assets 
was $1.0 million, $1.0 million and $0.8 million respectively and include 
purchases of machinery and equipment, office furniture, building improvements 
and leasehold improvements to the Company's South Carolina Warehouse 
facility. 

   During fiscal 1995, cash used for investment in acquisitions was $29.7 
million, net of cash acquired. In June of 1995, the Company acquired all of 
the issued and outstanding shares of Beldoch for $13.0 

                               16           
<PAGE>
million in cash and a $2.0 million note payable within one year of the 
closing date, bearing interest at 6.0%. The transaction was financed with 
long-term borrowings. The Company may be obligated to pay the former owners 
additional consideration based on future earnings levels. Any additional 
consideration paid will be recorded as goodwill and amortized over the 
remainder of the 20-year period subsequent to the acquisition. In July of 
1995, the Company completed the purchase of certain assets of Oak Hill for 
$14.6 million, financed by additional borrowings under the Company's 
revolving credit facility. The excess of the fair market value of net assets 
acquired were recorded as goodwill and are being amortized over 20 years. 

   Cash used in financing activities in Fiscal 1996 was $6.2 million, which 
represented repayments of $5.0 million for a senior term loan with Chase 
Manhattan Bank (formerly Chemical Bank), and $2.0 million for the note 
relating to the acquisition of Beldoch. This was offset by net borrowings 
under the revolving credit line and proceeds from the exercise of stock 
options. 

   Cash provided by financing activities in fiscal 1995 was $34 million, 
which represented the net proceeds of $11.3 million of long-term debt, net 
borrowings of $21.0 million under the revolving credit line, and proceeds of 
$2.2 million from the exercise of stock options. 

   Cash provided by financing activities in fiscal 1994 was $7.0 million, 
which represented repayments of $13.3 million of long-term debt, offset by 
net borrowing of $9.5 million and the proceeds from the stock offering. 

   The Company believes that the amount available under the revolving credit 
facility provided by the banking group along with the factoring agreement 
will be sufficient to support the Company's working capital requirements for 
the term of the agreement. Additionally, the Company believes that the letter 
of credit facility will be sufficient to support the Company's projected 
import business. 

OTHER ITEMS AFFECTING THE COMPANY 

Competition 

   The apparel industry in the United States is highly competitive and 
characterized by a number of multi-line manufacturers (such as the Company) 
and a larger number of specialty manufacturers. The Company faces substantial 
competition in its markets from manufacturers in both categories. 

Apparel Industry Cycles and other Economic Factors 

   The apparel industry historically has been subject to substantial cyclical 
variation, with consumer spending on apparel tending to decline during 
recessionary periods. A decline in the general economy or uncertainties 
regarding future economic prospects may affect consumer spending habits, 
which, in turn, could have a material adverse effect on the Company's results 
of operations and its financial condition. 

Retail Environment 

   Various retailers, including some of the Company's customers, have 
experienced declines in revenue and profits in recent periods and some have 
been forced to file for bankruptcy protection. To the extent that these 
financial difficulties continue, there can be no assurance that the Company's 
financial condition and results of operations would not be adversely 
affected. 

Seasonality of Business and Fashion Risk 

   The Company's principal products are organized into seasonal lines for 
resale at the retail level during the Spring, Summer, Transition, Fall and 
Holiday Seasons. Typically, the Company's products are designed as much as 
one year in advance and manufactured approximately one season in advance of 
the related retail selling season. Accordingly, the success of the Company's 
products is often dependent on the ability of the Company to successfully 
anticipate the needs of the Company's retail customers and the tastes of the 
ultimate consumer up to a year prior to the relevant selling season. 

                               17           
<PAGE>
Foreign Operations 

   The Company's foreign sourcing operations are subject to various risks of 
doing business abroad, including currency fluctuations (although the 
predominant currency used is the U.S. Dollar), quotas and, in certain parts 
of the world, political instability. Any substantial disruption of its 
relationship with its foreign suppliers could adversely affect the Company's 
operations. Some of the Company's imported merchandise is subject to United 
States Customs duties. In addition, bilateral agreements between the major 
exporting countries and the United States impose quotas, which limit the 
amount of certain categories of merchandise that may be imported into the 
United States. Any material increase in duty levels, material decrease in 
quota levels or material decrease in available quota allocation could 
adversely affect the Company's operations. 

Factors that May Affect Future Results and Financial Condition. 

   This Form 10-K contains or incorporates by reference forward-looking 
statements within the meaning of the Private Securities Litigation Reform Act 
of 1995. Where any such forward-looking statement includes a statement of the 
assumptions or bases underlying such forward-looking statement, the Company 
cautions that assumed facts or bases almost always vary from the actual 
results, and the differences between assumed facts or bases and actual 
results can be material, depending on the circumstances. Where, in any 
forward-looking statement, the Company or its management expresses an 
expectation or belief as to future results, there can be no assurance that 
the statement of the expectation or belief will result, or be achieved or 
accomplished. The words "believe", "expect", "estimate", "project", "seek", 
anticipate and similar expressions may identify forward-looking statements. 
The Company's future operating results and financial condition are dependent 
upon the Company's ability to successfully design, manufacture, import and 
market apparel. 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 

   See Financial Statements following Item 14 of this Annual Report on Form 
10-K. 

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

   As previously reported on the Company's Form 8-K filed November 12, 1996, 
on November 4, 1996 the Company's then auditors, KPMG Peat Marwick LLP, 
informed the Company that they were resigning. They informed the Company that 
they would no longer be able to rely on representations of financial 
management and that they did not have access to sufficient, credible 
information from others within the Company to enable them to continue as 
auditors. On December 17, 1996, Deloitte & Touche LLP accepted appointment to 
serve as the Company's new auditors. 

                               18           
<PAGE>
                                   PART III 

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT 

   Richard Rubin was the Chairman of the Board, President and Chief Executive 
Officer of the Company until December 18, 1996, when he resigned from all 
positions with the Company. Mr. Rubin joined the Company in 1978 as the 
national sales manager for the Company's Kenny Classics division. In 1982, he 
became President of Kenny Classics. In 1985, Mr. Rubin was named President 
and Chief Executive Officer of the Company. 

   Harvey A. Appelle, a director of the Company, was appointed Chairman of 
the Board and Chief Executive Officer of the Company on December 19, 1996. 
Mr. Appelle has been the President of HarGil Capital Associates Ltd., a 
private investment firm, since 1994. From 1985 to 1993, he was a Managing 
Director of the Investment Banking Division of Merrill Lynch Pierce Fenner & 
Smith Inc. and a Senior Vice President of Merrill Lynch Interfunding Inc. Mr. 
Appelle is 52 years old. 

   James W. Crystal, a director of the Company, has been President since 
1978, and Chairman of the Board since 1989, of Frank Crystal & Co., Inc., 
international insurance brokers. Mr. Crystal is 59 years old. 

   Sidney Eagle, a director of the Company, has been a principal of the law 
firm Eagle & Fein, or its predecessor, for more than the past five years. Mr. 
Eagle is 61 years old. 

   Harvey Horowitz, a director of the Company, became Vice President and 
General Counsel of the Company on October 1, 1996. Prior thereto he was a 
partner of the law firm Squadron, Ellenoff, Plesent & Sheinfeld, LLP, for 
more than the past five years. Mr. Horowitz is 54 years old. 

   Edward T. Creevy, C.P.A., was the Chief Financial Officer and Vice 
President of the Company from 1989 until December 18, 1996, when he resigned 
from all positions with the Company. 

   Ronald Hollandsworth was Corporate Controller of the Company from 1989 
until December 18, 1996, when he resigned from all positions with the 
Company. 

   Stuart S. Levy has been Vice President-Finance and the Chief Financial 
Officer of the Company since November 4, 1996. From January 1993 to July 
1996, Mr. Levy was Vice President of Finance and Chief Financial Officer of 
Xpedite Systems, Inc., a publicly-held provider of enhanced fax services. 
From August 1996 through October 1996, Mr. Levy provided services to Xpedite 
Systems, Inc., in connection with the completion and integration of 
international acquisitions. Prior thereto, he was a financial consultant to 
an investment group since 1988. Mr. Levy also serves as Assistant Secretary 
of the Company. Mr. Levy is 55 years old. 

   Lynn Siemers-Cross became President and Chief Operating Officer of the 
Company on April 14, 1997. Prior thereto she was President of the Oak Hill 
Division, and has been continuously employed by Oak Hill for more than five 
years. Ms. Siemers-Cross is 38 years old. 

ITEM 11. EXECUTIVE COMPENSATION 

   The following table sets forth compensation paid for the fiscal years 
ended December 31, 1996, December 2, 1995 and December 3, 1994, to those 
persons who were, at December 31, 1996 (i) the chief executive officer and 
(ii) the other most highly compensated executive officers of the Company, who 
are the only other executive officers of the Company (collectively, the 
"Named Executive Officers"). The information in the following tables with 
respect to the number of shares of Common Stock underlying options, option 
exercise prices and the number of shares of Common Stock acquired upon the 
exercise of options has been retroactively restated to reflect the 
two-for-one stock split paid to all holders of Common Stock of record on 
December 4, 1995 (the "Stock Split"). 

