<PAGE>



                                  FORM 10-K

                     -------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                     -------------------------------------

(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 JULY 31, 1997

                                        OR

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


Commission file number 0-4954                                      

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


              DELAWARE                             13-2648900
    (State or other jurisdiction of             (I.R.S. Employer
    incorporation or organization)              Identification No.)

    1175 STATE STREET, NEW HAVEN, CONNECTICUT         06511
    (Address of principal executive offices)        (Zip Code)


Registrant's telephone number, including area code: 203-777-5531

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

                                 None

     SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                                                  
                  Common Stock, $.05 par value per share
                           (Title of Class)


<PAGE>

         Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (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
Rule 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.  [  ]

         State the aggregate market value of the voting stock held by
non-affiliates of the registrant.  The aggregate market value shall be computed
by reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to the
date of filing.


         Common Stock, $.05 par value per share , as of September 30,
         1997 - $ 457,234                   

                APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                     PROCEEDINGS DURING THE PRECEDING FIVE YEARS:


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

                      (APPLICABLE ONLY TO CORPORATE REGISTRANTS)


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

                     19,762,648 shares of Common Stock, par value
                        $.05 per share, as of October 27, 1997

                         DOCUMENTS INCORPORATED BY REFERENCE:
                                         None

<PAGE>

                                        PART I

ITEM 1.  BUSINESS

INTRODUCTION

         Apparel America, Inc. (the "Company"), was incorporated under the laws
of the State of Delaware on June 14, 1968.  The Company designs, manufactures
and distributes women's swimwear and related sportswear and beachwear. The
Company's products are substantially all manufactured domestically and are
distributed principally within the United States through its Robby Len Division.
In May 1997, the Company commenced operation of a manufacturing facility in
Mexico.  See Item 1. - Recent Transactions for additional information.

SALES AND MARKETING; COMPETITION

    The Robby Len Division competes in the misses' swimwear market segment,
which caters to women over 18 years of age.  The Robby Len Division markets its
swimwear primarily under the Robby Len and Roxanne "branded" labels to many
national and regional department stores, specialty stores and catalogs, as well
as under "private label" programs for many of the nation's leading retailers and
catalogs.  The "branded" market segment accounts for approximately $600 million
of retail sales, or approximately 47% of the total $1.3 billion retail women's
swimwear industry.  At the present time, Robby Len is the third largest misses'
swimwear brand in units sold and fifth largest in dollar volume.  Roxanne is the
eleventh largest misses' swimwear brand in units sold and seventh largest in
dollar volume.  The top ten competitors in the branded women's swimwear market,
all of which, except for Robby Len, are privately owned or are subsidiaries of
larger companies, account for an estimated 70% of such sales. 

    Three major customers of the Robby Len Division accounted for an aggregate
of approximately 39% of the Company's total sales for fiscal year ended July
1997.  Shipments to Sears Roebuck & Co. were approximately $6,314,000 (13%) for
the year ended July 31, 1997, $5,604,000 (11%) for the year ended July 31, 1996
and $5,301,000 (13%) for the year ended July 31, 1995.  Shipments to Federated
Stores were $5,648,000 (12%) for the year ended July 31, 1997, $7,328,000 (14%)
for the year ended July 31, 1996 and less than 10% of sales for the year ended
July 31, 1995.  Shipments to May Company were approximately $6,530,000 (14%) for
the year ended July 31, 1997, $6,235,000 (12%) for the year ended July 31, 1996
and less than 10% of sales for the year ended July 31, 1995.


<PAGE>


MANUFACTURING AND DISTRIBUTION

    The Robby Len Division's business is highly seasonal, with peak
manufacturing levels occurring from October through May.  Accordingly, the
largest volume of shipments, representing approximately 80% of its sales, occur
from January through June.  All swimwear is cut and sewn in Robby Len's in-house
manufacturing facilities in New Haven, Connecticut and Hartford, Connecticut or
on a contract basis to the Company's specifications at other domestic and
foreign outside facilities.  In May 1997, the Company's Mexican manufacturing
subsidiary commenced operations (see Item 1. - Recent Transactions for
additional information).  Approximately 77% of the fabric cutting and 29% of the
sewing is done at the Company's in-house facilities with the balance produced at
outside contractors.  Approximately 21% of the sewn garments are produced by
off-shore outside contractors.  All finished garments are shipped to customers
from the Company's New Haven, Connecticut manufacturing and distribution
facility.  The Company believes that the use of this combination of
manufacturing facilities enhances the Robby Len Division's manufacturing
flexibility and minimizes quality control problems.

    The return policy of the Robby Len Division is that a return authorization
must be issued to a customer before merchandise will be accepted at its
facility.  Returns have historically averaged between 4.0% and 5.0% of net
sales.

EMPLOYEES

    During its peak periods during the year ended July 31, 1997, the Robby Len
Division employed approximately 427 employees, including 97 managerial, sales
and clerical employees and 330 employees engaged in the Robby Len Division's
manufacturing operations.  Approximately 262 of the Robby Len Division's
employees are covered by a collective bargaining agreement with the
International Ladies Garment Workers Union (the "ILGWU") and the Company
believes that its employee relations are satisfactory.  The current agreement
with the ILGWU remains in force through May 1999. 

         During the slower manufacturing periods of June through August, the
Robby Len Division employed approximately 180 employees, including 85
managerial, sales and clerical employees and 95  employees engaged in the Robby
Len Division's manufacturing operations, approximately 93 of whom are covered by
the collective bargaining agreement with the ILGWU.

         In July 1997, the Company's Mexican subsidiary, Trajes de Bano
Morelos, S.A. de C.V., employed approximately 77 employees, including 31
managerial and clerical employees and 46 employees engaged in manufacturing
operations.  Approximately 46 employees are covered by a collective bargaining
agreement with the Mexican National Labor Union for the Textile Industry.


                                         -2-

<PAGE>


PATENTS, TRADEMARKS AND TRADENAMES

    The Company uses a number of trademarks in connection with the business 
of the Robby Len Division, including "Robby Len," "Roxanne," "Louisa Brooks," 
"Tall Talk," "Shape-Lee," "Fit Zone," "Sport Form," "Longsuit," "Longlines,", 
"Waterlines," "Aquacize" and "Benefit System," each of which is a registered 
trademark in the United States for use on women's, misses' and girl's 
swimwear.

RAW MATERIALS

    The principal raw materials used by the Company in connection with the
operations of the Robby Len Division are synthetic fabrics, substantially all of
which are a blend of 85% nylon and 15% spandex, commonly referred to as "elastic
fabric".  The Robby Len Division purchases its fabric from major domestic
producers, including Milliken and Company, Darlington Fabrics, Guilford Mills,
Lida, Inc. and Missbrenner, Inc..  The Company expects sufficient supplies of
fabric and other raw material to be available to meet the demands of the Robby
Len Division in the foreseeable future.  The Company is generally able to
purchase its fabric under normal trade credit terms of sixty (60) days.

BACKLOG

    At July 31, 1997 and 1996, the Robby Len Division's backlog of unshipped
customer orders was approximately $3,400,000 and $2,098,000, respectively. 
Substantially all of the backlog of unshipped orders at July 31, 1997 was filled
by October 27, 1997.

RECENT TRANSACTIONS

    In fiscal 1995, the Company entered into agreements providing for the
exchange of 25,000 shares of its $9.00 Cumulative Preferred Series B Stock and
accrued dividends thereon for 11,650 shares of the Company's $8.50 Cumulative
Preferred Series H Stock ("Series H Preferred Stock") plus consideration of
$85,000.  The Series H Preferred Stock has a redemption value of $100 per share
and is subject to mandatory redemption requirements which commenced on May 1,
1996, with a final redemption on May 1, 2002.

    On August 7, 1995, the Company acquired from Milady Brassiere & Corset 
Co., Inc. ("Milady") the trademarks Roxanne and Harbour Casual as well as the 
tradename Coco Reef.  The Company also acquired certain inventory and 
associated customer purchase orders.  The purchase price for the trademarks 
and tradename is to be determined based on a percentage of net sales of goods 
bearing the Roxanne, Harbour Casual and Coco Reef labels over the next seven 
years.  In addition, at the Closing (August 7, 1995) the Company paid an 
advance against the purchase price of $500,000.  Further,

                                         -3-

<PAGE>

the Company guaranteed a minimum payment of $1,200,000 (inclusive of the 
$500,000 advance) for the first three years and $500,000 for the last four 
years.

    In related developments, the Company (i) purchased approximately $500,000
of inventory bearing the purchased tradenames as well as assumed matching
customer purchase orders against this inventory and (ii) entered into one year
and two year employment agreements, respectively, with two of the principals of
Milady.  All funds used in the acquisition came from the Company's  internally
generated capital.

    Effective November 1, 1995, the Company entered into an agreement for the
exchange of its $1,000,000 Subordinated Note plus unpaid interest of $150,000
for an Amended and Restated Subordinated Note in the amount of $600,000.  A
principal payment of $50,000 was made in February 1996 and additional annual
principal payments of $50,000 can be made subject to excess cash flow provisions
of senior debt with the unpaid balance due on June 30, 1998.  The amended and
restated note is subordinate to payment in full of all senior debt.

    During fiscal year 1996, the Company and its senior debt lenders negotiated
two amendments to their Fifth Amended and Restated Credit Agreement.  These
amendments, among other things, authorized the establishment of a foreign
subsidiary, deferred a portion of the scheduled June 1996 principal payment,
permitted the payment of dividends and redemption of a portion of Series H
Preferred Stock and revised certain financial covenants.

    In July 1996, outstanding warrants to purchase 3,876,140 shares of the
Company's common stock at a price of $.10 per share were exercised.  The
warrants, which were issued in connection with the conversion of certain debt to
Series F Preferred Stock, were held primarily by affiliates of the Company.

    Effective July 30, 1996, the Company entered into agreements for the
exchange of all outstanding Series E, F and G Preferred Stock for 8,096,940
shares of common stock.  The Series E, F and G Preferred Stock was held
principally by affiliates of the Company or members of the family holding
majority ownership of the Company.

    In September 1996, the Company incorporated a subsidiary in Mexico, Trajes
de Bano Morelos, S.A. de C.V. ("TBM"), for the purpose of establishing a
manufacturing facility in Mexico.  The facility commenced operations in May
1997.  TBM is projected to produce approximately 30% of the Company's swimwear
within two years of commencement of operations.


                                         -4-

<PAGE>


During fiscal year 1997 and in September 1997, the Company and its senior debt
lenders negotiated three additional amendments to their Fifth Amended and
Restated Credit Agreement.  These amendments provided for, among other things,
the deferral of certain scheduled principal and interest payments for 1997 and
1998, a reduction in the interest rate and the revision of certain financial
covenants.

Effective July 1997, the Company and its working capital lender amended their
loan agreement to provide for the factoring of substantially all of the
Company's accounts receivable with recourse and modified permitted seasonal loan
overadvances.  The working capital loan agreement was also amended to modify
certain financial covenants as well as cured existing events of default.  In
addition, during the fiscal year July 1997 the loan agreement's expiration was
extended to August 31, 1999.  The amended agreement is partially secured by
guarantees aggregating $5,800,000 provided by a corporate affiliate and a member
of the family holding majority ownership of the Company.

In October 1997, the maturity date of the Company's Amended and Restated
Subordinated Note was extended to June 30, 2000.

In October 1997, the holder of the Company's Series H Preferred Stock waived all
unpaid redemptions of stock scheduled through May 1997.














                                         -5-

<PAGE>


ITEM 2.  PROPERTIES

         The Company's principal administrative offices are located at 1175
State Street, New Haven, Connecticut.  In connection with the operation of its
Robby Len Division, the Company leases showroom facilities in New York, Florida
and California, and manufacturing and distribution facilities in Connecticut. 
In connection with the operations of its Mexican subsidiary, Trajes de Bano
Morelos, S.A. de C.V, the Company leases a manufacturing facility in Cuernavaca,
Mexico.

         The following table sets forth the Company's leased facilities:

                           Type of             Approximate    Expiration
Location                   Facility            Square Feet    of Lease  
--------                   --------            -----------    ----------
                          
1175 State Street          Manufacturing/         242,000         2001
New Haven, CT               Distribution
                          
1429 Park Street           Manufacturing           38,625         2000
Hartford, CT              
                          
1411 Broadway              Showroom                 9,110         2000
30th Floor                
New York, NY              
                          
110 East 9th Street        Showroom                 1,432         2000
Los Angeles, CA           
                          
777 Northwest              Showroom                   900         1998
72nd Avenue               
Miami, FL                 
                          
777 Northwest              Showroom                   600         1999
72nd Avenue               
Miami, FL                  

Ciudad de la Confeccion    Manufacturing           32,000         1998
Carr. Temixco
Emiliano Zapata
Morelos, Mexico

ITEM 3.  LEGAL PROCEEDINGS

         The Company is a party to certain litigation arising in the
ordinary course of business.  While the outcome of any litigation has an
element of uncertainty, the Company believes, based in part on the opinions
of counsel, that such litigation is either without merit, or that the
Company has meritorious defenses, or that the outcome of such litigation
will not have a material adverse effect on its financial position.


                                       -6-


<PAGE>

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

         None

                                     PART II


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

           During the fiscal years ended July 31, 1997 and July 31 1996,
the Company's Common Stock has been traded on the OTC Electronic Bulletin
Board.  The high and low bid quotations for the fiscal years ended July 31,
1997 and July 31, 1996 according to the OTC Bulletin Board is as follows:


                                     Fiscal Year         Fiscal Year
                                     July 31,1997        July 31,1996
                                    ---------------     ---------------
                                     High     Low        High     Low
                                    ------   ------     ------   ------

August 1 - October 31               $.7500   $.2500     $1.000   $.0625
November 1 - January 3              $.7500   $.2500     $.8750   $.1250
February 1 - April 30               $.2500   $.1250     $.5625   $.1875
May 1 - July 31                     $.1250   $.1250     $.5938   $.4375

         The Company had approximately 4,988 holders of record of its
Common Stock as of October 27, 1997.