                               19           
<PAGE>
                          SUMMARY COMPENSATION TABLE 

<TABLE>
<CAPTION>
                                                    ANNUAL COMPENSATION 
-----------------------------  --------  ---------------------------------------- 
                                                                     OTHER ANNUAL 
                                 FISCAL                              COMPENSATION 
NAME AND PRINCIPAL POSITION       YEAR      SALARY       BONUS           (1) 
-----------------------------  --------  ----------  ------------  -------------- 
<S>                            <C>       <C>         <C>           <C>
Richard Rubin 
 President and Chief             1996     $604,167    $        0      $60,574(2) 
 Executive Officer until         1995      500,000     1,500,000       57,249(4) 
 December 18, 1996               1994      500,000     1,750,000       62,506(6) 
Edward T. Creevy                 1996     $196,667    $        0      $88,220 
 Chief Financial Officer,        1995      190,000       205,000       59,696 
 V.P. until November 4, 1996     1994      188,750       200,000            0 
Ronald Hollandsworth             1996     $140,652    $  100,000      $67,520 
 Corporate Controller until      1995      120,000       100,000       63,435 
 November 4, 1996                1994      118,628       100,000            0 
Harvey Appelle(7) 
 Chairman of the Board and 
 Chief Executive Officer         1996            0             0            0 
Harvey Horowitz(7) 
 Vice President and General 
 Counsel                         1996      124,444             0            0 
Stuart S. Levy(7) 
 Vice President--Finance and 
 Chief Financial Officer         1996       31,667             0            0 

</TABLE>

                    (RESTUBBED TABLE CONTINUED FROM ABOVE) 

<TABLE>
<CAPTION>
                                          LONG TERM 
                                        COMPENSATION 
                                           AWARDS 
-----------------------------  -----------------------------  ------------- 
                                                  SECURITIES 
                                                  UNDERLYING 
                                  RESTRICTED       OPTIONS/      ALL OTHER 
NAME AND PRINCIPAL POSITION      STOCK AWARDS        SARS      COMPENSATION 
-----------------------------  ---------------  ------------  ------------- 
<S>                            <C>              <C>           <C>
Richard Rubin 
 President and Chief                                25,000     $72,233(3) 
 Executive Officer until                            50,000      51,950(3) 
 December 18, 1996             $1,354,688(8)             0      46,908(3) 
Edward T. Creevy                                    10,000     $ 1,740(6) 
 Chief Financial Officer,                           20,000       1,740(6) 
 V.P. until November 4, 1996   $ 270,938(8)         20,000       1,020(6) 
Ronald Hollandsworth                                 5,000     $   488(6) 
 Corporate Controller until                         10,000         409(6) 
 November 4, 1996              $ 162,563(8)         20,000         339(6) 
Harvey Appelle(7) 
 Chairman of the Board and 
 Chief Executive Officer             0               2,500(9)        0 
Harvey Horowitz(7) 
 Vice President and General 
 Counsel                             0               2,500(9)      960(6) 
Stuart S. Levy(7) 
 Vice President--Finance and 
 Chief Financial Officer             0                   0         470 

</TABLE>

------------ 
(1)    Includes only items which are, in the aggregate, greater than or equal 
       to the lesser of $50,000 or 10% of the total annual salary and bonus. 
(2)    This amount represents a car allowance of $17,800, health insurance 
       premiums of $19,924 and disability insurance premiums of $22,850. 
(3)    Represents insurance premiums paid by, or on behalf of, the Company 
       during the covered fiscal year with respect to term and whole life 
       insurance for the benefit of the Named Executive Officer. 
(4)    This amount represents a car allowance of $17,904, health insurance 
       premiums of $19,782 and disability insurance premiums of $19,563. 
(5)    This amount represents a car allowance of $19,619, health insurance 
       premiums of $16,651 and disability insurance premiums of $26,236. 
(6)    Represents insurance premiums paid by, or on behalf of, the Company 
       during the covered fiscal year with respect to term life insurance for 
       the benefit of the Named Executive Officer. 
(7)    This individual became an executive officer of the Company in 1996. 
(8)    On April 19, 1996, pursuant to the terms of the Company's 1996 
       Restricted Stock Plan, Mr. Rubin was granted 75,000 shares, Mr. Creevy 
       was granted 15,000 shares and Mr. Hollandsworth was granted 9,000 
       shares of restricted stock. The closing price of the Company's common 
       stock on April 19, 1996 was $18.0625. As at December 31, 1996, all of 
       these restricted stock awards had been forfeited under the terms of 
       their grants. 
(9)    Represents options granted pursuant to the Company's 1994 Non-Employee 
       Director Option Plan. 

EMPLOYMENT AGREEMENTS 

Harvey Appelle 

   On April 14, 1997, the Company's Board of Directors authorized the Company 
to enter into a three year employment agreement with Mr. Appelle to serve as 
Chairman of the Board and Chief Executive Officer. The agreement will provide 
for a base annual salary of $400,000 for each of the first two years, 
increasing to $500,000 for the third year, and a discretionary performance 
bonus based on achievement of goals set annually by the Compensation 
Committee of the Board, as well as certain insurance and other benefits. 

                               20           
<PAGE>
   In addition, in connection with the execution of the employment agreement, 
the Compensation Committee authorized grants to Mr. Appelle of 150,000 
restricted shares and options to purchase an aggregate of 150,000 additional 
shares at a price equal to the closing price of the Common Stock on the date 
of grant. The agreement will further provide for an incentive cash bonus 
equal to the appreciation over five years of 50,000 shares of stock. The 
restricted shares, options and right to receive the incentive cash bonus will 
vest over the term of the agreement, subject to acceleration in the event of 
a change in control of the Company. 

   The agreement will provide that in the event Mr. Appelle's employment is 
terminated (except in certain limited circumstances) following a change in 
control of the Company, Mr. Appelle will have the right to receive severance 
benefits equal to three times the sum of the last annual salary inclusive of 
performance bonus (but not incentive bonus). 

Lynn Siemers-Cross 

   On April 14, 1997, the Company's Board of Directors authorized the Company 
to enter into a four-year employment agreement with Ms. Siemers-Cross to 
serve as President and Chief Operating Officer. The agreement will provide 
for a base annual salary of $500,000, a discretionary performance bonus based 
on achievement of goals set annually by the Compensation Committee, but not 
less than $150,000 for fiscal 1997, as well as certain insurance and other 
benefits. 

   In addition, in connection with the execution of the employment agreement, 
the Compensation Committee authorized grants to Ms. Siemers-Cross of 150,000 
restricted shares and options to purchase an aggregate of 150,000 additional 
shares at a price equal to the closing price of the Common Stock on the date 
of grant. The agreement will further provide for an incentive cash bonus 
equal to the appreciation over five years of 50,000 shares of stock. The 
restricted shares, options and right to receive the incentive cash bonus will 
vest over the term of the agreement, subject to acceleration in the event of 
a change in control of the Company. 

   The agreement will provide that in the event Ms. Siemers-Cross' employment 
is terminated (except in certain limited circumstances) following a change in 
control of the Company, Ms. Siemers-Cross will have the right to receive 
severance benefits equal to three times the sum of the last annual salary 
inclusive of performance bonus (but not incentive bonus). 

Harvey Horowitz 

   On September 5, 1996, Mr. Horowitz entered into a three-year employment 
agreement with a subsidiary of the Company to serve as Vice President, 
General Counsel and Director of Operations. The agreement provides for a base 
annual salary of $400,000, with an annual increase of 5% for each subsequent 
year, a non-discretionary performance bonus based on achievement of certain 
pre-tax profit goals, a discretionary performance bonus based on achievement 
of pre-tax profits in excess of $30,000,000, as well as certain insurance and 
other benefits. 

   In the event the Company does not renew the agreement, it will pay to Mr. 
Horowitz compensation for a period of one year following the end of the term 
of employment. 

Stuart S. Levy 

   On January 28, 1997, Mr. Levy entered into a two year employment agreement 
with the Company to serve as Chief Financial Officer, Vice President-Finance 
and Assistant Secretary. The agreement provides for an annual salary of 
$335,000, which will increase on November 4, 1997 to $350,000, an annual 
bonus based on the performance of Mr. Levy and the Company, as well as 
certain insurance and other benefits. 

   The Agreement provides for a grant of 5,000 restricted shares of Common 
Stock, and options to purchase 100,000 shares of Common Stock at a price of 
$4.43 per share, vesting over three years. 

   The Agreement provides for severance payments to be based on the current 
year's salary and the preceding year's bonus and to continue for the longer 
of the remaining term under the Agreement or six months after termination. 

                               21           
<PAGE>
                          1996 STOCK OPTIONS GRANTS 

   The Company strives to distribute stock option awards broadly throughout 
the organization. Stock option awards are based on the individual's position 
and contribution to the Company. The Company's long term performance 
ultimately determines compensation from stock options because stock option 
value is entirely dependent on the long term growth of the Company's common 
stock price. 

   The following table sets forth certain information concerning options 
granted to the Chief Executive Officer and the Named Executive Officers 
during Fiscal 1996, including information concerning the potential realizable 
value of such options. 

                      OPTION GRANTS IN LAST FISCAL YEAR 

<TABLE>
<CAPTION>
                                                                                POTENTIAL REALIZABLE 
                                                                                  VALUE AT ASSUMED 
                                                                               ANNUAL RATES OF STOCK 
                                                                               PRICE APPRECIATION FOR 
                                         INDIVIDUAL GRANTS                        OPTION TERM (1) 
                      ------------------------------------------------------  ---------------------- 
                        NUMBER OF     % OF TOTAL # 
                        SECURITIES     OF OPTIONS 
                        UNDERLYING     GRANTED TO 
                          OPTION       EMPLOYEES      EXERCISE 
                         GRANTED       IN FISCAL     PRICE (4)    EXPIRATION 
NAME                       (#)            YEAR         ($/SH)        DATE        5%($)       10%($) 
--------------------  ------------  --------------  ----------  ------------  ----------  ---------- 
<S>                   <C>           <C>             <C>         <C>           <C>         <C>
Richard Rubin........    25,000(2)       11.83%       $18.125     4/19/2006     $284,968    $722,165 
Edward T. Creevy ....    10,000(2)        4.73%        18.125     4/19/2006      113,987     288,866 
Ronald 
 Hollandsworth.......     5,000(2)        2.37%        18.125     4/19/2006       56,994     144,433 
Harvey A. Appelle ...     2,500(3)        1.18%        18.125     4/19/2006       28,497      72,216 
Harvey Horowitz......     2,500(3)        1.18%        18.125     4/19/2006       28,497      72,216 
Stuart S. Levy.......           0         0.00%           N/A           N/A          N/A         N/A 
</TABLE>

------------ 
(1)    The dollar amounts under these columns are the result of calculations 
       at the 5% and 10% rates set by the SEC and, therefore, are not intended 
       to forecast possible future appreciation, if any, of the Company's 
       stock price. 
(2)    These options expired as of March 31, 1997. 
(3)    Represents options granted to Messrs. Appelle and Horowitz as directors 
       pursuant to the Company's 1994 Non-Employee Director Option Plan. 
(4)    All options were granted at an exercise price equal to the market value 
       of the Company's common stock on the date of grant. 