         No dividends were paid by the Company on its Common Stock during
the fiscal years ended July 31, 1997, 1996 and 1995.  It is not anticipated
that any dividends will be paid by the Company on its Common Stock in the
foreseeable future.






                                       -7-

<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>

                                                                                 Six Months Ended
                                               Year Ended July 31,                   July 31,
                                          -------------------------------------  -----------------          Year Ended
                                          1997      1996       1995      1994      1993     1992         January 31, 1993
                                          ----      ----       ----      ----      ----     ----         ----------------
                                                                      (In thousands, except per share data)
<S>                                       <C>      <C>       <C>        <C>       <C>      <C>          <C>
INCOME STATEMENT DATA(1)
------------------------

Net sales                                $47,743   $49,876   $38,964    $34,273   $19,339  $22,529            $33,608


Operating income (loss)                   (4,696)      642     2,849      1,575       504    2,459              1,888

Interest and
 financing costs                           1,514     1,265       779      1,804     1,088    1,418              2,394

Income (loss) from
 continuing
 operations
 before income taxes                      (6,168)     (387)    1,691        162      (584)   1,041               (506)

Income (loss) from
 continuing operations                    (6,204)     (407)    1,671        142      (594)     638               (532)

Income (loss) from
 discontinued 
 operations                                   --        --        --         --        99      201             (7,537)

Extraordinary
 Income                                       --       550        --      4,165        --      395                 --

Net income (loss)                         (6,204)      143     1,671      4,307      (495)   1,234             (8,069)
Preferred stock
 dividends                                   453       504       718        540       270      270                540

Net income (loss)
 applicable to common
 stockholders                             (6,657)     (361)      953      3,767      (765)     964             (8,609)

Net income (loss) per
 common share:

 Income (loss) from
 continuing operations                    $ (.34)    $(.12)   $  .13     $ (.05)   $ (.11)  $  .05             $ (.14)
 Income (loss) from
 discontinued 
 operations                                   --        --        --         --    $  .01   $  .03             $(1.02)
 Extraordinary income                         --      $.07        --     $  .56        --      .05                 --
 Net income (loss)                        $ (.34)    $(.05)   $  .13     $  .51    $ (.10)  $  .13             $(1.16)

Weighted average 
 number of common shares
 outstanding                                19,763   7,740     7,390      7,390     7,390    7,390              7,390

</TABLE>
                                       -8-

<PAGE>
<TABLE>
<CAPTION>

                                                              July 31,
                                          ------------------------------------------------
                                          1997      1996       1995      1994     1993(1)
                                          ----      ----       ----      ----     -------
<S>                                       <C>       <C>        <C>      <C>      <C>
                                            (Thousands of dollars)


BALANCE SHEET DATA

Total assets                             $22,722   $20,408   $15,095    $14,664    $14,977 

Working capital
 (deficit)                                (4,386)    1,227     3,288      3,947    (12,434)

Long-term debt(2)
(excluding current 
 portion)                                  9,415     8,454     8,523     10,940         --

Subordinated notes
 payable(3)                                  550       450     1,000      1,000      1,000

Cumulative redeemable
 preferred stock(4)                        4,610     4,568     4,537      5,583      5,412

$12 Preferred series 
E stock(5)                                    --        --    16,383     16,383     14,383

$12 Preferred series 
F stock(5)                                    --        --     7,022      7,022      7,022

$10 Preferred series 
G stock(5)                                    --        --    17,079     17,079     17,079

--------------------
</TABLE>

(1) Reflects reclassification of the discontinued Mayfair Division
    accounts and results of operations.

(2) See Note 4 to the Financial Statements.

(3) See Note 5 to the Financial Statements.

(4) See Note 6 to the Financial Statements.

(5) See Note 7 to the Financial Statements.



                                    -9-

<PAGE>

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

Results of Continuing Operations
--------------------------------

         The following table sets forth, for the periods indicated,
certain items expressed as a percentage of net sales:

<TABLE>
<CAPTION>
                            Year Ended           Year Ended           Year Ended 
                           July 31, 1997        July 31, 1996        July 31, 1995
                           -------------        -------------        -------------
<S>                            <C>                  <C>                   <C>
Net sales                      100.0%               100.0%                100.0%
                               ------               ------                ------
                              
Cost of goods sold              84.5                 78.6                  72.4  
Operating expenses              25.3                 20.1                  20.3  
Interest and financing        
  costs                          3.2                  2.5                   2.0  
Other, net                      (0.1)                (0.4)                  1.0  
                               ------               ------                ------
                               112.9                100.8                  95.7  
                               ------               ------                ------
                              
Income (loss) before          
  provision for               
  income taxes and            
  extraordinary income         (12.9)                (0.8)                  4.3
Provision for income          
  taxes                         (0.1)                  -                     -   
                               ------               ------                ------
Income (loss) before          
  extraordinary income         (13.0)                (0.8)                  4.3 
                              
Extraordinary income             -                    1.1                    -   
                               ------               ------                ------
Net income (loss)              (13.0)                 0.3                   4.3  
                               ------               ------                ------
                               ------               ------                ------
</TABLE>

                                      -10-

<PAGE>


Year Ended July 31, 1997 Compared
to Year Ended July 31, 1996      
---------------------------------

    Net sales decreased by $2,133,000, or 4.3%, to $47,743,000 for the year
ended July 31, 1997 as compared to $49,876,000 for the year ended July 31, 1996.
The decline in net sales is primarily due to a decrease in unit sales as unit
prices remained relatively flat as compared to the prior year.  This decrease is
principally attributable to an approximate $4.0 million decline in Robby Len
"branded" swimwear sales for the year ended July 31, 1997 as compared to the
prior year.  Partially offsetting this decline was an approximate $2.0 million
increase in "Roxanne" branded swimwear sales.

    Gross profit as a percentage of net sales decreased to 15.5% for the year
ended July 31, 1997 as compared to 21.4% for the year ended July 31, 1996.  This
decline is due primarily to a poor retail performance of "Robby Len" branded
swimwear which led to significant off-price sales and the liquidation or
markdown of certain unsold inventory.  Also contributing to the decrease in
gross margin was a change in product mix associated with increased sales to
discount stores under the Company's "Lenee" label and increased sales of
"private label" swimwear.

    Operating expenses increased by $2,062,000, or 20.5%, to $12,104,000 for
the year ended July 31, 1997 as compared to $10,042,000 for the year ended July
31, 1996.  This increase is principally related to a) the recognition of
$750,000 of restructuring and other special charges related to the financial and
operational restructuring of the Company which commenced in May 1997 b)
increased charges to bad debt expense of approximately $140,000 related to the
write-off of Montgomery Ward receivables subject to Chapter 11 bankruptcy
proceedings and increased reserves against receivables of approximately $590,000
relating to unauthorized customer deductions and c) increased shipping and
warehousing expenses of approximately $435,000 relating to the expansion of the
Company's New Haven, CT warehousing and distribution facility.  The $750,000
charge for restructuring expenses is composed primarily of certain legal and
professional fees associated with the negotiation of amended working capital and
term loan agreements and accruals for consulting fees, employee severance
payments and other charges associated with the Company's operational
restructuring.

    The above activities resulted in an operating loss of $4,696,000 for the
year ended July 31, 1997 as compared to operating income of $642,000 for the
prior year.

    Interest and financing costs increased by $249,000, or 19.7%, to $1,514,000
for the year ended July 31, 1997 as compared to $1,265,000 for the year ended
July 31, 1996.  This increase is primarily attributable to increased borrowings
under the Company's revolving loan agreement required to fund the Company's
working capital needs.

    The aggregate effect of the above activities resulted in a loss before
provision for income taxes of $6,168,000 for the year ended July 31, 1997 as
compared to a loss before provision for income taxes of $387,000 for the year
ended July 31, 1996.



                                      -11-
<PAGE>

Year Ended July 31, 1996 Compared
to Year Ended July 31, 1995      
---------------------------------

    Net sales increased by $10,912,000, or 28.0%, to $49,876,000 for the year
ended July 31, 1996 as compared to $38,964,000 for the year ended July 31, 1995.
This increase is due principally to an increase in unit sales volume as unit
selling prices rose by approximately 4% compared to the prior year.  Sales of
goods relating to the August 1995 acquisition of the Roxanne, Harbour Casual and
Coco Reef labels (see Item 1 - Recent Transactions for further information)
represented approximately 75% of the sales increase.  The balance of the
increase is primarily attributable to increased sales of "Sand Dollars" swimwear
cover-ups and sportswear and increased sales of non-branded, or "private label",
swimwear.

    Gross profit as a percentage of net sales declined to 21.4% for the year
ended July 31, 1996 as compared to 27.6% for the year ended July 31, 1995.  This
decline is due principally to a) increased manufacturing and product development
costs relating to goods produced under the newly acquired Roxanne, Harbour
Casuals and Coco Reef labels b) a change in product mix related to increased
sales of non-branded "private label" swimwear and c) a poor retail selling
environment which led to increased promotional sales and liquidation of certain
unsold inventory.

    Operating expenses increased by $2,150,000, or 27.2%, to $10,042,000 for 
the year ended July 31, 1996 as compared to $7,892,000 for the year ended 
July 31, 1995.  The increase in selling, design and promotion expenses of 
$1,552,000 is composed principally of Roxanne and Harbour Casual sales 
salaries, commissions, showroom rent and related overhead expenses.  Shipping 
expenses increased by $619,000 primarily due to staff additions, additional 
shipping supplies and maintenance costs and increases in freight costs 
necessary to warehouse and ship Roxanne and Harbour Casual product along with 
certain variable shipping costs associated with increased sales volume.  
Certain inflationary increases in salaries, supplies and other operating 
overhead costs also contributed to this increase.

    The above activities resulted in a decline in operating income of
$2,207,000, or 77.5%, to $642,000 for the year ended July 31, 1996 as compared
to operating income of $2,849,000 for the year end July 31, 1995.

    Interest and financing costs increased by $486,000, or 62.4%, to $1,265,000
for the year ended July 31, 1996 as compared to $779,000 for the year ended July
31, 1995.  This increase is principally related to increased borrowings under
the Company's working capital line of credit necessary to fund the acquisition
and development of the Roxanne, Harbour Casuals and Coco Reef product lines and,
to a lesser extent, the growth of the Company's Robby Len business.

    Other income of $236,000 for the year ended July 31, 1996 is primarily
related to the recognition of a net settlement gain in connection with the
termination of the Company's defined benefit pension plan.  See Note 8 to the
Financial Statements for additional information.


                                      -12-
<PAGE>

    The aggregate effect of the above activities resulted in a loss before
provision for income taxes and extraordinary income of $387,000 for the year
ended July 31, 1996 as compared to income before provision for income taxes and
extraordinary income of $1,691,000 for the year ended July 31, 1995.

    Extraordinary income of $550,000 for the year ended July 31, 1996 is a
result of the restructuring of the Subordinated Note described in Note 5 to the
Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

    The ratio of current assets to current liabilities was 0.77 to 1.00 at July
31, 1997 as compared to 1.13 to 1.00 at July 31, 1996.  The working capital
deficit was $4,386,000 at July 31, 1997 as compared to working capital of
$1,227,000 at July 31, 1996.  This decrease in working capital is primarily
attributable to the net loss for the period along with capital expenditures of
approximately $300,000 which were not financed through long-term debt.  A
reduction in the current portion of long-term debt (primarily related to the
renegotiation of the Company's term loan agreement) of approximately $1,200,000
partially offset this decrease.

    The Company's working capital requirements are affected significantly by
the highly seasonal nature of its business, through which it markets women's
swimwear and related sportswear under the Robby Len, Harbour Casual, Roxanne,
and Coco Reef labels, among others.  As a leading manufacturer of women's
swimwear, the Company builds inventory during the first five months of the
fiscal year (August - December) in order to meet its shipping requirements in
January through June (approximately 80% of annual sales are shipped in this time
period).  The $635,000 increase in inventory is due primarily to increased
levels of unsold finished goods carried over from the 1997 season and early
production of 1998 season goods from offshore contractors.  The $4,187,000
decline in accounts receivable and the $5,198,000 increase in due from factor is
related to the amendment, effective July 1997, of the Company's working capital
loan to provide for the factoring of substantially all of the Company's accounts
receivable (see Note 4 to the Consolidated Financial Statements).  The
$6,716,000 increase in the revolving debt and $2,366,000 increase in accounts
payable and accrued expenses are primarily attributable to the net loss for the
period.  The $268,000 of net cash used in operating activities is primarily
reflected in the net loss for the period (adjusted for non-cash items) along
with a) the decrease in accounts receivable b) increases in inventory, accounts
payable and accrued expenses and c) the factoring of the Company's accounts
receivables.

    The Company's investing activities consist primarily of purchases of
machinery and equipment as well as leasehold improvements.  During fiscal years
1996 and 1997, the Company purchased certain production and pattern making
equipment financed primarily through long-term arrangements (see Note 4 to the
Consolidated Financial Statements for further information).  The balance of
capital expenditures were financed through the Company's working capital line of
credit and internally generated funds.  The Company expects its capital
expenditures for the next twelve months to be immaterial.  


                                      -13-
<PAGE>

    In connection with the Company's establishment of a foreign subsidiary (see
Item 1. -  Recent Transactions), approximately $300,000 of sewing equipment was
purchased in the second and third quarters of the 1997 fiscal year.  This
equipment was financed under long-term arrangements discussed above.  In
addition, certain start-up costs (principally consisting of certain operating
overhead costs including payroll, travel, legal and professional fees)
associated with the establishment of the manufacturing facility of approximately
$100,000 were incurred during the third quarter of fiscal year 1997.  Management
believes that the Company's gross profit margin should improve as it expands
production in Mexico and achieves operating efficiencies in that facility.

    The Company's primary ongoing cash needs are for working capital
requirements, capital expenditures, dividends and redemption of Series H
Preferred Stock and term debt amortization (both principal and interest).  The
three present sources for the Company's liquidity needs are internally generated
funds, long-term capital expenditure borrowings and short-term borrowings
available under its revolving loan agreement (see Note 4 to the Consolidated
Financial Statements).  Through this agreement, the Company finances its
inventory and receivables build-up during the first five months of the fiscal
year and repays these borrowings over the remainder of the fiscal year.  Under
the terms of this agreement which expires August 31, 1999, the Company can
borrow up to 85% against eligible receivables and 50% of eligible inventories
along with specified seasonal overadvances.  The outstanding loan balance under
the agreement at July 31, 1997 was $12,204,000.  To support peak seasonal
borrowing requirements, an additional $2,000,000 (collateralized by an affiliate
of the Company) was provided under the revolving credit facility from November
1996 to April 1997.  Effective July 1997, the revolving credit facility was
amended to provide for a) the factoring of substantially all of the Company's
trade accounts receivable with recourse and b) anticipated seasonal overadvance
requirements for the 1998 fiscal year.  The amended agreement is partially
secured by guarantees aggregating $5,800,000 provided by a corporate affiliate
and a member of the family holding majority ownership of the Company.

    In fiscal year July 1997 and October 1997, the Company and its term lenders
amended the Fifth Amended and Restated Credit Agreement to modify, among others
things, the principal and interest repayment terms, interest rate and certain
financial covenants.  The ability of the Company to meet its foreseeable
liquidity requirements in the year ahead is contingent upon its ability to
regain profitability, generate cash flows sufficient to meet its obligations and
sustain operations and maintain adequate financing with its working capital
lender and its term lenders.  The Company's accountants have included an
explanatory paragraph in their 1997 report regarding uncertainties about the
Company continuing as a going concern.

INFLATION

         The Company's Robby Len Division has historically been able to
increase selling prices to the extent permitted by competition as the costs of
merchandise and related operating expenses have increased and, therefore,
inflation has not had a significant effect on the operations.


                                      -14-
<PAGE>

FUTURE TRENDS

         In August 1995, the Company acquired the trademarks Roxanne and
Harbour Casual and the tradename Coco Reef from Milady Brassiere & Corset Co.,
Inc. (see Item 1 - Recent Transactions for further discussion of the
acquisition).  Sales of swimwear bearing these labels represented approximately
$8,200,000 (16%) and $10,000,000 (21%) of the Company's sales for the years
ended July 31, 1996 and 1997, respectively.  It is the belief of management that
there is potential for additional growth in sales volume as a result of this
acquisition over the next several years.   
    
         In an effort to lower its overall production costs , the Company is
engaged in contract manufacturing programs in Columbia, Mexico and the Dominican
Republic.  Currently, approximately 21% of the Company's production requirements
are sourced from these areas, with additional growth planned for the future.  In
addition, in September 1996 the Company established a subsidiary in Mexico,
Trajes de Bano Morelos, S.A. de C.V..  This subsidiary began operation of a
swimwear manufacturing facility in Cuernavaca, Mexico in May 1997.  It is
anticipated that approximately 30% of the Company's production requirements will
be fulfilled by this operation in the next two years. It is management's belief
that the acquisition of sources of lower manufacturing costs will be an
important factor in the ability of the Company to continue to compete in its
market and regain profitability.

         While the Company is aggressively pursuing its plans in these areas,
there can be no assurance that it will be successful in its efforts.

RECENT ACCOUNTING STANDARDS

    In March 1997, the Financial Accounting Standards Board issued SFAS No. 128
("SFAS 128"), "Earnings Per Share".  SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share.  SFAS 128 is
effective for periods ending after December 15, 1997.  The adoption of this
statement is not expected to have a material effect on the Company's financial
statements.

    In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.  Results of operations and financial position will be
unaffected by implementation of these new standards.

    SFAS No. 130 ("SFAS 130"), "Reporting Comprehensive Income", establishes
standards for reporting and display of comprehensive income, its components and
accumulated balances.  Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners.  Among other disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.

    SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information", which supersedes SFAS 14, "Financial Reporting for
Segments of a Business Enterprise", establishes standards for the way that 


                                      -15-
<PAGE>

public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements issued to the public.  It
also establishes standards for disclosures regarding products and services,
geographic areas and major customers.  SFAS 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.

    Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated.  Due to the recent issuance of these
standards, management has been unable to fully evaluate the impact, if any, they
may have on future financial statement disclosures.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements required to be submitted in response to this
Item 8 are set forth in Part IV, Item 14 of the report.


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

         None                           



                                      -16-

<PAGE>




                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Set forth below is a list of the directors, executive officers and key
employees of the Company and their respective ages as of July 31, 1997:

      NAME                   AGE                 CAPACITY
      ----                   ---                 --------

Burton I. Koffman(3)         71             Chairman of the Board
                                            and Chief Executive 
                                            Officer of the Company

Richard E. Koffman(2)        64             Vice Chairman of the
                                            Board, Executive Vice
                                            President and Secretary
                                            of the Company

Arthur G. Cohen(2)(3)        67             Director of the Company 

Jeffrey P. Koffman(1)(3)     32             Director and President of     
                                            the Company

Eric T. Weitz                53             Director and Executive Vice   
                                            President of the Company,     
                                            President of the Robby Len    
                                            Division

David L. Koffman             38             Vice President and 
                                            Assistant Secretary of
                                            the Company

Mark D. Greenberg            45             Vice President of the  Company,
                                            Vice President - Operations of the
                                            Robby Len Division

Murray Merl                  60             Vice President -
                                            Manufacturing of the
                                            Robby Len Division

Frederick M. D'Amato         43             Vice President - Finance
                                            of the Company and the 
                                            Robby Len Division

--------------------
(1) Elected President of the Company in February 1996

(2) Member of the Audit Committee

(3) Member of the Compensation Committee         


                                      -17-
<PAGE>

         Burton I. Koffman has served as Chairman of the Board of the Company
since January 1989 and as Chief Executive Officer of the Company since October
1989.  Mr. Koffman served as President of the Company from January 1989 until
October 1989 and from June 1995 to February 1996.   

         Richard E. Koffman has served as Vice Chairman of the Board of the
Company since October 1989 and as a Director, Executive Vice President and
Secretary of the Company since January 1989.   Mr. Koffman is also Treasurer,
Vice President, Secretary and a director of Empire Industries, Inc. and
Executive Vice President and Secretary of Public Loan Company, Inc. 

         Arthur G. Cohen has served as a Director of the Company since July 25,
1989.  Mr. Cohen is a self-employed real estate developer and investor.  Among
other positions, he serves as Chairman of the Board of The Arlen Corporation.

         Jeffrey P. Koffman has served as a Director of the Company since June
1995 and Executive Vice President from June 1994 to February 1996.  Mr. Koffman
was appointed President of the Company in February 1996.  Mr. Koffman served as
a financial analyst with Security Pacific from 1987 to 1989.  In 1989, Mr.
Koffman became Vice President of Pilgrim Industries and in 1990, he became the
President of that Company.  From 1994 to present, Mr. Koffman has served in an
executive capacity with Tech Aerofoam Products. 

         Eric T. Weitz has served as a Director of the Company since January
1995 and as President of the Robby Len Division since January 1994.  Mr. Weitz
was appointed Executive Vice President of the Company in February 1996.  Mr.
Weitz served as Vice President-Marketing for Robby Len Fashions from 1983 until
it was acquired by the Company in January  1989 and continued in that capacity
for the Company's Robby Len Division until January 1994.  Previously, Mr. Weitz
served in various sales and executive capacities in the apparel industry.

         David L. Koffman has served as Vice President of the Company since
January 1989.  From January 1989 until October 1989, he was a Director of the
Company and from 1984 until January 1989 he served as Chairman of the Board of
the Company.  In addition, Mr. Koffman served as Secretary of the Company from
October 1985 until January 1989.  For the past five years, Mr. Koffman has
served as President of Jayark Corporation.

         Mark D. Greenberg was employed in various capacities by Robby Len
Fashions from 1979 until it was acquired by the Company in January 1989.  From
1979 to 1981, Mr. Greenberg served as a senior accountant and from 1981 to 1985
he was the controller of Robby Len Fashions.  In 1985, Mr. Greenberg became Vice
President of Finance and Administration of Robby Len Fashions, a position he
held until January 1993, when he undertook his present position.


                                      -18-
<PAGE>

         Murray Merl was employed in various capacities by Robby Len Fashions
from January 1987 until it was acquired by the Company in January 1989.  From
January 1987 to September 1988, Mr. Merl served as Assistant Vice President and
in September 1988 he became Vice President-Manufacturing of Robby Len Fashions,
a position he currently holds with the Company's Robby Len Division.  In
addition, Mr. Merl has served as President of Tarrytown Garment Company from
1984 to the present.

         Frederick M. D'Amato was employed by Mayfair in various capacities for
more than five years prior to the acquisition of Mayfair by the Company in May
1989.  Mr. D'Amato served as Assistant Secretary of Mayfair from July 1987 until
May 1989 and as Vice President-Finance of Mayfair, a position he held through
January 1993 whereupon he assumed his present position.

         Messrs. Burton I. Koffman and Richard E. Koffman are brothers.  Burton
I. Koffman is the father of David L. Koffman and Jeffrey P. Koffman .  Messrs.
David L. Koffman and Jeffrey P. Koffman are brothers.

         The Board of Directors held three meetings during the year ended July
31, 1997.  All other actions of the Board of Directors during the year ended
July 31, 1997 were taken by unanimous written consent.  There are two committees
of the Board of Directors, an Audit Committee and an Executive Compensation
Committee.  The Company has no standing nominating committee of the Board of
Directors or committee performing a similar function.  Officers are elected by,
and serve at the discretion of, the Board of Directors.










                                      -19-
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth all compensation paid or accrued by the
Company for the years ended July 31, 1997, July 31, 1996 and July 31, 1995 to or
for the chief executive officer and the remaining four most highly compensated
executive officers and key employees of the Company.

<TABLE>
<CAPTION>
                             SUMMARY COMPENSATION TABLE

                                          ANNUAL COMPENSATION
NAME AND                               -------------------------      ALL OTHER
PRINCIPAL POSITION           YEAR      SALARY($)       BONUS($)    COMPENSATION ($)
------------------           ----      ---------    ------------   ----------------
<S>                          <C>        <C>            <C>             <C>
Burton I. Koffman            1997          -              -            40,000
  Chairman of the Board,     1996          -              -            40,000
  Chief Executive            1995          -              -            40,000
  Officer of the Company                                          
                                                                  
Eric T. Weitz                1997       275,000           -             4,515
  Executive Vice Pres-       1996       240,000         33,240          3,840
 ident of the Company,       1995       240,000        144,600          4,800
  President of the                                                
  Robby Len Division                                              
                                                                  
Mark D. Greenberg            1997       157,500           -             4,063
  V.P. of the Company,       1996       150,000         16,620          3,696
  V.P. - Operations          1995       150,000         72,300          3,000
  of the Robby Len                                                
  Division                                                        
                                                                  
Murray Merl                  1997       143,000           -             3,549
  V.P. - Manufacturing       1996       136,500         16,620          3,347
  of the Robby Len           1995       130,000         54,225          2,600
  Division                                                        
                                                                  
Frederick M. D'Amato         1997       125,000           -             3,399
  Vice President-            1996       110,300         16,620          3,770
  Finance                    1995       105,000         54,225          2,100

</TABLE>

    Directors who are not officers or employees of the Company receive an
annual fee of $5,000 and $500 per meeting attended for their services as
directors.  The Board of Directors held three meetings during the year ended
July 31, 1997.

    Mr. Burton I. Koffman and Mr. Richard E. Koffman received an annual
consulting fee of $40,000 (as disclosed above) and $60,000, respectively for the
years ended July 31, 1997, July 31, 1996 and July 31, 1995.  Mr. Jeffrey P.
Koffman received an annual salary of $36,000 for the years ended July 31, 1997
and July 31, 1996 and received an annual salary of $24,000 for the year ended
July 31, 1995.                         



                                      -20-
<PAGE>

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

GENERAL  

         The Compensation Committee was established in 1989 when the Company
acquired the existing Robby Len Division and the now discontinued Mayfair
Division.  At the time of the 1989 acquisitions, the Company's Compensation
Committee reviewed the compensation level of the executive officers of Robby Len
and Mayfair and adopted their existing compensation plans.

COMPENSATION PHILOSOPHY 

         The Compensation Committee's executive compensation philosophy is to
provide competitive levels of compensation, integrate executive officer's pay
with the achievement of the Company's annual and long-term performance goals,
reward above average corporate performance, recognize individual initiative and
achievement, and assist the Company in attracting and retaining qualified
executive officers.  Executive officer compensation is intended to be set at
levels that the Compensation Committee believes are consistent with others in
the Company's industry and gives emphasis to the need for the best creative
talent available in product related positions.

         The Compensation Committee plans to further review the Company's
existing executive officer compensation plans in 1997 and intends to modify such
plans as required to fit within the announced philosophy of the Committee.

BASE SALARIES 

         Base salaries for new executive officers are determined initially by
evaluating the responsibilities of the position held and the experience of the
individual, and by reference to the competitive marketplace for managerial and
creative talent.  Annual salary adjustments are determined by evaluating the
competitive marketplace, the performance of the Company, the performance of the
executive and any increased responsibilities assumed by the executive.  Salary
adjustments are determined and normally made on an annual basis.

         Salaries for the year ended July 31, 1997 for Messrs. Weitz,
Greenberg, Merl and D'Amato were based on levels established and approved by the
Company's Board of Directors in August 1996.  Mr. Burton I. Koffman's
compensation is based on a consulting arrangement.


                                      -21-

<PAGE>

ANNUAL BONUSES  

         The Company has a bonus incentive program for its executive officers. 
The bonuses, if any, awarded are based upon minimum levels of profitability, as
defined.  No bonuses were awarded for the year ended July 31, 1997 to Messrs.
Weitz, Greenberg, Merl and D'Amato.


PERFORMANCE GRAPH

         The following graph compares the yearly percentage change in the
Company's cumulative total stockholder return on Common Stock with (i) the
cumulative total return of the NASDAQ market index and (ii) the cumulative total
return of companies with the standard industrial code (SIC) Code 2339 over the
period from August 1, 1992 through July 31, 1997.  The component entities of SIC
Code 2339 were generated by Media General Financial Service, Inc.  All the
entities in SIC Code 2339 were incorporated into the peer group.