                               AGGREGATE OPTION 
                      EXERCISES IN LAST FISCAL YEAR AND 
                       FISCAL YEAR END OPTION VALUES(1) 

<TABLE>
<CAPTION>
                                                          NUMBER OF SECURITIES            VALUE OF UNEXERCISED 
                                                         UNDERLYING UNEXERCISED               IN-THE-MONEY 
                             SHARES                            OPTIONS AT                      OPTIONS AT 
                            ACQUIRED                       DECEMBER 31, 1996              DECEMBER 31, 1996(2) 
                           ON EXERCISE     VALUE    ------------------------------  ------------------------------ 
NAME                           (#)        REALIZED    EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE 
-----------------------  -------------  ----------  -------------    -------------    -----------    -------------
<S>                      <C>            <C>         <C>              <C>              <C>            <C>
Richard Rubin(3)........          0       $     0       75,000               0           $  0            $  0 
Edward T. Creevy(3) ....     14,000        88,220        4,800          49,200              0               0 
Ronald 
 Hollandsworth(3).......      8,000        67,520        7,200          37,800              0               0 
Harvey Appelle..........          0             0       22,500               0              0               0 
Harvey Horowitz.........          0             0       22,500               0              0               0 
Stuart S. Levy..........        N/A           N/A          N/A             N/A            N/A             N/A 
</TABLE>

------------ 
(1)    All options were granted at an exercise price equal to market value of 
       the Company's common stock on the date of grant. 

                               22           
<PAGE>
(2)    Amount reflects the market value of the underlying shares of the 
       Company's common stock at the closing sales price reported on the 
       Nasdaq National Market on December 31, 1996 ($4.625 per share, which 
       amount has been retroactively adjusted to reflect the Stock Split) less 
       the exercise price of each option. 
(3)    These options expired as of March 31, 1997. 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 
         MANAGEMENT 

   The following table sets forth certain information, as of March 15, 1997, 
with respect to beneficial ownership of the Company's Common Stock by: (i) 
each of the Company's directors, (ii) each of the Company's Named Executive 
Officers, (iii) each person who is known by the Company beneficially to own 
more than 5% of the Company's Common Stock, and (iv) by all directors and 
executive officers of the Company as a group. All information in the table 
below with respect to the Common Stock of the Company has been restated to 
reflect the two-for-one stock split paid to all holders of Common Stock of 
record on December 4, 1995. 

<TABLE>
<CAPTION>
                  NAME AND ADDRESS                      COMMON STOCK 
                OF BENEFICIAL OWNER                  BENEFICIALLY OWNED  PERCENTAGE OWNED 
--------------------------------------------------  ------------------  ---------------- 
<S>                                                 <C>                 <C>
Richard Rubin(7)  ....................................     479,640              3.41% 
 920 Park Avenue 
 New York, NY 10028 
Shaenen Fox Capital .................................      859,350(1)           6.11% 
 Management LLC 
 200 Park Avenue 
 Suite 3900 
 New York, NY 10166 
Pax Clearing Company ................................    1,199,200(2)           8.52% 
 Limited Partnership Capital 
 440 South LaSalle Street 
 Suite 3100 
 Chicago, IL 60605 
Putnam Investments, Inc..............................    1,087,300(1)           7.73% 
 1 Post Office Square 
 Boston, MA 02109 
Pioneering Management Corporation ..................       730,000(1)           5.19% 
 60 State Street 
 Boston, MA 02109 
Edward T. Creevy(7) .................................        6,000              * 
 11 Nappa Drive 
 Westport, CT 06886 
Ronald Hollandsworth(7) .............................         None              * 
 190 Brookhaven Drive 
 Wytheville, VA 24382 
Harvey A. Appelle(3) ..............................         32,500              * 
James W. Crystal(4) ...............................         23,500              * 
Sidney Eagle(5) ...................................         19,300              * 
Harvey Horowitz(6) ................................         22,500              * 
Stuart S. Levy(8) .................................          5,000              * 
All directors and officers as a group (5 persons)          102,800              * 
</TABLE>

------------ 
*      Less than 1%. 
(1)    Based on information contained in a Schedule 13G filed with the 
       Company. 

                               23           
<PAGE>
(2)    Based on information contained in a Schedule 13D filed with the 
       Company. 
(3)    Includes 22,500 shares underlying stock options which have been granted 
       to Harvey A. Appelle pursuant to the Company's 1994 Non-Employee 
       Director Option Plan. Such options are currently exercisable. 
(4)    Includes 22,500 shares underlying stock options which have been granted 
       to James Crystal pursuant to the Company's 1994 Non-Employee Director 
       Option Plan. Such options are currently exercisable. 
(5)    Includes 17,500 shares underlying stock options which have been granted 
       to Sidney Eagle, pursuant to the Company's 1994 Non-Employee Director 
       Option Plan. Such options are currently exercisable. 
(6)    Includes 22,500 shares underlying stock options which have been granted 
       to Harvey Horowitz, pursuant to the Company's 1994 Non-Employee 
       Director Option Plan. Such options are currently exercisable. 
(7)    Based on information contained in a Form 4 filed with the Company. 
(8)    Shares to be issued pursuant to Mr. Levy's employment agreement. 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 

   Mr. Crystal is Chairman and President of Frank Crystal & Co., Inc., which 
provides insurance brokerage services to the Company. Frank Crystal & Co., 
Inc. received approximately $154,000 in commissions during 1996 for services 
rendered to the Company. 

   Mr. Rubin was a party to an employment agreement with a subsidiary of the 
Company, and is a party to a settlement agreement, as described in 
"Business--Significant Financial and Business Developments." 

   Until October 1, 1996, Mr. Horowitz was the managing partner of Squadron, 
Ellenoff, Plesent & Sheinfeld, LLP, which performs legal services for the 
Company. During 1996, the Company paid approximately $494,000 in fees and 
disbursement reimbursement to Squadron, Ellenoff, Plesent & Sheinfeld, LLP. 
Mr. Horowitz is a party to an employment agreement with a subsidiary of the 
Company, as set forth in Exhibit 10.35 hereto. 

                               24           
<PAGE>
                                   PART IV 

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

   (a) The following documents are filed as part of this report: 

     1. The following financial statements: 

        Independent Auditors' Report 

        Consolidated Balance Sheets at December 31, 1996, December 2, 1995 and 
        December 3, 1994 

      Consolidated Statements of Operations for the Fiscal Years ended 
      December 31, 1996, December 2, 1995 and December 3, 1994 

      Consolidated Statements of Stockholders' Equity for the Fiscal Years 
      ended December 31, 1996, December 2, 1995 and December 3, 1994 

      Consolidated Statements of Cash Flows for the Fiscal Years ended 
      December 31, 1996, December 2, 1995 and December 3, 1994 

      Notes to Consolidated Financial Statements 

     2. Financial Statement Schedule 

      Valuation and Qualifying Accounts 

     3. The Exhibits, which are listed on the Exhibit Index attached hereto. 

   (b) Reports on Form 8-K 

   The Company filed, during the last quarter of Fiscal 1996, the following 
reports on Form 8-K: 

   A report on Form 8-K on December 19, 1996, stating that the Company had 
been informed that the Securities and Exchange Commission was formally 
investigating various matters relating to the Company's financial statements 
and to trading in the Company's securities; that, as of November 19, 1996, 
Mr. Thomas E. Constance had resigned as a member of the Company's Board of 
Directors; that, as of December 18, 1996, Mr. Richard Rubin had resigned as 
the Company's President and Chief Executive Officer; and that the Company had 
issued a press release to the effect that Mr. Harvey Appelle had been named 
Chairman of the Board of Directors of the Company, and also that the 
Company's Board of Directors had appointed an Executive Operating Committee. 

   A report on Form 8-K on November 12, 1996, stating that on November 4, 
1996 KPMG Peat Marwick LLP, the Company's certifying accountant, had orally 
advised the Company of its resignation; stating the reasons for such 
resignation; stating that, on November 5, 1996, the Company had received from 
KPMG Peat Marwick a letter affirming its resignation; and stating that the 
Company had selected Deloitte & Touche LLP as its new independent auditors. 

   A report on Form 8-K on October 18, 1996, in which the Company confirmed 
its announcement that it was changing its fiscal year to one ending on 
December 31, 1996, and that it expected to file amended quarterly reports for 
the 1995 fiscal year and the first two quarters of the 1996 fiscal year to 
reflect adjustments to the timing of recognition of sales revenues. The 
report further stated that the Company's Form 10-K for Fiscal 1995 was to be 
amended with respect to the 1994 and 1995 fiscal years. 

   A report on Form 8-K on September 21, 1996, stating that, on September 6, 
1996, pursuant to a Stock Purchase Agreement of September 3, 1996, Donnkenny 
Apparel had acquired all of the outstanding capital stock of Fashion Avenue 
Knits Inc. and related companies. Further, the report stated that the 
Company, on September 11, 1996, determined to change its fiscal year to one 
ending on December 31 of each year, and that its Form 10-Q filing for the 
third quarter, ending September 30, 1996, would cover the transition period. 
The report further stated that the Company expected to file amended quarterly 
reports for the 1995 fiscal year and for the first two quarters of fiscal 
1996 to reflect adjustments to the timing of recognition of sales revenues. 

                               25           
<PAGE>
                                  SIGNATURES 

   Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the Company has duly caused this report to be signed on 
its behalf by the undersigned, thereunto duly authorized. 