                   COMPARISON OF CUMULATIVE TOTAL RETURN
                 OF COMPANY, INDUSTRY INDEX AND BROAD MARKET

<TABLE>
<CAPTION>
                                                 FISCAL YEAR ENDING
                            ---------------------------------------------------------
<S>                         <C>      <C>       <C>        <C>         <C>       <C>
COMPANY                     1992     1993      1994       1995        1996       1997

APPAREL AMERICA, INC.       100     100.00     100.00     200.00     900.00     200.00
INDUSTRY INDEX              100      57.71      60.00      76.88      80.96      26.17
BROAD MARKET -              100     124.21     135.54     166.10     181.07     266.18

</TABLE>

THE INDUSTRY INDEX CHOSEN WAS:
SIC CODE 2339 - WOMEN'S, MISSES', & JUNIORS' OUTERWEAR, N.E.C.

THE BROAD MARKET INDEX CHOSEN WAS:
NASDAQ MARKET INDEX


Assumes $100 invested on August 1, 1992
Assumes dividends reinvested
Fiscal year ended July 31, 1997




                                      -22-
<PAGE>

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL 
         OWNERS AND MANAGEMENT

         The following table sets forth the holdings, as of October 27, 1997,
of the Company's Common Stock by (i) each person who held of record more than 5%
of the Company's Common Stock, (ii) each of the directors of the Company and
(iii) all directors and officers as a group:


                                                  Shares
                               Title of           Beneficially       Percent
Name and Address               Class              Owned              of Class
----------------               --------           ------------       --------

PLC, Inc.                      Common Stock       4,211,400(1)       21.31%
300 Plaza Drive                $.05 par value
Vestal, New York

Mayfair Industries, Inc.       Common Stock       3,563,640(1)       18.03%
300 Plaza Drive                $.05 par value
Vestal, New York

Burton I. Koffman              Common Stock       2,124,456(2)       10.75%
300 Plaza Drive                $.05 par value
Vestal , New York 

REK Corp.                      Common Stock       1,901,677(1)        9.62%
300 Plaza Drive                $.05 par value
Vestal, New York
                                    
Richard E. Koffman            Common Stock        1,074,037(2)        5.43%
300 Plaza Drive               $.05 par value
Vestal, New York 

Arthur G. Cohen               Common Stock          884,000(3)        4.47%
1501 Broadway                 $.05 par value
New York, New York 

Jeffrey P. Koffman            Common Stock          600,000           3.04%
300 Plaza Drive               $.05 par value
Vestal, New York

All Directors and             Common Stock        5,187,599(4)       26.25%
Officers as a Group           $.05 par value   
 (5 persons) 

The Koffman Group             Common Stock       15,220,778(5)       77.02%
 (13 persons)                 $.05 par value
300 Plaza Drive
Vestal, New York 

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

(1)      PLC, Inc., Mayfair Industries, Inc. and REK Corp. are substantially all
         owned, directly or indirectly, by members of the Koffman family.  See
         Footnote (5) below.


                                      -23-
<PAGE>



(2) The number of shares of Common Stock set forth herein includes 943
    shares of Common Stock jointly held by Messrs. Burton I. Koffman and
    Richard E. Koffman, of which each owns an undivided 50% interest, and
    645,817 in the case of Mr. Burton I. Koffman and 601,347 in the case
    of Mr. Richard E. Koffman of the shares held by Empire Industries,
    Inc. and Public Loan Company, Inc., all of the stock of which is owned
    directly or indirectly by them and members of their families.

(3) Mr. Arthur G. Cohen holds the shares of Common Stock set forth herein
    for the benefit of Ben Arnold Company, Inc., a corporation owned 50%
    by members of Mr. Cohen's immediate family, the beneficial ownership
    of which Mr. Cohen disclaims, and 50% by members of Messrs. Burton I.
    Koffman and Richard E. Koffman's immediate families, the beneficial
    ownership of which each disclaims.  Mr. Cohen also disclaims
    beneficial ownership of 194,720 shares of Common Stock owned by Karen
    Cohen, his wife.

(4) The number of shares of Common Stock set forth herein includes the
    shares of Common Stock reported above for Messrs. Burton I. Koffman,
    Richard E. Koffman, Arthur C. Cohen and Jeffrey P. Koffman.  Also
    included herein are 505,106 shares of Common Stock beneficially owned
    by Mr. David L. Koffman, a Vice President and Assistant Secretary of
    the Company and the son of Burton I. Koffman and brother of Jeffrey P.
    Koffman.

(5) The members of this reporting group include Messrs. Burton I. Koffman,
    Richard E. Koffman, Jeffrey P. Koffman, David L. Koffman and members
    of their immediate families, as well as entities controlled by members
    of the Koffman family.  The number of shares of Common Stock set forth
    herein includes the shares of Common Stock reported above for Messrs.
    Burton I. Koffman, Richard E. Koffman, Jeffrey P. Koffman and David L.
    Koffman.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    During the fiscal years ended July 31, 1997 and July 31, 1995, the
Company purchased certain pattern making and production equipment and made
certain leasehold improvements to its New Haven, CT manufacturing facility. 
These capital expenditures were financed primarily through a loan by the
wife of the Chairman of the Board of the Company and by a corporate
affiliate of the Company on terms and conditions similar to those of the
Company's working capital lender.


                                    -24-
<PAGE>

    Certain of the Company's swimwear products are manufactured on a
contract basis by companies owned by certain officers of the Robby Len
Division.  See Note 9 to the Consolidated Financial Statements for further
information.

    The Company leases a warehouse and production facility from an
affiliate.  Rental amounts paid by the Company to this affiliate were
approximately $402,000, $227,000 and $214,000 for the years ended July 31,
1997, 1996 and 1995, respectively.

    In July 1997, the Company's working capital loan agreement was
amended.  The amended agreement is partially secured by loan guarantees in
the aggregate amount of $5,800,000 provided by a corporate affiliate and a
member of the family holding majority ownership of the Company.

                                  PART IV


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

    (a)  Financial Statements and Financial Statement Schedules

         See the accompanying Financial Statements and Financial
         Statement Schedules filed herewith. 

    (b)  Reports on Form 8-K

         There were no reports on Form 8-K for the fiscal year
         ended July 31, 1997.

    (c)  Exhibits

         See the accompanying Exhibit Index.


                                    -25-

<PAGE>


                                 SIGNATURES

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

                                            APPAREL AMERICA, INC.

Date: November 10, 1997                     By: Burton I. Koffman
                                                ---------------------------
                                                Burton I. Koffman
                                                Chairman of the Board
                                                and Chief Executive Officer

                                            By: Frederick M. D'Amato
                                                ---------------------------
                                                Frederick M. D'Amato
                                                Vice President-Finance

    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
registrant and in the capacities and on the dates indicated below.

                                                                   DATE

Burton I. Koffman               Chairman of the Board         November 10, 1997 
-------------------------
Burton I. Koffman


Richard E. Koffman              Vice Chairman of the          November 10, 1997 
-------------------------       Board, Executive Vice
Richard E. Koffman              President and Secretary
                               

Jeffrey P. Koffman              Director and                  November 10, 1997
-------------------------       President of the Company
Jeffrey P. Koffman             

Arthur G. Cohen                 Director                      November 10, 1997 
-------------------------
Arthur G. Cohen 

Eric T. Weitz                   Director and Executive Vice   November 10, 1997
-------------------------       President of the Company 
Eric T. Weitz                



                                      -26-

<PAGE>











                        APPAREL AMERICA, INC.













                                                     FINANCIAL STATEMENTS
                                 Years Ended July 31, 1997, 1996 and 1995


<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary




================================================================================

                                               Consolidated Financial Statements
                                        Years Ended July 31, 1997, 1996 and 1995


                                                                             F-1
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary


                                  Index of Consolidated Financial Statements and
                                                    Financial Statement Schedule

================================================================================

The following consolidated financial statements of
   Apparel America, Inc. and Subsidiary are included
   in Item 8:
     Report of independent certified public accountants                      F-3
     Balance sheets as of July 31, 1997 and 1996                       F-4 - F-5
     Statements of operations for the years ended July 31,
       1997, 1996 and 1995                                                   F-6
     Statements of stockholders' deficit for the years
       ended July 31, 1997, 1996 and 1995                                    F-7
     Statements of cash flows for the years ended July 31,
       1997, 1996 and 1995                                                   F-8
     Notes to consolidated financial statements                       F-9 - F-25

The following schedule of Apparel America, Inc. and
   Subsidiary is included in Item 14(d):
     Report of independent certified public accountants                      S-1
     Schedule II Valuation and qualifying accounts                           S-2


                                                                             F-2
<PAGE>

Report of Independent Certified Public Accountants


Apparel America, Inc.
New Haven, Connecticut

We have audited the accompanying consolidated balance sheets of Apparel America,
Inc. and subsidiary (the "Company") as of July 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' deficit, and cash
flows for each of the three years in the period ended July 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to report on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Apparel America,
Inc. and subsidiary at July 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
July 31, 1997, in conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred a significant loss in
fiscal 1997 and, at July 31, 1997, had deficiencies in working capital and
equity. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.



BDO Seidman, LLP



New York, New York

September 23, 1997

                                                                             F-3
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                                     Consolidated Balance Sheets
                                 (in thousands, except share and per share data)

================================================================================

July 31,                                                      1997       1996
--------------------------------------------------------------------------------

Assets
Current:
   Cash and cash equivalents                                $    238   $     41
   Accounts receivable, net of allowance for doubtful
     accounts of $675 and $584, respectively                     355      4,187
   Due from factor, net of allowance for doubtful
     accounts of $225 and $-0-, respectively                   5,198         --
   Inventories                                                 8,365      7,730
   Due from affiliates                                            64        185
   Prepaid expenses and other current assets                     655        477
--------------------------------------------------------------------------------

         Total current assets                                 14,875     12,620
--------------------------------------------------------------------------------

Property, plant and equipment, at cost:
   Machinery and equipment                                     5,468      4,765
   Leasehold improvements                                      2,773      2,549
--------------------------------------------------------------------------------
                                                               8,241      7,314

   Less:  Accumulated depreciation and amortization           (6,214)    (5,613)
--------------------------------------------------------------------------------

                                                               2,027      1,701
--------------------------------------------------------------------------------

Intangibles and other assets:
   Trademarks, net of accumulated amortization
     of $227 and $113                                          1,473      1,587
   Cost in excess of net assets acquired, less
     accumulated amortization of $1,357 and $1,196             4,328      4,488
   Other assets                                                   19         12
--------------------------------------------------------------------------------

                                                               5,820      6,087
--------------------------------------------------------------------------------

                                                            $ 22,722   $ 20,408
================================================================================

                    See accompanying notes to consolidated financial statements.

                                                                             F-4
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                                     Consolidated Balance Sheets
                                 (in thousands, except share and per share data)
================================================================================

July 31,                                                      1997       1996
--------------------------------------------------------------------------------
Liabilities and Stockholders' Deficit
Current:
   Current portion of long-term debt                        $    355   $  1,649
   Current portion of accrued purchase price - trademark         464        162
   Current portion of deferred interest                          330        452
   Current portion of subordinated note payable                   --        100
   Loan payable - revolver (factor)                           12,204      5,488
   Accounts payable                                            3,847      2,062
   Accrued expenses                                            1,860        926
   Accrued compensation                                          201        554
--------------------------------------------------------------------------------
           Total current liabilities                          19,261     11,393
Long-term debt, less current portion                           6,460      5,032
Accrued purchase price - trademark                               586      1,038
Deferred interest - long-term portion                            400        730
Dividends payable                                              1,969      1,654
Subordinated note payable                                        550        450
--------------------------------------------------------------------------------
           Total liabilities                                  29,226     20,297
--------------------------------------------------------------------------------
$9 cumulative redeemable preferred stock, net of
   discount of $8 and $50                                      3,492      3,450
--------------------------------------------------------------------------------
$8.50 cumulative redeemable preferred stock                    1,118      1,118
--------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' deficit:
   Common stock, $.05 par value - shares authorized
     30,000,000; issued 19,783,312                               989        989
   Additional paid-in capital                                 64,071     64,071
   Deficit                                                   (48,213)   (41,556)
   Less:
     Treasury stock, at cost - 20,665 shares                    (129)      (129)
     Acquisition costs in excess of historical basis
       of net assets acquired from affiliates                (27,832)   (27,832)
--------------------------------------------------------------------------------
           Total stockholders' deficit                       (11,114)    (4,457)
--------------------------------------------------------------------------------
                                                            $ 22,722   $ 20,408
================================================================================

                    See accompanying notes to consolidated financial statements.

                                                                             F-5
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                           Consolidated Statements of Operations
                                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
==========================================================================================

Year ended July 31,                                   1997          1996         1995
------------------------------------------------------------------------------------------
<S>                                               <C>            <C>           <C>        
Net sales                                         $     47,743   $    49,876   $    38,964
Cost of goods sold                                      40,335        39,192        28,223
------------------------------------------------------------------------------------------
       Gross profit                                      7,408        10,684        10,741
------------------------------------------------------------------------------------------
Operating expenses:
   Selling, design and promotion                         4,528         4,659         3,107
   Shipping and warehousing                              2,119         1,684         1,065
   General and administrative                            4,707         3,699         3,720
   Restructuring and other special charges                 750            --            --
------------------------------------------------------------------------------------------
       Total operating expenses                         12,104        10,042         7,892
------------------------------------------------------------------------------------------
       Operating income (loss)                          (4,696)          642         2,849
------------------------------------------------------------------------------------------
Nonoperating charges (income):
   Interest and financing costs                          1,514         1,265           779
   Litigation settlement                                    --            --           412
   Other income                                            (42)         (236)          (33)
------------------------------------------------------------------------------------------
                                                         1,472         1,029         1,158
------------------------------------------------------------------------------------------
       Income (loss) before provision for income
         taxes and extraordinary income                 (6,168)         (387)        1,691
Provision for income taxes                                  36            20            20
------------------------------------------------------------------------------------------
       Income (loss) before extraordinary income        (6,204)         (407)        1,671
Extraordinary income:
   Gain on debt restructuring                               --           550            --
------------------------------------------------------------------------------------------
Net income (loss)                                       (6,204)          143         1,671
Preferred stock dividends and accretion of
   redeemable preferred stock                              453           504           718
------------------------------------------------------------------------------------------
Net income (loss) applicable to common            $     (6,657)  $      (361)  $       953
   stockholders
==========================================================================================
Income (loss) per common share:
   Income (loss) before extraordinary income      $       (.34)  $      (.12)  $       .13
   Extraordinary income                                     --           .07            --
------------------------------------------------------------------------------------------
Net income (loss)                                 $       (.34)  $      (.05)  $       .13
==========================================================================================
Weighted average number of common shares
   outstanding                                      19,762,645     7,739,489     7,389,552
==========================================================================================
</TABLE>

                    See accompanying notes to consolidated financial statements.