Dated: April 14, 1997 

                                          DONNKENNY, INC. 
                                          By: /s/ Harvey A. Appelle 
                                          ----------------------------------- 
                                                Harvey A. Appelle, Chairman 
                                                of the Board of Directors and 
                                                Chief Executive Officer 

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

<TABLE>
<CAPTION>
<S>                        <C>
 Dated: April 14, 1997     /s/Harvey A. Appelle 
                           ----------------------------------------------------- 
                           Harvey A. Appelle, Chairman of the Board of 
                           Directors and Chief Executive Officer (Principal 
                           Executive Officer) 

Dated: April 14, 1997      /s/Sidney Eagle 
                           ----------------------------------------------------- 
                           Sidney Eagle, Director 

Dated: April 14, 1997      /s/James W. Crystal 
                           ----------------------------------------------------- 
                           James W. Crystal, Director 

Dated: April 14, 1997      /s/Harvey Horowitz 
                           ----------------------------------------------------- 
                           Harvey Horowitz, Director 

</TABLE>


<TABLE>
<CAPTION>
<S>                        <C>
                           /s/ Stuart S. Levy 
                           --------------------------------------------------------- 
                           Stuart S. Levy, Chief Financial Officer, Vice 
                           President-Finance and Assistant Secretary (Principal 
Dated: April 14, 1997      Financial and Accounting Officer) 
</TABLE>

                               26           
<PAGE>
                                EXHIBIT INDEX 

<TABLE>
<CAPTION>
   EXHIBIT                                                                                SEQUENTIALLY 
     NO.                               DESCRIPTION OF EXHIBIT                             NUMBERED PAGE 

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

<S>          <C>                                                                       <C>
     3.1     Amended and Restated Certificate of Incorporation of Donnkenny, Inc., 
             dated May 15, 1992.(1) 

     3.3     Certificate of Ownership and Merger of DHC Holding Corporation into 
             Donnkenny, Inc.(1) 

     3.4     Certificate of Amendment to the Amended and Restated Certificate of 
             Incorporation of Donnkenny, Inc., dated May 18, 1993.(2) 

     3.5     By-laws of Donnkenny, Inc., dated May 18, 1993.(2) 

     4.1     Specimen form of Common Stock Certificate.(4) 

    10.12    Amended and Restated Donnkenny, Inc. 1992 Stock Option Plan.(9) 

    10.13    Form of Indemnification Agreement with Directors and Executive 
             Officers.(2) 

    10.14    Donnkenny, Inc. Employees Savings 401(k) Plan.(1) 

    10.22    Employment Agreement between Richard Rubin and the Company, dated 
             September 23, 1992.(3) 

    10.23    Lease Purchase Agreement among The Industrial Development Authority of 
             Dickenson County, Virginia, Donnkenny, Inc. and the County of Dickenson, 
             Virginia, dated July 31, 1989.(3) 

    10.24    Loan Agreement between The Industrial Development Authority of Dickenson 
             County, Virginia and Donnkenny Apparel, Inc., dated as of June 8, 
             1992.(3) 

    10.25    Credit Agreement among Donnkenny Apparel, Inc. the Lenders Named therein 
             and Chemical Bank, as Agent, dated February 2, 1995.(5) 

    10.26    Satisfaction and Termination Agreement among Donnkenny, Inc., Donnkenny 
             Apparel, Inc., The Prudential Insurance Company of America, Pruco Life 
             Insurance Company, and Prudential Reinsurance Company, dated February 2, 
             1995.(5) 

    10.27    Release of Security Interest-Marks among Donnkenny, Inc., Donnkenny 
             Apparel, Inc., The Prudential Insurance Company of America, Pruco Life 
             Insurance Company and Prudential Reinsurance Company, dated February 2, 
             1995.(5) 

    10.28    Asset Purchase Agreement between Oak Hill Sportswear Corporation and 
             Donnkenny Apparel, Inc., dated as of May 23, 1995,(5) together with 
             Amendment No. 1 thereto, dated as of June 26, 1995.(8) 

    10.29    Stock Purchase Agreement among Donnkenny Apparel, Inc. and all of the 
             Shareholders of Beldoch Industries Corporation, dated June 5, 1995.(6) 

    10.30    Credit Agreement among Donnkenny Apparel, Inc., Beldoch Industries 
             Corporation, the Guarantors Named therein, the Lenders Named therein and 
             Chemical Bank, as Agent, dated June 5, 1995.(7) 

                               27           
<PAGE>
   EXHIBIT                                                                                SEQUENTIALLY 
     NO.                               DESCRIPTION OF EXHIBIT                             NUMBERED PAGE 

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

    10.31    Employment Agreement between Richard Rubin and the Company, dated 
             November 30, 1995.(9) 

    10.32    Donnkenny, Inc. 1994 Stock Option Plan for Non-Employee Directors.(9) 

    10.33    Donnkenny, Inc. 1996 Restricted Stock Plan.(12) 

    10.34    Stock Purchase Agreement between Donnkenny Apparel, Inc. and Mel Weiss, 
             dated as of September 3, 1996.(10) 

    10.35    Employment Agreement between Harvey Horowitz and the Company, dated 
             September 5, 1996. 

    10.36    Settlement Agreement between Richard Rubin and the Company, dated 
             December 18, 1996.(11) 

    10.37    Rescission Agreement between Donnkenny Apparel, Inc. and Mel Weiss, 
             dated as of January 24, 1997. 

    10.38    Employment Agreement between Stuart S. Levy and the Company, dated 
             January 28, 1997. 

    10.39    Term Sheet and Commitment Letter for Credit Agreement. 

    21       Subsidiaries of the Company. 

    27       Financial Data Schedule. 
</TABLE>

------------ 
 1 Incorporated herein by reference to the Company's Registration Statement 
   on Form S-1 (Registration No. 33-48243), as filed with the Commission on 
   May 29, 1992 (the "Registration Statement"). 
 2 Incorporated herein by reference to Amendment No. 4 to the Registration 
   Statement (Registration No. 33-48243), as filed with the Commission on May 
   24, 1993. 
 3 Incorporated herein by reference to Amendment No. 3 to the Registration 
   Statement (Registration Statement No. 33-48243), as filed with the 
   Commission on May 10, 1993. 
 4 Incorporated herein by reference to Amendment No. 5 to the Registration 
   Statement (Registration No. 33-48243), as filed with the Commission on 
   June 11, 1993. 
 5 Incorporated herein by reference to the Company's Annual Report on Form 
   10-K for the fiscal year ended December 3, 1994. 
 6 Incorporated herein by reference to the Company's Report on Form 8-K, as 
   filed with the Commission on June 2, 1995. 
 7 Incorporated herein by reference to the Company's Report on Form 8-K, as 
   filed with the Commission on June 17, 1995. 
 8 Incorporated herein by reference to the Company's Report on Form 8-K, as 
   filed with the Commission on August 8, 1995. 
 9 Incorporated herein by reference to the Company's Annual Report on Form 
   10-K for the fiscal year ended December 2, 1995. 
12 Incorporated herein by reference to the Company's Report on Form 8-K, as 
   filed with the Commission on September 21, 1996. 
11 Incorporated herein by reference to the Company's Report on Form 8-K, as 
   filed with the Commission on December 19, 1996. 
12 Incorporated by reference to the Company's 1996 Proxy Statement, filed 
   March 22, 1996. 
                               28           
<PAGE>
                                  EXHIBIT 21 
                         SUBSIDIARIES OF THE COMPANY 

<TABLE>
<CAPTION>
 SUBSIDIARY                            JURISDICTION OF INCORPORATION 
----------------------------------  --------------------------------- 
<S>                                 <C>
Christiansburg Garment Company      Delaware 
Donnkenny Apparel, Inc.             Delaware 
Beldoch Industries Corporation      Delaware 
MegaKnits, Inc.                     New York 
</TABLE>

                               29           
<PAGE>
                         INDEPENDENT AUDITORS' REPORT 

To the Board of Directors and Stockholders of 
Donnkenny, Inc. 

   We have audited the accompanying consolidated balance sheets of Donnkenny, 
Inc. and subsidiaries as of December 31, 1996, December 2, 1995 and December 
3, 1994, and the related consolidated statements of operations, stockholders' 
equity, and cash flows for each of the years then ended. Our audits also 
included the financial statement schedule listed in the Index at Item 14(a)2. 
These financial statements and financial statement schedule are the 
responsibility of the Corporation's management. Our responsibility is to 
express an opinion on these 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, such consolidated financial statements present fairly, in 
all material respects, the financial position of Donnkenny, Inc. at December 
31, 1996, December 2, 1995 and December 3, 1994 and the results of their 
operations and their cash flows for each of the years then ended in 
conformity with generally accepted accounting principles. Also, in our 
opinion, such 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. 

   As discussed in Note 2, the accompanying consolidated financial statements 
for the years ended December 2, 1995 and December 3, 1994 have been restated. 

Deloitte & Touche LLP 
New York, New York 
April 15, 1997 

                               F-1           
<PAGE>
                       DONNKENNY, INC. AND SUBSIDIARIES 

                         CONSOLIDATED BALANCE SHEETS 
                                (IN THOUSANDS) 

<TABLE>
<CAPTION>
                                                      DECEMBER 31,    DECEMBER 2,    DECEMBER 3, 
                                                          1996           1995           1994 
                                                    --------------  -------------  ------------- 
                                                                     (AS RESTATED)  (AS RESTATED) 
<S>                                                 <C>             <C>            <C>
ASSETS 
CURRENT ASSETS: 
 Cash..............................................     $  3,998       $  2,688       $  1,606 
 Accounts receivable, net of allowances of $2,240, 
  $1,946 and $881 in 1996, 1995 and 1994, 
  respectively.....................................       29,721         49,834         34,349 
 Recoverable income taxes..........................        8,625          6,921          2,308 
 Inventories.......................................       46,793         47,660         34,458 
 Deferred tax assets...............................        4,439          2,414          1,330 
 Prepaid expenses and other current assets ........        1,633          1,464          1,260 
                                                    --------------  -------------  ------------- 
  Total current assets.............................       95,209        110,981         75,311 
PROPERTY, PLANT AND EQUIPMENT, NET.................       11,774         12,670          9,552 
INTANGIBLE ASSETS..................................       32,450         34,013         24,316 
                                                    --------------  -------------  ------------- 
TOTAL..............................................     $139,433       $157,664       $109,179 
                                                    ==============  =============  ============= 
LIABILITIES AND STOCKHOLDERS' EQUITY 
CURRENT LIABILITIES: 
 Current portion of long-term debt.................     $ 50,761       $  7,092       $     85 
 Accounts payable..................................       19,476         13,178         16,959 
 Accrued expenses and other current liabilities ...        8,055         10,354          3,975 
                                                    --------------  -------------  ------------- 
  Total current liabilities........................       78,292         30,624         21,019 
                                                    --------------  -------------  ------------- 
LONG-TERM DEBT.....................................           --         55,519         28,230 
DEFERRED TAX LIABILITIES...........................        5,863          6,287          2,104 
COMMITMENTS AND CONTINGENCIES 
STOCKHOLDERS' EQUITY: 
 Preferred stock $.01 par value; authorized 500 
  shares, issued none ............................. 
 Common stock, $.01 par value; authorized 20,000 
  shares, issued and outstanding 14,045, 13,968 
  and 13,644 shares in 1996, 1995 and 1994, 
  respectively.....................................          140            139            137 
 Additional paid-in capital........................       46,344         45,744         43,585 
 Retained earnings.................................        8,794         19,351         14,104 
                                                    --------------  -------------  ------------- 
  Total stockholders' equity.......................       55,278         65,234         57,826 
                                                    --------------  -------------  ------------- 
TOTAL..............................................     $139,433       $157,664       $109,179 
                                                    ==============  =============  ============= 
</TABLE>

         See accompanying notes to consolidated financial statements. 