                                                                             F-6
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                Consolidated Statements of Stockholders' Deficit
                                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
====================================================================================================================

Years ended July 31, 1997, 1996 and 1995
--------------------------------------------------------------------------------------------------------------------
                                                                                                                    
                                                  Preferred stock                       Common stock                
                                             ------------------------   ------------------------------------------- 
                                                      Issued                     Issued              In treasury    
                                             ------------------------   ----------------------    ----------------- 
                                               Shares       Amount         Shares      Amount     Shares     Amount 
--------------------------------------------------------------------------------------------------------------------
<S>                                            <C>       <C>               <C>        <C>         <C>       <C>     
Balance, August 1, 1994                        404,847   $     40,484      7,410,213  $    371    20,665    $  (129)
Net income                                          --             --             --        --        --         -- 
Fractional shares                                   --             --             10        --        --         -- 
Exchange of redeemable preferred stock              --             --             --        --        --         -- 
Dividends on cumulative redeemable                                                                                  
   preferred stock                                  --             --             --        --        --         -- 
Accretion on cumulative redeemable                                                                                  
   preferred stock                                  --             --             --        --        --         -- 
--------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1995                         404,847         40,484      7,410,223       371    20,665       (129)
Net income                                          --             --             --        --        --         -- 
Fractional shares                                   --             --              5        --        --         -- 
Exchange of preferred stock                   (404,847)       (40,484)     8,096,940       405        --         -- 
Dividends on cumulative redeemable                                                                                  
   preferred stock                                  --             --             --        --        --         -- 
Accretion on cumulative redeemable                                                                                  
   preferred stock                                  --             --             --        --        --         -- 
Issuance of common stock                            --             --        400,000        20        --         -- 
Exercise of common stock purchase                                                                                   
   warrants                                         --             --      3,876,140       193        --         -- 
--------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1996                              --             --     19,783,308       989    20,665       (129)
Net loss                                            --             --             --        --        --         -- 
Fractional shares                                   --             --              4        --        --         -- 
Dividends on cumulative redeemable                                                                                  
   preferred stock                                  --             --             --        --        --         -- 
Accretion on cumulative redeemable                                                                                  
   preferred stock                                  --             --             --        --        --         -- 
--------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1997                              --     19,783,312   $        989  $ 20,665        --    $  (129)
====================================================================================================================

<CAPTION>
=======================================================================================================

Years ended July 31, 1997, 1996 and 1995
-------------------------------------------------------------------------------------------------------
                                                                             Acquisition
                                                                           costs in excess
                                                                            of historical
                                                                            basis of net
                                                Additional                 assets acquired       Total
                                             paid-in capital  Deficit      from affiliates      deficit
-------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>             <C>             <C>        
Balance, August 1, 1994                        $ 21,706     $ (42,148)      $ (27,832)      $   (7,548)
Net income                                           --         1,671              --            1,671
Fractional shares                                    --            --              --               --
Exchange of redeemable preferred stock            2,097            --              --            2,097
Dividends on cumulative redeemable                                                          
   preferred stock                                   --          (521)             --             (521)
Accretion on cumulative redeemable                                                          
   preferred stock                                   --          (197)             --             (197)
-------------------------------------------------------------------------------------------------------
Balance, July 31, 1995                           23,803       (41,195)        (27,832)          (4,498)
Net income                                           --           143              --              143
Fractional shares                                    --            --              --               --
Exchange of preferred stock                      40,079            --              --               --
Dividends on cumulative redeemable                                                          
   preferred stock                                   --          (426)             --             (426)
Accretion on cumulative redeemable                                                          
   preferred stock                                   --           (78)             --              (78)
Issuance of common stock                             (5)           --              --               15
Exercise of common stock purchase                                                           
   warrants                                         194            --              --              387
-------------------------------------------------------------------------------------------------------
Balance, July 31, 1996                           64,071       (41,556)        (27,832)          (4,457)
Net loss                                             --        (6,204)             --           (6,204)
Fractional shares                                    --            --              --               --
Dividends on cumulative redeemable                                                          
   preferred stock                                   --          (410)             --             (410)
Accretion on cumulative redeemable                                                          
   preferred stock                                   --           (43)             --              (43)
-------------------------------------------------------------------------------------------------------
Balance, July 31, 1997                         $ 64,071     $ (48,213)      $ (27,832)      $  (11,114)
=======================================================================================================
</TABLE>

                    See accompanying notes to consolidated financial statements.

                                                                             F-7
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                           Consolidated Statements of Cash Flows
                                                                  (in thousands)
================================================================================

Year ended July 31,                                   1997      1996     1995
--------------------------------------------------------------------------------
Cash flows from operating activities:
   Net income (loss)                                $(6,204)  $   143   $ 1,671
   Adjustments to reconcile net income (loss) to
     net cash provided by (used in) operating
     activities:
       Extraordinary gain on debt restructuring          --      (550)       --
       Amortization of deferred interest               (452)     (573)     (685)
       Depreciation and amortization                    601       490       372
       Other amortization                               288       290       160
       Litigation settlement                             --        --       412
       Decrease (increase) in:
         Accounts receivable                          4,187    (4,151)      (14)
         Inventories                                   (635)   (2,213)   (2,536)
         Due from affiliates                            121        71        54
         Prepaid expenses and other current assets     (533)     (169)      (14)
         Other assets                                    (7)       (2)        2
         Net assets of discontinued operations           --        --       334
       Increase (decrease) in:
         Accounts payable and accrued expenses        2,366       647       692
         Due to affiliates                               --      (395)       78
--------------------------------------------------------------------------------
           Net cash provided by (used in) operating
             activities                                (268)   (6,412)      526
--------------------------------------------------------------------------------
Cash flows from investing activities:
   Purchases of property, plant and equipment          (927)     (574)     (780)
   Purchase of trademark                                 --      (500)       --
--------------------------------------------------------------------------------
           Net cash used in investing activities       (927)   (1,074)     (780)
--------------------------------------------------------------------------------
Cash flows from financing activities:
   Proceeds from revolving debt                       6,716     5,488        --
   (Payment of) proceeds from equipment loans          (197)      166        --
   Proceeds from the issuance of common stock            --       402        --
   Payments on subordinated debt                         --       (50)       --
   Preferred stock dividends and redemption             (95)     (158)       --
   Due from factor                                   (5,198)    2,675     1,940
   Proceeds from long-term debt                         649        --        --
   Payments of long-term debt                          (383)     (925)   (1,452)
   Payment for the exchange of preferred stock           --        --       (85)
   Litigation settlement payments                      (100)     (100)     (200)
--------------------------------------------------------------------------------
           Net cash provided by financing activities  1,392     7,498       203
--------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents    197        12       (51)
Cash and cash equivalents, beginning of year             41        29        80
================================================================================
Cash and cash equivalents, end of year              $   238   $    41   $    29
================================================================================
Supplemental disclosures of cash flow information:
   Cash paid during the year for:
     Interest                                       $ 1,394   $ 2,199   $ 2,001
     Income taxes                                        --        72        12
Supplemental disclosures of noncash investing and
   financing activities:
     Unpaid dividends                                   315       315       521
================================================================================

                    See accompanying notes to consolidated financial statements.

                                                                             F-8
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

1.    Significant              Business
      Accounting Policies

                               The operations of Apparel America, Inc. and
                               subsidiary (the "Company") consist of the design,
                               manufacture and distribution of apparel,
                               primarily women's swimwear. The Company's
                               products are substantially manufactured and
                               distributed within the United States. In fiscal
                               1997, the Company opened a manufacturing facility
                               in Mexico. Through July 31, 1997, assets and
                               operations of this facility are immaterial.

                               Basis of Presentation

                               The accompanying consolidated financial
                               statements have been prepared assuming that the
                               Company will continue as a going concern which
                               contemplates the realization of assets and the
                               satisfaction of liabilities in the normal course
                               of business. The Company experienced a
                               significant loss for the year ended July 31,
                               1997, and had negative working capital of
                               approximately $4,400,000 and a capital deficit of
                               $11,100,000 as of July 31, 1997.

                               Management cannot be assured that the Company
                               will be able to continue as a going concern in
                               view of its weakened financial condition. The
                               Company's continued existence is dependent upon
                               its ability to maintain compliance with the loan
                               covenants in the future (or obtain adequate
                               waivers), additional debt financings, and
                               improving operating results by increasing sales
                               initiatives, reducing overhead expenses and
                               decreasing manufacturing costs. There can be no
                               assurance as to the success of these efforts.

                               The consolidated financial statements do not
                               include any adjustments that might result from
                               the outcome of this uncertainty.

                               Principles of Consolidation

                               The consolidated financial statements include the
                               accounts of the Company and its wholly-owned
                               subsidiary. All significant intercompany accounts
                               and transactions have been eliminated in
                               consolidation.

                               Inventories

                               Inventories are valued at the lower of cost
                               (first-in, first-out) or market.


                                                                             F-9
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               Property, Plant and Equipment

                               Depreciation and amortization are computed by the
                               straight-line method over the estimated useful
                               lives of the assets for financial reporting
                               purposes. Leasehold improvements are amortized
                               over their estimated useful lives or the lives of
                               the related leases, whichever is shorter.

                               Cash Equivalents

                               Cash equivalents consist of certain highly liquid
                               investments with an original maturity of less
                               than three months. The Company has substantially
                               all of its cash and cash equivalents in one
                               financial institution.

                               Costs in Excess of Net Assets Acquired

                               Costs in excess of net assets acquired are being
                               amortized by the straight-line method over 40
                               years. Amortization expense amounted to
                               approximately $160,000 for all of the years
                               presented. The Company periodically reevaluates
                               the carrying amount of the costs in excess of net
                               assets acquired. Based on the Company's
                               projections, and the estimated undiscounted
                               future operating profits and cash flows, the
                               Company expects to recover the remaining amount
                               of the costs in excess of net assets acquired
                               over the remaining estimated useful life of the
                               asset.

                               Acquisition Costs in Excess of Historical Basis
                               of Net Assets Acquired from Affiliates

                               The Company purchased the net assets and
                               outstanding common stock of various companies in
                               a series of transactions with affiliates. The
                               acquisitions have been accounted for as
                               combinations of companies under common control,
                               with the net assets acquired (including costs in
                               excess of net assets acquired arising from prior
                               acquisitions by the affiliates) recorded at their
                               historical cost, comparable to a pooling of
                               interests. The acquisition costs in excess of the
                               historical basis of the net assets acquired have
                               been recorded as a charge to stockholders'
                               equity.


                                                                            F-10
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               Trademarks

                               Trademarks are amortized on the straight-line
                               method over their estimated useful lives (15
                               years). Amortization expense amounted to
                               approximately $113,000 per year for the years
                               ended July 31, 1997 and 1996.

                               Revenue Recognition

                               Sales are recognized when products are shipped.
                               Provision for estimated sales returns and
                               allowances and losses are accrued at the time
                               revenue is recognized.

                               Net Income (Loss) Per Common Share

                               Net income (loss) per common share has been
                               computed, after deducting applicable preferred
                               stock dividend requirements, based upon the
                               weighted average number of common shares
                               outstanding during each of the respective years.
                               In each year, common share equivalents relating
                               to warrants were anti-dilutive and, therefore,
                               not included in the computation.

                               Income Taxes

                               Income taxes are calculated using the liability
                               method specified by Statement of Financial
                               Accounting Standards ("SFAS") No. 109,
                               "Accounting for Income Taxes". SFAS 109 requires
                               a company to recognize deferred tax liabilities
                               and assets for the expected future tax
                               consequences of events that have been recognized
                               in a company's financial statements or tax
                               returns. Under this method, deferred tax
                               liabilities and assets are determined based on
                               the difference between the financial statement
                               carrying amounts and tax basis of assets and
                               liabilities using enacted tax rates in effect in
                               the years in which the differences are expected
                               to reverse. Deferred tax assets have been fully
                               reduced by a valuation allowance since
                               realization is uncertain.


                                                                            F-11
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               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 and disclosure 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.

                               Fair Value of Financial Instruments

                               The carrying amounts of cash and cash
                               equivalents, accounts receivable, accounts
                               payable, accrued compensation and other expenses
                               approximate fair value because of the short
                               maturity of these items. The carrying amounts of
                               the revolving loan and certain long-term debt
                               approximate fair value because the underlying
                               instruments are at terms which reflect prevailing
                               market conditions. It was not practical to
                               determine the fair value of the term loans, see
                               Note 4(a).

                               Long-Lived Assets

                               Long-lived assets are evaluated for impairment
                               when events or changes in circumstances indicate
                               that the carrying amounts of the assets may not
                               be recoverable. When any such impairment exists,
                               the related assets will be written down to their
                               fair value. This policy is in accordance with
                               Statement of Financial Accounting Standards No.
                               121 ("SFAS 121"), "Accounting for the Impairment
                               of Long-Lived Assets to be Disposed Of", which
                               was adopted on August 1, 1996. The adoption of
                               SFAS 121 had no effect on the financial
                               statements.