                               F-2           
<PAGE>
                       DONNKENNY, INC. AND SUBSIDIARIES 

                CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 3) 
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

<TABLE>
<CAPTION>
                                                 YEAR ENDED     YEAR ENDED     YEAR ENDED 
                                                DECEMBER 31,    DECEMBER 2,    DECEMBER 3, 
                                                    1996           1995           1994 
                                              --------------  -------------  ------------- 
                                                               (AS RESTATED)  (AS RESTATED) 
<S>                                           <C>             <C>            <C>
NET SALES....................................   $   255,179     $   193,306    $   151,147 
COST OF SALES................................       202,580         142,128        106,389 
                                              --------------  -------------  ------------- 

  Gross profit...............................        52,599          51,178         44,758 

OPERATING EXPENSES: 
 Selling, general and administrative 
  expenses...................................        57,603          34,000         26,772 
 Amortization of goodwill and other related 
  acquisition costs..........................         1,449             985          1,145 
 Restructuring charge........................            --           2,815             -- 
 Gain on sale of license.....................            --              --         (1,116) 
                                              --------------  -------------  ------------- 
  Operating (loss) income....................        (6,453)         13,378         17,957 

OTHER EXPENSE: 
 Interest expense............................         5,154           4,135          2,870 
                                              --------------  -------------  ------------- 
  (Loss) income before income taxes and 
   extraordinary item........................       (11,607)          9,243         15,087 
INCOME TAX PROVISION (BENEFIT)...............        (3,319)          3,996          6,034 
                                              --------------  -------------  ------------- 

(LOSS) INCOME BEFORE 
 EXTRAORDINARY ITEM..........................        (8,288)          5,247          9,053 

EXTRAORDINARY ITEM-- 
 Net of income taxes.........................            --              --            295 
                                              --------------  -------------  ------------- 

NET (LOSS) INCOME............................   $    (8,288)    $     5,247    $     8,758 
                                              ==============  =============  ============= 
(LOSS) INCOME PER COMMON SHARE: 
 (Loss) income before extraordinary item ....   $     (0.59)    $      0.38    $      0.68 
 Extraordinary item..........................            --              --          (0.02) 
                                              --------------  -------------  ------------- 
 Net (loss) income...........................   $     (0.59)    $      0.38    $      0.66 
                                              ==============  =============  ============= 

WEIGHTED AVERAGE NUMBER 
 OF COMMON AND COMMON 
 EQUIVALENT SHARES OUTSTANDING...............    14,012,116      13,910,342     13,330,192 
                                              ==============  =============  ============= 
</TABLE>

         See accompanying notes to consolidated financial statements. 

                               F-3           
<PAGE>
                       DONNKENNY, INC. AND SUBSIDIARIES 

               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 
                      YEAR ENDED DECEMBER 31, 1996, AND 
              YEARS ENDED DECEMBER 2, 1995 AND DECEMBER 3, 1994 
                                (IN THOUSANDS) 

<TABLE>
<CAPTION>
                                                         ADDITIONAL                    TOTAL 
                                  PREFERRED    COMMON     PAID-IN      RETAINED    STOCKHOLDERS' 
                                    STOCK      STOCK      CAPITAL      EARNINGS       EQUITY 
                                -----------  --------  ------------  ----------  --------------- 
<S>                             <C>          <C>       <C>           <C>         <C>
BALANCE, DECEMBER 4, 1993 .....      $--        $ 62      $32,775      $ 6,945        $39,782 
Adjustment of results of prior 
 periods.......................       --          --           --       (1,599)        (1,599) 
                                -----------  --------  ------------  ----------  --------------- 
BALANCE, DECEMBER 4, 1993 
 (As restated).................       --          62       32,775        5,346         38,183 

 Stock Split (two for one) ....       --          69          (69)          --             -- 

 Proceeds from stock offering .       --           6       10,879           --         10,885 

 Net income (as restated) .....       --          --           --        8,758          8,758 
                                -----------  --------  ------------  ----------  --------------- 

BALANCE, DECEMBER 3, 1994  (As 
restated)......................       --         137       43,585       14,104         57,826 
 Exercise of stock options ....                    2        2,159           --          2,161 

 Net income (as restated) .....       --          --           --        5,247          5,247 
                                -----------  --------  ------------  ----------  --------------- 
BALANCE, DECEMBER 2, 1995 
 (As restated).................       --         139       45,744       19,351         65,234 

 Net loss--December 3, 1995 to 
  December 31, 1995 (Note 3) ..       --          --           --       (2,269)        (2,269) 

 Exercise of stock options ....                    1          600                         601 

 Net loss--year ended December 
  31, 1996.....................       --          --           --       (8,288)        (8,288) 
                                -----------  --------  ------------  ----------  --------------- 

BALANCE, DECEMBER 31, 1996 ....      $--        $140      $46,344      $ 8,794        $55,278 
                                ===========  ========  ============  ==========  =============== 
</TABLE>

         See accompanying notes to consolidated financial statements. 

                               F-4           
<PAGE>
                       DONNKENNY, INC. AND SUBSIDIARIES 
                    CONSOLIDATED STATEMENTS OF CASH FLOWS 
                                (IN THOUSANDS) 

<TABLE>
<CAPTION>
                                                         YEAR ENDED     YEAR ENDED     YEAR ENDED 
                                                        DECEMBER 31,    DECEMBER 2,    DECEMBER 3, 
                                                            1996           1995           1994 
                                                      --------------  -------------  ------------- 
                                                                       (AS RESTATED)  (AS RESTATED) 
<S>                                                   <C>             <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 
 (Loss) income before extraordinary item.............    $  (8,288)      $  5,247       $  9,053 
 Extraordinary item..................................           --             --           (295) 
 Adjustments to reconcile net income to net cash 
  provided by (used in) operating activities: 
  Deferred income taxes..............................       (2,449)         1,279            350 
  Depreciation and amortization of fixed assets .....        1,911          1,889          1,036 
  Amortization of inventory step up..................           --          1,905             -- 
  Amortization of intangibles and other .............        1,449            985          1,145 
  Provision for losses on accounts receivable .......          231          1,065           (237) 
 Changes in assets and liabilities, net of the 
  effects of acquisitions and disposals: 
  Decrease (increase) in accounts receivable ........          876         (9,601)        (5,587) 
  Increase in recoverable income taxes...............         (127)        (4,613)        (2,308) 
  Decrease (increase) in inventories.................        3,458          2,138        (10,406) 
  Decrease in prepaid expenses and other current 
   assets............................................        1,378            289            524 
  Increase (decrease) in accounts payable............        8,116         (6,286)         3,002 
  (Decrease) increase in accrued expenses and other 
   current liabilities...............................         (796)         3,012         (1,722) 
  Decrease in income taxes payable...................           --             --           (116) 
                                                      --------------  -------------  ------------- 
   Net cash provided by (used in) operating 
   activities........................................        5,759         (2,691)        (5,561) 
                                                      --------------  -------------  ------------- 
CASH FLOWS FROM INVESTING ACTIVITIES: 
 Purchase of fixed assets............................       (1,016)          (962)          (815) 
 Acquisitions, net of cash acquired..................           --        (29,715)            -- 
                                                      --------------  -------------  ------------- 
   Net cash used in investing activities.............       (1,016)       (30,677)          (815) 
                                                      --------------  -------------  ------------- 
CASH FLOWS FROM FINANCING ACTIVITIES: ............... 
 Repayment of long-term debt.........................       (7,100)       (13,711)       (13,330) 
 Proceeds of long-term debt..........................           --         25,000             -- 
 Repayments under revolving credit line..............     (151,010)       (30,500)       (18,000) 
 Borrowings under revolving credit line..............      151,300         51,500         27,500 
 Proceeds of stock offering..........................           --             --         10,885 
 Proceeds from exercise of stock options.............          600          2,161             -- 
                                                      --------------  -------------  ------------- 
   Net cash (used in) provided by financing 
   activities........................................       (6,210)        34,450          7,055 
                                                      --------------  -------------  ------------- 
NET (DECREASE) INCREASE IN CASH......................       (1,467)         1,082            679 
CASH, AT BEGINNING OF PERIOD.........................        5,465          1,606            927 
                                                      --------------  -------------  ------------- 
CASH, AT END OF PERIOD...............................    $   3,998       $  2,688       $  1,606 
                                                      ==============  =============  ============= 
</TABLE>

         See accompanying notes to consolidated financial statements. 