                                                                            F-12
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               Stock-Based Compensation

                               The Company accounts for its stock option awards
                               under the intrinsic value based method of
                               accounting prescribed by Accounting Principles
                               Board Opinion No. 25, "Accounting for Stock
                               Issued to Employees." Under the intrinsic value
                               based method, compensation cost is the excess, if
                               any, of the quoted market price of the stock at
                               grant date or other measurement date over the
                               amount an employee must pay to acquire the stock.
                               The Company makes pro forma disclosures of net
                               income and earnings per share as if the fair
                               value based method of accounting had been applied
                               as required by SFAS 123, "Accounting for
                               Stock-Based Compensation."

                               Recent Accounting Standards

                               In March 1997, the Financial Accounting Standards
                               Board issued SFAS No. 128 ("SFAS 128"), "Earnings
                               Per Share". SFAS 128 specifies the computation,
                               presentation and disclosure requirements for
                               earnings per share. SFAS 128 is effective for
                               periods ending after December 15, 1997. The
                               adoption of this statement is not expected to
                               have a material effect on the financial
                               statements.

                               In June 1997, the Financial Accounting Standards
                               Board issued two new disclosure standards.
                               Results of operations and financial position will
                               be unaffected by implementation of these new
                               standards.

                               SFAS No. 130 ("SFAS 130"), "Reporting
                               Comprehensive Income", establishes standards for
                               reporting and display of comprehensive income,
                               its components and accumulated balances.
                               Comprehensive income is defined to include all
                               changes in equity except those resulting from
                               investments by owners and distributions to
                               owners. Among other disclosures, SFAS 130
                               requires that all items that are required to be
                               recognized under current accounting standards as
                               components of comprehensive income be reported in
                               a financial statement that is displayed with the
                               same prominence as other financial statements.


                                                                            F-13
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               SFAS No. 131 ("SFAS 131"), "Disclosures about
                               Segments of an Enterprise and Related
                               Information", which supersedes SFAS 14,
                               "Financial Reporting for Segments of a Business
                               Enterprise", establishes standards for the way
                               that public enterprises report information about
                               operating segments in annual financial statements
                               and requires reporting of selected information
                               about operating segments in interim financial
                               statements issued to the public. It also
                               establishes standards for disclosures regarding
                               products and services, geographic areas and major
                               customers. SFAS 131 defines operating segments as
                               components of an enterprise about which separate
                               financial information is available that is
                               evaluated regularly by the chief operating
                               decision maker in deciding how to allocate
                               resources and in assessing performance.

                               Both of these new standards are effective for
                               financial statements for periods beginning after
                               December 15, 1997 and require comparative
                               information for earlier years to be restated. Due
                               to the recent issuance of these standards,
                               management has been unable to fully evaluate the
                               impact, if any, they may have on future financial
                               statement disclosures.

                               Reclassifications

                               Certain amounts in 1996 were reclassified to
                               conform to those used in 1997.

2.    Acquisition              On August 7, 1995, the Company acquired from
                               Milady Brassiere & Corset Co., Inc. ("Milady")
                               the tradenames Roxanne, Harbour Casual and Coco
                               Reef. The purchase price for the tradenames is to
                               be determined based on a percentage of net sales
                               of goods bearing the tradenames Roxanne and
                               Harbour Casual over the next seven years, with a
                               minimum guaranteed purchase price of $1,700,000
                               (which was recorded in fiscal 1996). The Company
                               paid $500,000 of the purchase price at the
                               closing, with the balance payable over 7 years
                               based on a percentage (ranging from 3% to 5%) of
                               net sales, as defined. Any payments in excess of
                               the $1,700,000 will be charged to the trademark
                               account. Through July 31, 1997, another $150,000
                               has been paid. The Company also purchased
                               approximately $500,000 of inventory bearing the
                               purchased tradenames as well as assumed matching
                               customer purchase orders against this inventory.


                                                                            F-14
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

3.    Inventories              Inventories consist of the following:


July 31,                                                  1997           1996
--------------------------------------------------------------------------------
                                                         (in thousands)
Raw materials                                           $3,036        $ 4,058
Work-in-process                                          1,219          1,226
Finished goods                                           4,110          2,446
--------------------------------------------------------------------------------
                                                        $8,365        $ 7,730
================================================================================

4.    Long-term Debt                Long-term debt consists of the following:
      and Credit
      Arrangements 
                                    July 31,              1997           1996
--------------------------------------------------------------------------------
                                                         (in thousands)
Term loan payable (a)                                   $6,060        $ 6,210
Litigation settlement (b)                                   60            147
Other (including $651 and $84 due to 
   related parties)                                        695            324
--------------------------------------------------------------------------------
                                                         6,815          6,681
Less:  Current portion                                    (355)        (1,649)
--------------------------------------------------------------------------------
                                                        $6,460        $ 5,032
================================================================================

                   The future minimum payments of long-term debt are as follows:

                   July 31,
--------------------------------------------------------------------------------
                                                          (in thousands)
                   1998                                                $  355
                   1999                                                 1,509
                   2000                                                 3,477
                   2001                                                 1,459
                   2002                                                    15
--------------------------------------------------------------------------------
                                                                        6,815
                  Interest through maturity                               730
--------------------------------------------------------------------------------
                                                                       $7,545
================================================================================


                                                                            F-15
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                        (a)    Term Loan

                               In fiscal 1994, the Company negotiated two
                               significant amendments to its term loan
                               agreement. The first amendment, dated December
                               15, 1993, modified the payment terms and interest
                               rates of the term loans and reduced the
                               outstanding principal amount of the debt (payable
                               to a related party, see below), upon the issuance
                               of 20,000 shares of its $12 Preferred Series E
                               Stock (the "Series E Preferred Stock"). The
                               second amendment, dated July 31, 1994, extended
                               the maturity dates of the loans, modified the
                               payment terms and interest rates and reduced the
                               outstanding principal amount of the debt by a
                               total of $4,755,000, resulting in an
                               extraordinary gain of approximately $4,165,000
                               for the year ended July 31, 1994.

                               The interest on the debt, which offset the gain
                               recognized upon restructuring (in compliance with
                               SFAS No. 15, "Accounting by Debtors and Creditors
                               for Troubled Debt Restructurings"), was deferred
                               and is being recognized as a reduction of
                               interest expense through the maturity of the
                               debt. The remaining balance of deferred interest
                               at July 31, 1997 and 1996 was $730,000 and
                               $1,182,000, respectively.

                               The Company negotiated three additional
                               amendments dated October 15, 1996 and June 1 and
                               September 1, 1997. The amendments modified
                               payment terms, interest rates and terms of the
                               loan covenants.

                               The outstanding balance of the term loans is
                               approximately $6,060,000 and $6,210,000 at July
                               31, 1997 and 1996, respectively. The loans are
                               repayable in varying amounts through fiscal 2001.
                               Interest, which is payable monthly, accrued at
                               the rate of 1.5% above the one-year LIBOR (5.9%
                               at July 31, 1997 and 1996) for loans totaling
                               approximately $3,887,000 and $3,974,000 at July
                               31, 1997 and 1996, respectively, and accrued at
                               the rate of 1.5% above the prime rate (8.50% and
                               8.25% at July 31, 1997 and 1996, respectively)
                               for the balance of the debt (approximately
                               $2,173,000 and $2,236,000 at July 31, 1997 and
                               1996, respectively).


                                                                            F-16
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               The term loan agreement contains various
                               covenants, including requirements relating to the
                               maintenance of certain specified ratios and
                               levels of income, as defined, and limitations on
                               (i) the creation of new debt, (ii) the
                               amortization of the subordinated debt (Note 5)
                               and the redemption of the cumulative preferred
                               stock (Note 6), (iii) the level of capital
                               expenditures, and (iv) dividends and other
                               restricted payments, as defined. At July 31, 1997
                               and during the year then ended, the Company was
                               in violation of various financial covenants which
                               were waived by the lenders. The covenants were
                               modified for future years.


                               The term loans are subject to certain mandatory
                               repayment provisions using proceeds received from
                               (i) the sale of capital stock, (ii) the
                               collection of certain receivables from related
                               parties, (iii) the sale of collateral, and (iv)
                               excess cash flow as defined in the agreement.

                        (b)    Litigation Settlement

                               In December 1994, the Company entered into an
                               agreement to pay $460,000 to a former executive
                               in settlement of certain litigation. According to
                               the terms of the agreement, an initial payment of
                               $150,000 was made in December 1994, with the
                               balance payable in five semi-annual installments
                               of $50,000 commencing June 30, 1995 and a final
                               payment of $60,000 on December 31, 1997. The
                               settlement has been discounted at an annual
                               effective interest rate of 9% to reflect its
                               present value at July 31, 1997.


                                                                            F-17
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                        (c)    Revolving Line of Credit/Factor Agreement

                               In September 1995, the factor agreement entered
                               into during fiscal 1993 was replaced with a
                               credit agreement that provides a $15,000,000
                               revolving line of credit for advances of up to
                               85% of eligible receivables and 50% of eligible
                               inventories, subject to allowances for specified
                               seasonal overadvances. Borrowings under the
                               revolving line of credit bear interest at either
                               1% above the higher of Federal Funds Rate plus
                               1/2% or the prime rate (the "Alternative Base
                               Rate") or 2-1/2% above the applicable LIBOR
                               reserve rate, at the Company's option, and are
                               secured by the Company's accounts receivable and
                               inventories. In January 1996, the maximum loan
                               amount under the revolving credit facility was
                               increased from $15,000,000 to $23,000,000.

                               In July 1997, the credit agreement was amended
                               whereby the Company now factors substantially all
                               accounts receivable, with recourse, with the same
                               lender. The Company pays a commission rate of
                               .45% of the gross amount of each invoice
                               evidencing a receivable. All collections by the
                               lender will reduce the outstanding principal
                               balance of the revolving line of credit. The
                               agreement also specifies annual minimum volume
                               levels, as defined. The term of the credit
                               agreement has been extended to August 31, 1999
                               and certain existing covenants including levels
                               of working capital, net worth and net income have
                               been modified. At July 31, 1997 and for the year
                               then ended, the Company was in violation of
                               certain financial covenants which were waived by
                               the lender. The covenants were modified for
                               future years.

                               The agreement calls for affiliate corporate
                               guarantees as well as certain shareholder
                               guarantees in the amount of $5,800,000 consisting
                               of cash and other collateral.


                                                                            F-18
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

5.    Subordinated Note        In May 1989, the Company issued to a related 
      Payable                  party a $1,000,000 subordinated promissory note
                               which bears interest at the rate of 9% per annum,
                               payable semi-annually, with an original maturity
                               of December 31, 1993. In connection with an
                               amendment to the credit agreement, in December
                               1993, the holder of this note agreed to (i)
                               forgive accrued and unpaid interest through
                               December 15, 1993, in the amount of $266,250,
                               (ii) extend the maturity date of the note to June
                               1998, and (iii) reduce the interest rate to 8%.

                               In November 1995, the Company entered into an
                               agreement for the exchange of the $1,000,000
                               subordinated note dated May 1989 plus accrued and
                               unpaid interest of $150,000 for an amended and
                               restated subordinated note in the aggregate
                               principal amount of $600,000. As a result of this
                               exchange, a gain of $550,000 was recognized and
                               recorded as extraordinary income in the year
                               ended July 31, 1996. In February 1996, a
                               principal payment of $50,000 was made on the
                               amended note. The balance of the amended note is
                               payable $50,000 in June 1996 and 1997 to the
                               extent of "excess cash flow" (as defined), with
                               the remaining balance due on June 30, 1998.
                               During fiscal 1997, the Company did not have
                               excess cash flow and, under the terms of the
                               agreement, deferred payment of the $50,000.
                               Interest accrues on the unpaid principal balance
                               of the amended note at a rate of 8-1/2% and is
                               payable on a quarterly basis. Additional interest
                               accrues at the rate of 4% on the unpaid principal
                               balance and was payable on June 30, 1998. The
                               maturity date was extended to June 30, 2000.

                               The subordinated promissory note is subject to
                               certain restricted payment covenants and is
                               subordinate to payment in full of all senior
                               debt.

6.    Cumulative               The Company's $9 Cumulative Preferred Series B 
      Redeemable               Stock ("Series B Preferred Stock") has a 
      Preferred Stocks         redemption value of $100 per share and is subject
                               to mandatory semi-annual redemption requirements
                               which commenced on June 30, 1995, with a final
                               redemption on December 31, 1997. Such redemptions
                               are not permitted according to the terms of the
                               Company's loan agreement until payment in full of
                               the senior debt. The shares were issued at a
                               discount which is being amortized over the
                               redemption period. 35,000 shares were outstanding
                               as of July 31, 1997 and 1996.


                                                                            F-19
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               The Series B Preferred Stock is nonvoting and
                               contains certain restrictions on the payment of
                               dividends on the Common Stock or the acquisition
                               of Common Stock by the Company.

                               In fiscal 1995, the Company entered into
                               agreements providing for the exchange of 25,000
                               shares of the Series B Preferred Stock and
                               accrued dividends thereon for 11,650 shares of
                               the Company's $8.50 Cumulative Preferred Series H
                               Stock ("Series H Preferred Stock") plus
                               consideration of $85,000. The Series H Preferred
                               Stock has a redemption value of $100 per share
                               and is subject to mandatory redemption
                               requirements commencing on May 1, 1996, with a
                               final redemption on May 1, 2002. Redemptions for
                               1997 and 1996 were waived by the holder. 11,185
                               shares were outstanding as of July 31, 1997 and
                               1996.

                               The excess of the carrying value of the exchanged
                               Series B Preferred Stock and accrued dividends
                               thereon over the redemption value of the Series H
                               Preferred Stock and consideration paid was
                               recorded as a capital contribution of
                               approximately $2,097,000 in fiscal 1995.

7.    Stockholders' Deficit    The Series E Preferred Stock, with a stated value
                               $100 per share, is nonvoting and may be redeemed,
                               subject to certain conditions, at the Company's
                               option at anytime. The Series E Preferred Stock
                               ranks senior to common shares as to dividends and
                               liquidation preference.

                               The $12 Preferred Series F Stock (the "Series F
                               Preferred Stock"), with a stated value of $100
                               per share, is nonvoting and may be redeemed,
                               subject to certain conditions, at the Company's
                               option. The Series F Preferred Stock was issued
                               with warrants to purchase an aggregate of
                               3,876,140 shares of the Company's common stock.
                               Each warrant entitled the holder to purchase the
                               Company's common stock at an exercise price of
                               $.10 per share through November 1, 1996. The
                               warrants to 3,876,140 shares were exercised at
                               July 31, 1996.

                               The $10 Preferred Series G Stock (the "Series G
                               Preferred Stock") has a stated value of $100 per
                               share, is non-voting and may be redeemed by the
                               Company, subject to certain conditions.


                                                                            F-20
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               Effective July 30, 1996, the Company effectuated
                               a one-for-20 exchange of the Series E, F and G
                               Preferred Stock and issued 8,096,940 shares of
                               common stock. If this conversion occurred
                               effective August 1, 1995, the net loss per common
                               share for the year ended July 31, 1996 would have
                               decreased $.03 from $.05 to $.02.

                               In February 1996, the stockholders agreed to
                               amend the Company's Certificate of Incorporation
                               to increase the number of authorized common
                               shares from 15,000,000 to 30,000,000.

8.    Pension Plans            The Company had a noncontributory defined benefit
                               pension plan (the "Plan") covering substantially
                               all employees in the Robby Len Division who are
                               not members of a collective bargaining unit, and
                               have met certain age and service requirements.

                               Effective July 31, 1994, the Company suspended
                               the Plan and ceased contributions. In fiscal
                               1996, the Company terminated the Plan by settling
                               the vested benefit portion of the projected
                               benefit obligation through the purchase of
                               nonparticipating annuity contracts or lump-sum
                               payments to participants. The Company recognized
                               a net settlement gain of approximately $220,000
                               and a curtailment gain of approximately $340,000
                               in fiscal 1996 and 1994, respectively.

                               Effective October 1, 1994, the Company adopted a
                               tax qualified 401(k) plan. Participants may
                               contribute up to 15% of their salary. For fiscal
                               1997 and 1996, the Company matched 40% of the
                               participant's contribution up to a maximum of 6%
                               of each participant's salary. The expense related
                               to the 401(k) plan was approximately $20,000 and
                               $77,000 for the years ended July 31, 1997 and
                               1996, respectively.

                               The Company also contributes to noncontributory,
                               multi-employer retirement and health plans for
                               its union employees. The Company's contributions
                               to the plans were approximately $854,000,
                               $968,000 and $1,029,000 for the years ended July
                               31, 1997, 1996 and 1995, respectively.


                                                                            F-21
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

9.    Related Party            Certain of the Company's swimwear products are 
      Transactions             manufactured on a contract basis by companies 
                               owned by certain officers of the Company. Amounts
                               paid to such contractors approximated $3,616,000,
                               $3,965,000 and $2,888,000 for the years ended
                               July 31, 1997, 1996 and 1995, respectively.

                               Rent expense includes payments to an affiliate of
                               approximately $402,000, $227,000 and $214,000 for
                               the years ended July 31, 1997, 1996 and 1995,
                               respectively.

10.   Income Taxes             Deferred income taxes reflect the impact of
                               temporary differences between the amount of
                               assets and liabilities for financial reporting
                               purposes and such amounts as measured by tax laws
                               and regulations. These temporary differences are
                               determined in accordance with SFAS 109. Deferred
                               tax assets are comprised of the following:

                               July 31,                       1997         1996
                               -------------------------------------------------
                                                   (in thousands)
                               Inventory (Section 263A)   $     58     $     44
                               Accumulated depreciation        465          356
                               Receivable reserve              615          211
                               Other accruals                   23           23
                               Net operating loss           19,000       17,356
                               -------------------------------------------------
                               Gross deferred tax assets    20,161       17,990
                               Valuation allowance         (20,161)     (17,990)
                               -------------------------------------------------
                               Net deferred tax asset     $      -     $      -
                               -------------------------------------------------

                               The current provision for income taxes consists
                               of state income taxes. For the years ended July
                               31, 1997, 1996 and 1995, Federal income taxes
                               have not been provided for because of net
                               operating losses.

                               At July 31, 1997, the Company has the ability to
                               offset future taxable income aggregating
                               approximately $47,000,000 with tax loss
                               carryforwards which expire at various times from
                               2000 to 2012.


                                                                            F-22
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

11.   Leases                   The Company leases plant, warehouse and office
                               facilities and machinery and equipment under
                               noncancellable operating leases that expire in
                               various years through 2000. One of the plant
                               facilities is leased from an affiliate (see Note
                               9). Certain of the leases, which may be renewed
                               for periods ranging from five to ten years,
                               provide for rental adjustments based upon cost of
                               living escalations, changes in the Consumer Price
                               Index and for payments by the Company for
                               maintenance costs, property taxes and other
                               occupancy costs in excess of specified amounts
                               and insurance obligations on the leased property.

                               Future minimum lease payments, including rent
                               payable to an affiliate under noncancellable
                               operating leases as of July 31, 1997 are as
                               follows:

                               -------------------------------------------------
                                                                 (in thousands)
                               1998                                     $  986
                               1999                                        965
                               2000                                        865
                               2001                                        402
                               2002                                        134
                               -------------------------------------------------
                                      Total                             $3,352
                               =================================================

                               Rent expense amounted to approximately $985,000,
                               $839,000 and $645,000 for the years ended July
                               31, 1997, 1996 and 1995, respectively (see Note
                               9).

12.   Incentive                The Company has a management incentive 
      Compensation Plans       compensation plan for certain key executives and 
      and Employment           employees. The incentive compensation is based 
      Arrangements             upon percentages of adjusted pre-tax earnings, as
                               defined, of one of the Company's divisions. For
                               the years ended July 31, 1997, 1996 and 1995,
                               such compensation amounted to approximately $-0-,
                               $155,000 and $364,000, respectively.


                                                                            F-23
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

13.   Restructuring and        In connection with the financial difficulties 
      Other Special            incurred by the Company in fiscal 1997, various 
      Charges                  restructuring and other special charges were 
                               recorded and accrued as of July 31, 1997. These 
                               charges consisted of the following:

                               -------------------------------------------------
                               Financial consultant fees                $250,000
                               
                               Severance pay for terminated employees    182,600
                               
                               Professional and bank fees                175,000
                               
                               Other                                     142,400
                               -------------------------------------------------
                                                                        $750,000
                               =================================================

14.   Fourth Quarter           In the fourth quarter of fiscal 1997, the Company
      Adjustments              recorded certain material charges; including (i) 
                               restructuring and other special charges of
                               $750,000; (ii) inventory reserves and write-downs
                               of $480,000; and (iii) receivable reserves of
                               $125,000. These charges totaled $1,355,000, or
                               $.07 per share.

15.   Commitments,             (a)  The Company is a party to certain litigation
      Contingencies and             incurred in the normal course of business.
      Other Comments                While any litigation has an element of 
                                    uncertainty, the litigation pending against 
                                    the Company either (i) seeks immaterial
                                    damage amounts, or (ii) in the opinion of
                                    management and the Company's outside legal
                                    counsel, will be resolved in a manner that
                                    should not have a material adverse effect on
                                    the Company's financial statements.


                                                                            F-24
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

================================================================================

                               (b)  Financial instruments which potentially
                                    expose the Company to concentrations of
                                    credit risk, as defined by Statement of
                                    Financial Accounting Standards No. 105,
                                    consist primarily of trade accounts
                                    receivable. The Company's customers are not
                                    concentrated in any specific geographic
                                    region, but are concentrated in the apparel
                                    retail business. Sales to three major
                                    customers (with sales in excess of 10% of
                                    total sales) approximated, on an individual
                                    basis, 14%, 13% and 12% for the year ended
                                    July 31, 1997. These same three customers
                                    were also the major customers for 1996. On
                                    an individual basis, they accounted for 14%,
                                    12% and 11% for the year ended July 31,
                                    1996. Sales to one major customer, who was
                                    also a major customer in 1997 and 1996,
                                    approximated 13% for the year ended July 31,
                                    1995.


                                                                            F-25
<PAGE>

Report of Independent Certified Public Accountants


Apparel America, Inc.
New Haven, Connecticut

The audits referred to in our report dated September 23, 1997 (which included an
explanatory paragraph regarding the Company's ability to continue as a going
concern), relating to the consolidated financial statements of Apparel America,
Inc. and subsidiary which is included in Item 8 of this Form 10-K, included the
audit of the financial statement schedule listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based upon our audits.

In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.



BDO Seidman, LLP



New York, New York

September 23, 1997


                                                                             S-1
<PAGE>

                                                           Apparel America, Inc.
                                                                  and Subsidiary

                                               Valuation and Qualifying Accounts
                                                          (thousands of dollars)
                                                                     Schedule II

<TABLE>
<CAPTION>
              Column A                         Column B              Column C                           Column D             
--------------------------------------       ------------   ---------------------------   ---------------------------------- 
                                                                     Additions                         Deductions
                                                            ---------------------------   ----------------------------------
                                                                                          Uncollectible
                                             Balance at     Charged to                         accounts      Transferred to  
                                              beginning      costs and     Charged to        written off,      net balance   
            Description                       of period       expenses   other accounts   net of recoveries  due from factor 
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>            <C>            <C>               <C>           <C>         
Year ended July 31, 1997:                                   
   Reserves and allowances deducted from                    
     asset accounts:                                        
       Allowance for uncollectible                          
         accounts:                                          
           Accounts receivable                     $584           $461           $    -            $370          $   -       
           Due from factor                            -            225                -               -              -       
-----------------------------------------------------------------------------------------------------------------------------
                                                   $584           $686           $    -            $370          $   -       
-----------------------------------------------------------------------------------------------------------------------------
Year ended July 31, 1996:                                   
   Reserves and allowances deducted from                    
     asset accounts:                                        
       Allowance for uncollectible                          
         accounts:                                          
           Accounts receivable                     $302           $298           $ 124             $140          $   -       
           Due from factor                          124              -            (124)               -              -       
-----------------------------------------------------------------------------------------------------------------------------
                                                   $426           $298           $   -             $140          $   -       
-----------------------------------------------------------------------------------------------------------------------------
Year ended July 31, 1995:                                   
   Reserves and allowances deducted from                    
     asset accounts:                                        
       Allowance for uncollectible                          
         accounts:                                          
           Accounts receivable                     $147           $195           $   -            $ 40           $  -        
           Due from factor                           50              -               -             (74)             -        
-----------------------------------------------------------------------------------------------------------------------------
                                                   $197           $195           $   -            $(34)          $  -        
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                             
              Column A                            Column E
--------------------------------------          ------------
                                             
                                             
                                             
                                                 Balance at
                                                   end of
            Description                            period
-----------------------------------------------------------
Year ended July 31, 1997:                    
   Reserves and allowances deducted from     
     asset accounts:                         
       Allowance for uncollectible           
         accounts:                           
           Accounts receivable                      $675
           Due from factor                           225
-----------------------------------------------------------
                                                    $900
-----------------------------------------------------------
Year ended July 31, 1996:                    
   Reserves and allowances deducted from     
     asset accounts:                         
       Allowance for uncollectible           
         accounts:                           
           Accounts receivable                      $584   
           Due from factor                             -
-----------------------------------------------------------
                                                    $584   
-----------------------------------------------------------
Year ended July 31, 1995:                    
   Reserves and allowances deducted from     
     asset accounts:                         
       Allowance for uncollectible           
         accounts:                           
           Accounts receivable                      $302
           Due from factor                           124
-----------------------------------------------------------
                                                    $426
-----------------------------------------------------------
                                                            
                                                            
                                                                             S-2
 
<PAGE>

                                  EXHIBIT INDEX

Number        Description
------        -----------

2.1           Joint Plan of Reorganization dated July 7, 1987 (filed as 
              Exhibit 2.1 to the Company's Annual Report on Form 10-K for the 
              fiscal year ended January 31, 1988 and incorporated herein by 
              reference.)

2.2           Amended Joint Plan of Reorganization dated September 29, 1987 
              (filed as Exhibit 2.2 to the Company's Annual Report on Form 
              10-K for the fiscal year ended January 31, 1988 and 
              incorporated herein by reference.)

3.1           Articles of Incorporation of Apparel America, Inc. (filed as 
              Exhibit 3(i) to the Company's Current Report on Form 8-K dated 
              January 26, 1989 and incorporated herein by reference.)

3.2           By-Laws of Apparel America, Inc. (filed as Exhibit 3(i) to the 
              Company's Annual Report on Form 10-K for the fiscal year ended 
              January 31, 1988 and incorporated herein by reference.)

4.1           Specimen Certificate of Common Stock of Apparel America, Inc. 
              (filed as Exhibit 4.1 to the Company's Annual Report on Form 
              10-K for the fiscal year ended January 31, 1989 and 
              Incorporated herein by reference.)

4.2           Certificate of Designation, References and Rights of $12 
              Cumulative Preferred Stock of Apparel America, Inc. (filed as 
              Exhibit 4.2 to the Company's Annual Report on Form 10-K for the 
              fiscal year ended January 31, 1989 and incorporated herein by 
              reference.)

4.            Specimen Certificate of $12 Cumulative Preferred Stock of 
              Apparel America, Inc. (filed as Exhibit 4.3 to the Company's 
              Annual Report on Form 10-K for the fiscal year ended January 
              31, 1989 and incorporated herein by reference.)




<PAGE>

4.4           Form of Registration Rights Agreement Relating to Apparel 
              America, Inc. Common Stock (filed as Exhibit (4)(i) to the 
              Company's Current Report on Form 8-K dated May 29, 1989 and 
              incorporated herein by reference.)

4.5           Certificate of Designation, Preferences and Rights of $9 
              Cumulative Preferred Series B Stock of Apparel America, Inc. 
              (filed as Exhibit (4)(ii) to the Company's Current Report on 
              Form 8-K dated May 29, 1989 and incorporated herein by 
              reference.)

4.6           Specimen Certificate of $9 Cumulative Preferred Series B Stock 
              of Apparel America, Inc.  (Filed as Exhibit 4.6 to the 
              Company's Annual Report on Form 10-K for the fiscal year ended 
              January 31, 1990 and incorporated herein by reference.)