                               F-5           
<PAGE>
                       DONNKENNY, INC. AND SUBSIDIARIES 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
                        YEARS ENDED DECEMBER 31, 1996, 
                    DECEMBER 2, 1995 AND DECEMBER 3, 1994 
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

   NATURE OF BUSINESS -- The Company designs, manufactures, imports and 
markets a broad line of moderately priced women's sportswear and sleepwear. 
In addition, the Company manufactures, imports and markets men's, women's and 
children's sportswear and intimate apparel featuring various licensed cartoon 
character images. The Company's products are primarily sold throughout the 
United States by retail chains, department stores and smaller specialty 
shops. 

   PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements 
include the accounts of Donnkenny, Inc. and its wholly owned subsidiaries 
(collectively, the "Company"). All significant intercompany balances and 
transactions have been eliminated in consolidation. 

   CHANGE IN YEAR END -- In September 1996, the Company adopted December 31 
as its fiscal year end. Prior to 1996, the Company's fiscal year ended on the 
first Saturday in the month of December. Summarized statement of operations 
and cash flow data for the transition period from December 3, 1995 through 
December 31, 1995 (the "Transition Period") is included herein (See Note 3). 

   PUBLIC OFFERING -- On May 5, 1994, the Company completed a public offering 
of 5,060,000 shares of common stock of which 1,177,640 shares were sold by 
the Company and 3,882,360 shares were sold by certain stockholders. The price 
per share of $10.3725 for the offering resulted in proceeds of $10,885. The 
net proceeds were used to repay indebtedness, accrued interest and a 
prepayment penalty. 

   INVENTORIES -- Inventories are stated at the lower of cost or market. Cost 
is determined using the last-in, first-out method (LIFO) for $28,769 and the 
first-in, first-out method (FIFO) for the balance of the inventories at 
December 31, 1996. 

   PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are 
recorded at cost. Depreciation and amortization are computed on a 
straight-line basis over the estimated useful lives of the assets or, where 
applicable, the term of the lease, if shorter. 

   Estimated useful lives are as follows: 

<TABLE>
<CAPTION>
<S>                            <C>
 Buildings                            9 to 38 years 
Machinery and equipment               3 to 10 years 
Furniture and fixtures                7 to 10 years 
Leasehold improvements                7 to 10 years 
                               (or lease term if shorter) 
</TABLE>

   INTANGIBLE ASSETS -- Goodwill, which represents the excess purchase price 
over fair value of net assets acquired relates to the acquisition of the 
Company in 1989, and the sportswear division of Oak Hill Sportswear 
Corporation ("Oak Hill") in 1995. Goodwill is amortized on a straight-line 
basis over the expected periods to be benefited, ranging from 20 to 40 years. 

   Also included in intangible assets are organizational expenses and costs 
related to licenses acquired by the Company, which are being amortized using 
the straight-line method over periods of 5 to 20 years, respectively. 

   ASSESSMENT OF ASSET IMPAIRMENT -- The Company periodically assesses the 
recoverability of the carrying value of long-lived assets, including 
identifiable intangible assets, whenever events or changes in circumstances 
indicate that the carrying amount of an asset may not be recoverable. The 
assessment of recoverability of the carrying amount of an asset is based on 
estimated undiscounted future cash flows from the use of the asset and 
eventual disposition. If the estimated undiscounted future cash flows are 
less than the carrying value, an impairment loss is charged to operations 
based on the difference between the carrying amount and the fair value of the 
asset. 

                               F-6           
<PAGE>
    The Company assesses the recoverability of goodwill by determining 
whether the amortization of goodwill over its remaining life can be recovered 
through undiscounted future operating cash flows of the acquired operation or 
asset. If the estimated cash flows are less than the carrying value, an 
impairment loss is charged to operations based on the difference between the 
carrying amount and the estimated discounted cash flows. 

   INCOME TAXES -- Income taxes are accounted for under the asset and 
liability method. Deferred tax assets and liabilities are recognized for 
future tax consequences attributable to differences between the financial 
statement carrying amounts of existing assets and liabilities and their 
respective tax bases and operating loss and tax credit carryforwards. 
Deferred tax assets 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 of a change in tax rates on deferred 
tax assets and liabilities is recognized in income in the period that 
includes the enactment date. SFAS No. 109 requires that deferred tax assets 
are to be reduced by a valuation allowance if it is more likely than not that 
some portion or all of the deferred tax assets will not be realized. 

   STOCK SPLIT -- On November 17, 1995, the Board of Directors authorized a 
two-for-one stock split which was paid to all holders of record on December 
4, 1995. All references in the accompanying consolidated financial statements 
to number of shares, per share amounts, and prices of the Company's common 
stock for periods prior to December 4, 1995 have been restated to reflect the 
stock split. 

   FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amount of significant 
financial instruments, which includes accounts receivable, accounts payable 
and accrued expenses, all approximated fair value as of December 31, 1996, 
December 2, 1995, and December 3, 1994 due to their short maturities. Bank 
debt approximates fair value due to its variable interest rate. 

   ACCOUNTING FOR STOCK-BASED COMPENSATION -- During 1996, the Company 
adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based 
Compensation, which establishes financial accounting and reporting standards 
for stock-based employee compensation plans. This statement allows employers 
to continue to apply previous accounting guidance regarding stock-based 
compensation and only disclose the proforma impact the accounting provisions 
of the new standard would have had. The pro forma amounts required to be 
disclosed will reflect the difference between compensation cost, if any, 
included in net income and the related cost measured by the fair value based 
method defined in this Statement. 

   USE OF ESTIMATES -- The preparation of financial statements in conformity 
with generally accepted accounting principles requires management to make 
estimates and assumptions that affect the reported amounts of assets and 
liabilities (such as accounts receivable, inventories, restructuring 
reserves, and valuation allowances for income taxes), and disclosures of 
contingent assets and liabilities at the date of the financial statements, 
and the reported amounts of revenues and expenses during the reporting 
period. Actual results could differ from those estimates. 

2. RESTATEMENT OF FINANCIAL INFORMATION 

   The Company has restated its financial statements for the years ended 
December 2, 1995 and December 3, 1994 because of errors discovered for those 
periods subsequent to the issuance of such financial statements. The 
financial statements for the years ended December 2, 1995 and December 3, 
1994 required restatement to correct the reporting for the recognition of net 
sales, cost of sales, and certain expenses. 

                               F-7           
<PAGE>
    The impact of the restatement on the Company's balance sheets and 
statements of operations is summarized as follows: 

<TABLE>
<CAPTION>
                                              YEAR ENDED                   YEAR ENDED 
STATEMENTS OF OPERATIONS                   DECEMBER 2, 1995             DECEMBER 3, 1994 
-----------------------------------  ---------------------------  --------------------------- 
                                      (AS ORIGINALLY               (AS ORIGINALLY 
                                         REPORTED)     (RESTATED)     REPORTED)     (RESTATED) 
<S>                                  <C>               <C>            <C>           <C>
Net sales ..........................     $210,270       $193,306      $158,800       $151,147 
Gross profit........................       56,351         51,178        46,517         44,758 
Operating income....................       13,869         13,378        18,600         17,957 
Income before extraordinary charge          5,763          5,247        10,064          9,053 
Net income..........................        5,763          5,247         9,769          8,758 
Per common share: 
 Income before extraordinary item  .     $   0.41       $   0.38      $   0.76       $   0.68 
 Net income ........................     $   0.41       $   0.38      $   0.74       $   0.66 
</TABLE>

<TABLE>
<CAPTION>
 BALANCE SHEET                             DECEMBER 2, 1995             DECEMBER 3, 1994 
-----------------------------------  ---------------------------  --------------------------- 
                                      (AS ORIGINALLY               (AS ORIGINALLY 
                                        REPORTED)     (RESTATED)     REPORTED)     (RESTATED) 
<S>                                  <C>              <C>            <C>           <C>
Current Assets  ....................     $111,603      $110,981       $ 77,758      $ 75,311 
Total Assets  ......................      161,647       157,664        111,626       109,179 
Total Liabilities  .................       93,287        92,430         51,190        51,353 
Stockholders' Equity  ..............       68,360        65,234         60,436        57,826 
</TABLE>

3. TRANSITION PERIOD 

   The following information represents the condensed consolidated income 
statement and cash flow information for the transition period from December 
3, 1995 to December 31, 1995: 

<TABLE>
<CAPTION>
<S>                                      <C>
 INCOME STATEMENT DATA 
Net sales ............................   $ 6,838 
Gross profit..........................       915 
Operating expenses ...................     4,339 
Operating loss .......................    (3,424) 
Other expense ........................      (422) 
Net loss before income tax benefit  ..    (3,846) 
Net loss .............................    (2,269) 
CASH FLOW DATA 
Cash flow from operating activities  .   $ 7,827 
Cash flows from investing activities         (11) 
Cash flow from financing activities  .    (5,039) 
Net increase in cash .................     2,777 
Cash at beginning of period ..........     2,688 
Cash at end of period ................     5,465 
</TABLE>

4. ACQUISITIONS 

   In June 1995, the Company acquired all of the issued and outstanding 
shares of Beldoch Industries Corporation ("Beldoch") for $13,000 in cash and 
a $2,000 note payable due within one year of the closing date, bearing 
interest at 6%. The transaction was financed with long-term borrowings (Note 
8). The Company may be obligated to pay the former owners additional 
consideration based on future earnings levels. Any additional consideration 
paid will be recorded as goodwill and amortized over the remainder of the 20 
year period subsequent to the acquisition. 

   In July 1995, the Company completed the purchase of certain assets of Oak 
Hill for $14,600, financed by additional borrowings under the Company's 
revolving credit line. The excess of the purchase price over the fair market 
value of net assets acquired was recorded as goodwill and is being amortized 
over 20 years. 

                               F-8           
<PAGE>
    The operating results of each acquisition are included in the Company's 
consolidated results of operations from the respective date of acquisition. 
The following unaudited pro forma information assumes the acquisitions of 
Beldoch and Oak Hill were completed as of the beginning of each of the 
respective years. These results have been presented for comparative purposes 
only and do not purport to be indicative of results that would have occurred 
if the acquisitions had been made at the beginning of each of the respective 
years, or results that may occur in the future: 

<TABLE>
<CAPTION>
                         1995        1994 
                     ----------  ---------- 
<S>                  <C>         <C>
Net sales ..........   $248,698    $296,458 
Operating income ...      8,666      21,069 
Net income .........        384       8,461 
Earnings per share         0.03        0.63 
</TABLE>

5. INVENTORIES 

   Inventories consist of the following at December 31, 1996, December 2, 
1995, and December 3, 1994: 

<TABLE>
<CAPTION>
                                      1996       1995      1994 
                                   ---------  ---------  -------- 
<S>                                <C>        <C>        <C>
Raw materials  ...................  $12,081    $11,071    $ 8,320 
Work in process  .................    4,808      4,783      4,314 
Finished goods  ..................   29,904     31,806     21,824 
                                   ---------  ---------  -------- 
                                    $46,793    $47,660    $34,458 
                                   =========  =========  ======== 
</TABLE>

   If the first-in, first-out method of inventory valuation had been used, 
inventories would have been approximately $404, $346, and $270 higher than 
reported at December 31, 1996, December 2, 1995, and December 3, 1994, 
respectively. 

6. PROPERTY, PLANT AND EQUIPMENT 

   Property, plant, and equipment consist of the following at December 31, 
1996, December 2, 1995, and December 3, 1994: 

<TABLE>
<CAPTION>
                                      1996       1995       1994 
                                   ---------  ---------  -------- 
LAND AND LAND IMPROVEMENTS  ......   $   747    $   747   $   747 
<S>                                <C>        <C>        <C>
Buildings and improvements  ......     8,691      8,342     7,039 
Machinery and equipment ..........     8,787      9,207     5,718 
Furniture and fixtures ...........     1,342      1,021       806 
                                   ---------  ---------  -------- 
                                      19,567     19,317    14,310 
Less accumulated depreciation and 
 amortization ....................     7,793      6,647     4,758 
                                   ---------  ---------  -------- 
                                     $11,774    $12,670   $ 9,552 
                                   =========  =========  ======== 
</TABLE>

7. INTANGIBLE ASSETS 

   Intangible assets consist of the following at December 31, 1996, December 
2, 1995, and December 3, 1994: 

<TABLE>
<CAPTION>
                                   1996       1995       1994 
                                ---------  ---------  --------- 
<S>                             <C>        <C>        <C>
Goodwill.......................   $32,059    $32,059    $27,913 
Licenses ......................     6,550      6,550        616 
                                ---------  ---------  --------- 
                                   38,609     38,609     28,529 
Less accumulated amortization       6,159      4,596      4,213 
                                ---------  ---------  --------- 
                                  $32,450    $34,013    $24,316 
                                =========  =========  ========= 
</TABLE>

                               F-9           
<PAGE>
 8. LONG-TERM DEBT 

   Long-term debt consists of the following at December 31, 1996, December 2, 
1995, and December 3, 1994: 

<TABLE>
<CAPTION>
                                1996       1995       1994 
                             ---------  ---------  --------- 
<S>                          <C>        <C>        <C>
Revolving credit (a) .......   $33,000    $36,500    $15,500 
Senior term (b) ............    17,500     23,750         -- 
Seller note (c) ............        --      2,000         -- 
Prudential senior term (d)          --         --     12,368 
Other ......................       261        361        447 
                             ---------  ---------  --------- 
                                50,761     62,611     28,315 
Less current maturities  ...    50,761      7,092         85 
                             ---------  ---------  --------- 
                               $    --    $55,519    $28,230 
                             =========  =========  ========= 
</TABLE>

------------ 
(a)    The revolving credit line, which was originally scheduled to expire on 
       February 2, 1999, was modified by the fifth amendment and waiver 
       agreement to waive any defaults through April 30, 1997. The agreement 
       provides for maximum borrowings of up to $35,500. Each advance bears 
       interest at the prime plus 0.5%. At December 31, 1996, the prime rate 
       was 8.25%. 
(b)    On June 5, 1995, the Company entered into a senior term loan with Chase 
       Manhattan Bank (formerly Chemical Bank) for $25,000. The loan is 
       payable in quarterly installments of $1,250 which began September 30, 
       1995, with a balloon payment of $7,500 due February 2, 1999. The loan 
       bears interest at the prime rate plus 1.0% at December 31, 1996. 
(c)    Note payable to former owners of Beldoch which was due and paid in June 
       1996. This note bears interest at 6%. 
(d)    The senior term loan from an insurance company with a face amount of 
       $30,000 was issued in February 1990 to refinance then existing 
       indebtedness. This loan was payable in installments that began in March 
       1992, with the final payment made in February 1995. Interest was 
       payable quarterly at 11.7%. 

   The agreements contain certain restrictive covenants which, among other 
things, require the Company to maintain certain financial ratios, and to 
restrict investments, additional indebtedness and the payment of dividends. 

   The revolving credit and senior term loan are secured by substantially all 
of the assets of the Company and Beldoch. 

New Loan Agreement 

   On April 15, 1997, the Company agreed to a new credit facility to amend 
and replace its existing credit facility. The new facility, which expires on 
March 31, 1999, consists of a term loan, a revolving credit facility and a 
factoring agreement. 

   The Company's debt under the existing credit facility which was scheduled 
to expire on February 2, 1999 was classified as current portion of long-term 
debt as of December 31, 1996 because of the existence of covenant defaults 
allowing the Company's lenders to call the debt. Upon the closing of the new 
credit facility, that portion of the Company's debt which is not payable 
within one year will be long term. 

   The term loan, in the original amount of $25,000 is payable in quarterly 
installments of $1,250 with a balloon payment of $7,500 on March 31, 1999 and 
bears interest at the prime rate (8.25% at December 31, 1996) plus 1 1/2%. 
Additional principal payments are required out of excess cash flow, as 
defined, which includes any tax refunds for 1996 and prior years in excess of 
$2,000. As a result, an additional $6,625 has been classified as current at 
December 31, 1996. 

                              F-10           
<PAGE>
    The revolving credit facility provides for borrowings of up to $85,000, 
subject to an asset based borrowing formula with a direct debt sublimit of 
$70,000 and a letter of credit sublimit of $35,000. Borrowings under the 
revolving loan facility bear interest at prime plus 1/2%. 

   As part of the aforementioned amendment, the Company agreed to a factoring 
agreement with a member of the lending group, whereby all accounts receivable 
will be factored for the duration of the loan agreement. 

   As collateral for borrowings under the agreement, the Company has granted 
the lenders a first priority lien on all accounts receivable, inventory, 
machinery, equipment and intangibles and pledged the stock of Beldoch and 
Donnkenny Apparel, Inc. 

   The Credit Agreement contains numerous financial and operating covenants, 
including limitations on additional indebtedness, liens, dividends, stock 
repurchases and capital expenditures. 

   In addition, the Company is required to maintain specified levels of 
tangible net worth and comply with a maximum cumulative net loss test. 

9. INCOME TAXES 

   Income tax expense (benefit) for 1996, 1995 and 1994 is comprised of the 
following: 

<TABLE>
<CAPTION>
                       1996       1995      1994 
                   ----------  --------  -------- 
<S>                <C>         <C>       <C>
Current: 
 Federal..........   $(1,462)    $2,241    $4,762 
 State and local         592        476       922 
Deferred .........    (2,449)     1,279       350 
                   ----------  --------  -------- 
                     $(3,319)    $3,996    $6,034 
                   ==========  ========  ======== 
</TABLE>

   A reconciliation of the statutory Federal tax rate and the effective rate 
follows: 

<TABLE>
<CAPTION>
                                                1996       1995      1994 
                                             ---------  --------  -------- 
<S>                                          <C>        <C>       <C>
Federal statutory tax rate .................     (35)%      35%       35% 
State and local taxes, net of Federal 
 income tax benefit ........................      (2)        4         3 
Losses providing no state and local tax 
 benefit....................................       4        --        -- 
Amortization of nondeductible goodwill .....       3         3         2 
Other ......................................       1         1        -- 
                                             ---------  --------  -------- 
                                                 (29)%      43%       40% 
                                             =========  ========  ======== 
</TABLE>

                              F-11           
<PAGE>
    The tax effects of temporary differences that give rise to significant 
portions of the deferred tax assets and liabilities are presented below: 

<TABLE>
<CAPTION>
                                          DECEMBER 31,    DECEMBER 2,    DECEMBER 3, 
                                              1996           1995           1994 
                                        --------------  -------------  ------------- 
<S>                                     <C>             <C>            <C>
Deferred tax assets: 
 Accounts receivable allowances  ......     $   662         $   513        $   427 
 Inventory valuation ..................       2,356           1,182            853 
 Accrued expenses .....................         584             249             50 
 Restructuring charges ................         448             470             -- 
 State operating loss carryforwards ...         634              --             -- 
 Other ................................         182              --             -- 
                                        --------------  -------------  ------------- 
  Total gross deferred tax assets  ....       4,866           2,414          1,330 
  Less valuation allowance ............        (427)             --             -- 
                                        --------------  -------------  ------------- 
  Total net deferred tax assets  ......       4,439           2,414          1,330 
                                        --------------  -------------  ------------- 
Deferred tax liabilities: 
 Property, plant and equipment  .......      (2,294)         (2,489)        (2,104) 
 Intangibles ..........................      (3,569)         (3,798)            -- 
                                        --------------  -------------  ------------- 
  Total gross deferred tax liabilities       (5,863)         (6,287)        (2,104) 
                                        --------------  -------------  ------------- 
Net deferred tax liability.............     $(1,424)        $(3,873)       $  (774) 
                                        ==============  =============  ============= 
</TABLE>

   As of December 31, 1996, December 2, 1995, and December 3, 1994, the 
Company has deferred tax assets attributable to accounts receivable 
allowances, inventory valuation, accrued expenses, restructuring charges and 
other items. The Company considers these assets to be fully realizable based 
on the Company's anticipated future earnings and the fact that most of these 
items are expected to reverse within the next twelve months. At December 31, 
1996, the Company recorded a valuation allowance for a portion of its state 
net operating loss carryforward. 

10. COMMITMENTS AND CONTINGENCIES 

   a.      In November 1996, ten designated class action lawsuits were 
           commenced against the Company and certain former officers in the 
           United States District Court for the Southern District of New 
           York. The complaints in these actions allege various violations of 
           the federal securities laws and seek an unspecified amount of 
           monetary damages and other monetary relief. These actions have now 
           been consolidated pursuant to court order and the plaintiffs have 
           been directed to file a consolidated complaint. As this 
           consolidated complaint has yet to be filed, the Company is not 
           presently in a position to determine the ultimate outcome of these 
           legal proceedings or the impact on their financial condition of 
           the Company. 

           In September 1996, the Securities and Exchange Commission ("SEC") 
           obtained an order directing a private investigation of the Company 
           in connection with, among other things, the alleged overstatement 
           of revenues and expenses for certain reporting periods. The 
           Company is continuing to cooperate with the SEC's ongoing 
           investigation. In addition, the Nasdaq Stock Market, Inc. 
           commenced a review of the Company's eligibility for continued 
           listing on the Nasdaq Stock Market. Management believes that the 
           accompanying restated financial statements reflect all adjustments 
           necessary to correct previously issued financial statements. 

                              F-12           
<PAGE>
    b.     Rental expense for operating leases for the periods ended December 
           31, 1996, December 2, 1995 and December 3, 1994 approximated 
           $5,207, $2,996, and $1,729, respectively. Minimum future rental 
           payments as of December 31, 1996 for operating leases with initial 
           noncancelable lease terms in excess of one year, are as follows: 

<TABLE>
<CAPTION>
 YEAR ENDING DECEMBER 31,   AMOUNT 
------------------------  -------- 
<S>                       <C>
1997.....................  $ 3,909 
1998.....................    3,761 
1999.....................    3,475 
2000.....................    2,590 
2001.....................    2,402 
Thereafter ..............   11,643 
                          -------- 
                           $27,780 
                          ======== 
</TABLE>

   c.      At December 31, 1996, the Company was contingently liable on 
           outstanding letters of credit issued amounting to $19,166. 

11. EMPLOYEE BENEFIT PLAN 

   The Company sponsors an Employees' Savings 401(k) Plan (the "Plan") 
covering substantially all of its employees. Contributions to the Plan are 
made by the Company at the discretion of the Board of Directors. Total 
contributions to the Plan charged to operations for 1996, 1995 and 1994 
amounted to approximately $0, $0 and $302, respectively, exclusive of 
administrative costs. 

12. SUPPLEMENTAL CASH FLOW INFORMATION 

   a.      Cash paid for interest and income taxes was $4,960 and $2,990, 
           respectively, in 1996, $3,993 and $7,409, respectively, in 1995 
           and $2,464 and $7,314, respectively, in 1994. 

   b.      In connection with the acquisition of all the issued and 
           outstanding shares of Beldoch and certain assets of Oak Hill for 
           $32,400 (inclusive of a $2,000 note payable), the Company acquired 
           assets with a fair value of $38,241 and assumed liabilities of 
           $9,987 and recorded goodwill of $4,146. 

13. GAIN ON SALE OF LICENSE 

   The Company sold the rights to the Ship 'N Shore trademarks in December 
1993 resulting in one-time pretax gain of $1,116 equal to $0.05 per share on 
an after-tax basis. 

14. STOCK OPTIONS 

   The Company has a stock award and incentive program which permits the 
issuance up to 2,000,000 options on terms as determined by the Board of 
Directors. 

   Under the terms of the plan, options granted may be either non-qualified 
or incentive stock options and the exercise price, determined by the Stock 
Option committee, may not be less than the fair market value of a share on 
the date of the grant. 

                              F-13           
<PAGE>
    Information regarding the Company's stock option plan is summarized 
below: 

<TABLE>
<CAPTION>
                                             1996                         1995                         1994 
                                 ---------------------------  ---------------------------  -------------------------- 
                                                 WEIGHTED-                    WEIGHTED-                   WEIGHTED- 
                                                  AVERAGE                      AVERAGE                     AVERAGE 
                                    OPTIONS    EXERCISE PRICE    OPTIONS    EXERCISE PRICE   OPTIONS    EXERCISE PRICE 
                                 -----------  --------------  -----------  --------------  ----------  -------------- 
<S>                              <C>          <C>             <C>          <C>             <C>         <C>
Outstanding at beginning 
 of the year ...................     543,600       $ 8.26         727,000       $7.55         582,000       $ 6.69 

Granted ........................     216,350        18.15         198,000        8.14         187,000        10.39 
Exercised ......................     (76,100)        7.89        (323,200)       6.69 
Canceled .......................     (25,050)       12.80         (58,200)       8.03         (42,000)        7.99 
                                 -----------  --------------  -----------  --------------  ----------  -------------- 
Outstanding at end of year  ....     658,800        11.38         543,600        8.26         727,000         7.55 
                                 ===========                  ===========                  ========== 
Exercisable at year end ........     268,100                      130,000                     275,000 
                                 ===========                  ===========                  ========== 
Available for grant at year 
 end............................   1,341,200                    1,456,400                   1,273,000 
                                 ===========                  ===========                  ========== 
</TABLE>

   The options outstanding at December 31, 1996 range in price as follows: 

<TABLE>
<CAPTION>
 # OF OPTIONS    EXERCISE PRICE 
--------------  -------------- 
<S>             <C>
    454,100     $6.69-$11.06 
    204,700     $18.15 
-------------- 
    658,800 
============== 

</TABLE>

   The Company applies Accounting Principles Board Opinion No. 25, and 
related interpretations in accounting for its plans. Accordingly, no 
compensation expense has been recognized for its stock-based compensation 
plans because the exercise price for stock options granted equaled the market 
price of the underlying stock at the date of grant. Had compensation cost for 
the Company's stock option plans been determined based upon the fair value at 
the grant date for awards under these plans consistent with the methodology 
prescribed under Statement of Financial Accounting Standards No. 123, 
Accounting for Stock-Based Compensation, the Company's net income and 
earnings per share for the years ended December 31, 1996 and December 2, 1995 
would have been reduced to the pro forma amounts indicated below: 

<TABLE>
<CAPTION>
                                  1996       1995 
                              ----------  -------- 
<S>                           <C>         <C>    
Net (loss) income: 
 As reported ................   $(8,288)    $5,247 
 Pro forma ..................    (8,414)     5,185 

Net (loss) income per share: 
 As reported ................   $ (0.59)    $ 0.38 
 Pro forma ..................     (0.60)      0.37 
</TABLE>

   The weighted average fair value of the options granted during 1996 and 
1995 were $10.49 and $4.29, respectively. 

   The fair value of each option granted is estimated on the date of grant 
using the Black-Scholes option-pricing model with the following assumptions 
used for grants in 1996 and 1995, respectively: dividend yield of 0% and 0%, 
volatility of 47% and 36%, risk-free interest rate of 6.90% and 6.41%, and an 
expected life of 7 years and 7 years. 

15. RESTRUCTURING CHARGE 

   During the fourth quarter of 1995, the Company adopted a plan of 
restructuring and recorded a pretax charge of $2,815. The key elements of the 
restructuring plan include the costs associated with the consolidation of 
certain manufacturing facilities and the discontinuance of certain product 
lines. The 

                              F-14           
<PAGE>
 restructuring provision includes estimated costs of asset write-downs, lease 
terminations and other charges. As of the December 31, 1996 and December 2, 
1995, approximately $1,135 and $1,200 of the charge is represented by an 
accrual for future expenditures, principally related to lease terminations 
and the closing of a manufacturing facility. 

16. BUSINESS CONCENTRATIONS 

   Substantially all of the Company's sales are made to customers in the 
United States. Sales to one chain store retailer accounted for approximately 
19%, 15% and 18% of the Company's sales in fiscal 1996, 1995 and 1994, 
respectively. Sales to another mass retailer accounted for 15% of the 
Company's sales in fiscal 1994. No other customers accounted for more than 
four percent of the Company's sales in fiscal 1996, 1995 and 1994, and no 
account receivable from any customer exceeded $7,981 at December 31, 1996. 
The Company estimates an allowance for doubtful accounts based on the 
creditworthiness of its customers as well as general economic conditions. 
Consequently, an adverse change in those factors could affect the Company's 
estimate of its bad debts. 

                              F-15           
<PAGE>
                               DONNKENNY, INC. 

                    INDEX TO FINANCIAL STATEMENT SCHEDULE 

 SCHEDULE II       VALUATION AND QUALIFYING ACCOUNTS 

<PAGE>
                                 SCHEDULE II 
                               DONNKENNY, INC. 

                      Valuation and Qualifying Accounts 

                          For the Fiscal Years ended 
           December 3, 1994, December 2, 1995 and December 31, 1996 

<TABLE>
<CAPTION>
                                 BALANCE OF    CHARGED TO                  BALANCE AT 
                                 BEGINNING     COSTS AND                     END OF 
                                 OF PERIOD      EXPENSES     DEDUCTIONS      PERIOD 
                               ------------  ------------  ------------  ------------ 
<S>                            <C>           <C>           <C>           <C>
Year ended December 31, 1996: 
 Reserve for bad debts           $  897,000      233,000       162,000     $  968,000 
 Reserve for discounts            1,112,000    6,357,000     6,197,000      1,272,000 
                               ------------                              ------------ 
                                 $2,009,000                                $2,240,000 
                               ============                              ============ 
Year ended December 2, 1995: 
 Reserve for bad debts           $  468,000      795,000       666,000     $  597,000 
 Reserve for discounts              413,000    3,686,000     2,750,000     $1,349,000 
                               ------------                              ------------ 
                                 $  881,000                                $1,946,000 
                               ============                              ============ 
Year ended December 3, 1994: 
 Reserve for bad debts           $  592,000      169,000       293,000     $  468,000 
 Reserve for discounts              526,000    2,483,000     2,596,000        413,000 
                               ------------                              ------------ 
                                 $1,118,000                                $  881,000 
                               ============                              ============ 
</TABLE>