4.7           Certificate of Designation, Preferences and Rights of $12 
              Cumulative Preferred Series C Stock of Apparel America, Inc. 
              (filed as Exhibit (4)(iii) to the Company's Current Report on 
              Form 8-K dated May 29, 1989 and incorporated herein by 
              reference.)

4.8           Specimen Certificate of $12 Cumulative Preferred Series C Stock 
              of Apparel America, Inc.  (Filed as Exhibit 4.8 to the 
              Company's Annual Report on Form 10-K for the fiscal year ended 
              January 31, 1990 and incorporated herein by reference.)

4.9           Form of 9% Subordinated Note due December 31, 1993 of Apparel 
              America, Inc. (filed as Exhibit (4)(iv) to the Company's 
              Current Report on Form 8-K dated May 29, 1989 and incorporated 
              herein by reference.)

4.10          Form of 11% Subordinated Notes due December 31, 1994 of Apparel 
              America, Inc. (filed as Exhibit (4)(v) to the Company's Current 
              Report on Form 8-K dated May 29, 1989 and incorporated herein 
              by reference.)




<PAGE>

4.11          Form of 12% Subordinated Notes due December 31, 1998 of Apparel 
              America, Inc. (included as Exhibit B to the Asset Purchase 
              Agreement filed as Exhibit 2 to the Company's Current Report on 
              Form 8-K dated May 29, 1989 and incorporated herein by 
              reference.)

4.12          Certificate of Amendment of Certificate of Designation, 
              Preferences and Rights of $12 Cumulative Preferred Stock of 
              Apparel America, Inc.  (Filed as Exhibit 4.12 to the Company's 
              Annual Report on Form 10-K for the fiscal year ended January 
              31, 1990 and incorporated herein by reference.)

4.13          Certificate of Amendment of Certificate of Designation, 
              Preferences and Rights of $12 Cumulative Preferred Series C 
              Stock of Apparel America, Inc.  (Filed as Exhibit 4.13 to the 
              Company's Annual Report on Form 10-K for the fiscal year ended 
              January 31, 1990 and incorporated herein by reference.)

4.14          Certificate of Designation, Rights and Preferences of $10 
              Cumulative Preferred Series D Stock of Apparel America, Inc.  
              (Filed as Exhibit 4.14 to the Company's Annual Report on Form 
              10-K for the fiscal year ended January 31, 1990 and 
              incorporated herein by reference.)

4.15          Specimen Certificate of $10 Cumulative Preferred Series D Stock 
              of Apparel America, Inc.  (Filed as Exhibit 4.15 to the 
              Company's Annual Report on Form 10-K for the fiscal year ended 
              January 31, 1990 and incorporated herein by reference.)

4.16          Certificate of Designation, Rights and Preferences of $12 
              Preferred Series E Stock of Apparel America, Inc.  (Filed as 
              Exhibit 4.16 to the Company's Annual Report on Form 10-K for 
              the fiscal year ended January 31, 1990 and incorporated herein 
              by reference.)




<PAGE>

4.17          Specimen Certificate of $12 Preferred Series E Stock of Apparel 
              America, Inc.  (Filed as Exhibit 4.17 to the Company's Annual 
              Report on Form 10-K for the fiscal year ended January 31, 1990 
              and incorporated herein by reference.)

4.18          Certificate of Designation, Rights and Preferences of $12 
              Preferred Series F Stock of Apparel America, Inc. (Previously 
              filed)

4.19          Specimen Certificate of $12 Preferred Series F Stock of Apparel 
              America, Inc. (Previously filed)

4.20          Certificate of Designation, Rights and Preferences of $10 
              Preferred Series G Stock of Apparel America, Inc. (Previously 
              filed)

4.21          Specimen Certificate of $10 Preferred Series G Stock of Apparel 
              America, Inc. (Previously filed)

4.22          Certificate of Designation, Rights and Preferences of $8.50 
              Cumulative Preferred Series H Stock of Apparel America, Inc. 
              (previously filed)

4.23          Specimen Certificate of $8.50 Cumulative Preferred Series H 
              Stock of Apparel America, Inc. (previously filed)

4.24          Form of Amended and Restated Subordinated Note dated November 
              1, 1995 by Apparel America, Inc. (previously filed)




<PAGE>

10.1          Form of Promissory Note from Miller Shoe Industries, Inc. to 
              affiliates of certain stockholders (filed as Exhibit 10.1 to 
              the Company's Annual Report on Form 10-K for the fiscal year 
              ended January 31, 1988 and incorporated herein by reference.)

10.2          Stock Acquisition Agreement dated January 3, 1989 between 
              Apparel America, Inc. and Great American Industries, Inc. 
              (filed as Exhibit 10.2 to the Company's Annual Report on Form 
              10-K for the fiscal year ended January 31, 1989 and 
              incorporated herein by reference.)

10.3          12% Subordinated Promissory Note dated January 13, 1989 from 
              Apparel America, Inc. to Great American Industries, Inc. in the 
              original principal amount of $1,650,000 (filed as Exhibit 10.3 
              to the Company's Annual Report on Form 10-K for the fiscal year 
              ended January 31, 1989 and incorporated herein by reference.)

10.4          Asset Purchase Agreement dated as of April 27, 1989 by and 
              between Apparel America, Inc. and Mayfair Industries, Inc. 
              (filed as Exhibit 2 to the Company's Current Report on Form 8-K 
              dated May 29, 1989 and incorporated herein by reference.)

10.5          Amended and Restated Credit Agreement dated as of May 12, 1989 
              among Apparel America, Inc., Norstar Bank, Manufacturers 
              Hanover Trust Company and Norstar Bank, as Agent (filed as 
              Exhibit (10)(i) to the Company's Current Report on Form 8-K 
              dated May 29, 1989 and incorporated herein by reference.)

10.6          Form of Purchase Agreement for 60,000 Units consisting of 
              60,000 Shares of $9 Cumulative Preferred Series B Stock and 
              498,000 Shares of Common Stock of Apparel America, Inc. (filed 
              as Exhibit (10)(ii) to the Company's Current Report on Form 8-K 
              dated May 29, 1989 and incorporated herein by reference.)




<PAGE>

10.7          Form of Purchase Agreement for $5,000,000 Subordinated C Notes 
              due December 31, 1994 of Apparel America, Inc. (filed as 
              Exhibit (10)(iii) to the Company's Current Report on Form 8-K 
              dated May 29, 1989 and incorporated herein by reference.)

10.8          Form of Purchase Agreement for $1,000,000 Subordinated B Note 
              due December 31, 1993 Apparel America, Inc. (filed as Exhibit 
              (10)(iv) to the Company's Current Report on Form 8-K dated May 
              29, 1989 and incorporated herein by reference.)

10.9          Amendment dated as of December 21, 1989 to Amended and Restated 
              Credit Agreement dated as of May 12, 1989 among Apparel 
              America, Inc., Norstar Bank, Manufacturers Hanover Trust 
              Company and Norstar Bank, as Agent. (Filed as Exhibit 10.8 to 
              the Company's Annual Report on Form 10-K for the fiscal year 
              ended January 31, 1990 and incorporated herein by reference.)

10.10         Preferred Stock and Warrant Purchase Agreement dated as of 
              January 29, 1990 between Mayfair Industries, Inc. and Apparel 
              America, Inc. (Filed as Exhibit 10.9 to the Company's Annual 
              Report on Form 10-K for the fiscal year ended January 31, 1990 
              and incorporated herein by reference.)

10.11         Preferred Stock and Warrant Purchase Agreement dated as of 
              January 29, 1990 between Great American Industries, Inc. and 
              Apparel America, Inc.  (Filed as Exhibit 10.10 to the Company's 
              Annual Report on Form 10-K for the fiscal year ended January 
              31, 1990 and incorporated herein by reference.)




<PAGE>

10.12         Agreement to Extend Payment Dates dated as of January 29, 1990 
              between Mayfair Industries, Inc. and Apparel America, Inc.  
              (Filed as Exhibit 10.11 to the Company's Annual Report on Form 
              10-K for the fiscal year ended January 31, 1990 and 
              incorporated herein by reference.)

10.13         Agreement to Extend Payment Dates dated as of January 29, 1990 
              between Great American Industries, Inc. and Apparel America, 
              Inc.  (Filed as Exhibit 10.12 to the Company's Annual Report on 
              Form 10-K for the fiscal year ended January 31, 1990 and 
              incorporated herein by reference.)

10.14         Letter Agreement dated January 29, 1990 from Burton I. Koffman 
              to Apparel America, Inc. re 11% Subordinated Note Due December 
              31, 1994.  (Filed as Exhibit 10.13 to the Company's Annual 
              Report on Form 10-K for the fiscal year ended January 31, 1990 
              and incorporated herein by reference.)

10.15         Letter Agreement dated February 1, 1990 from REK Corp. to 
              Apparel America, Inc. re 11% Subordinated Notes Due December 
              31, 1994  (Filed as Exhibit 10.14 to the Company's Annual 
              Report on Form 10-K for the fiscal year ended January 31, 1990 
              and incorporated herein by reference.)

10.16         Forms of Warrants dated as of January 29, 1990 issued by 
              Apparel America, Inc. to Mayfair Industries, Inc. and Great 
              America Industries, Inc.  (Filed as Exhibit 10.15 to the 
              Company's Annual Report on Form 10-K for the fiscal year ended 
              January 31, 1990 and incorporated herein by reference.)




<PAGE>

10.17         Amendment dated as of April 27, 1990 to Amended and Restated 
              Credit Agreement dated as of May 12, 1989 among Apparel 
              America, Inc., Norstar Bank, Manufacturers Hanover Trust 
              Company and Norstar Bank, as Agent. (Filed as Exhibit 10.16 to 
              the Company's Annual Report on Form 10-K for the fiscal year 
              ended January 31, 1990 and incorporated herein by reference.)

10.18         Preferred Stock and Warrant Assignment dated as of January 31, 
              1990 from Great American Industries, Inc. to REK Corp.  (Filed 
              as Exhibit 10.17 to the Company's Annual Report on Form 10-K 
              for the fiscal year ended January 31, 1990 and incorporated 
              herein by reference.)

10.19         Preferred Stock Exchange Agreement dated as of April 19, 1990 
              between Mayfair Industries, Inc. and Apparel America, Inc.  
              (Filed as Exhibit 10.18 to the Company's Annual Report on Form 
              10-K for the fiscal year ended January 31, 1990 and 
              incorporated herein by reference.)

10.20         Preferred Stock Exchange Agreement dated as of April 19, 1990 
              between Great America Industries, Inc. and Apparel America, 
              Inc.  (Filed as Exhibit 10.19 to the Company's Annual Report on 
              Form 10-K for the fiscal year ended January 31, 1990 and 
              incorporated herein by reference.)

10.21         Preferred Stock Exchange Agreement dated as of April 19, 1990 
              between REK Corp. and Apparel America, Inc. (Filed as Exhibit 
              10.20 to the Company's Annual Report on Form 10-K for the 
              fiscal year ended January 31, 1990 and incorporated herein by 
              reference.)




<PAGE>

10.22         Second Amended and Restated Credit Agreement dated as of 
              October 1, 1991 among Apparel America, Inc., Norstar Bank, 
              Manufacturers Hanover Trust Company and Norstar Bank, as Agent. 
              (Previously filed)

10.23         First Amendment to Second Amended and Restated Credit Agreement 
              dated as of October 1, 1991 by and among Apparel America, Inc., 
              Norstar Bank and Manufacturers Hanover Trust Company. 
              (Previously filed)

10.24         Preferred Stock Exchange Agreement dated November 4, 1991 and 
              effective as of February 1, 1991 between Great American 
              Industries, Inc. and Apparel America, Inc. (Previously filed)

10.25         Preferred Stock Exchange Agreement dated November 4, 1991 and 
              effective as of February 1, 1991 between Mayfair Industries, 
              Inc. and Apparel America, Inc. (Previously filed)

10.26         Preferred Stock Exchange Agreement dated November 4, 1991 and 
              effective as of February 1, 1991 between REK Corp. and Apparel 
              America, Inc. (Previously filed)

10.27         Preferred Stock Exchange Agreement dated November 4, 1991 and 
              effective as of February 1, 1991 between Ben Arnold Company, 
              Inc. and Apparel America, Inc. (Previously filed)

10.28         Preferred Stock Exchange Agreement dated November 4, 1991 and 
              effective as of October 1, 1991 between Mayfair Industries, 
              Inc. and Apparel America, Inc. (Previously filed)

10.29         Preferred Stock Exchange Agreement dated November 4, 1991 
              between Burton I. Koffman and Apparel America, Inc. (Previously 
              filed)




<PAGE>

10.30         Fifth Amended and Restated Credit Agreement dated as of July 
              31, 1994 among  Apparel America, Inc., Connecticut Development 
              Authority, Binghamton Savings Bank, A.I. Associates, Inc. and 
              Binghamton Savings Bank, as Agent. (previously filed)

10.31         First Amendment dated January 12, 1996 to the Fifth Amended and 
              Restated Credit Agreement dated as of July 31, 1994 among 
              Apparel America, Inc., Connecticut Development Authority, 
              Binghamton Savings Bank, A.I. Associates, Inc. and Binghamton 
              Savings Bank, as Agent. (previously filed)

10.32         Second Amendment dated June 1, 1996 to the Fifth Amended and 
              Restated Credit Agreement dated as of July 31, 1994 among 
              Apparel America, Inc., Connecticut Development Authority, 
              Binghamton Savings Bank, A.I. Associates, Inc. and Binghamton 
              Savings Bank, as Agent. (previously filed)

10.33         Third Amendment dated October 15, 1996 to the Fifth Amended and 
              Restated Credit Agreement dated as of July 31, 1994 among 
              Apparel America, Inc., Connecticut Development Authority, 
              Binghamton Savings Bank, A.I. Associates, Inc. and Binghamton 
              Savings Bank, as Agent. (previously filed)

10.34         Fourth Amendment dated June 1, 1997 to the Fifth Amended and 
              Restated Credit Agreement dated as of July 31, 1994 among 
              Apparel America, Inc., Connecticut Development Authority, 
              Binghamton Savings Bank, A.I. Associates, Inc. and Binghamton 
              Savings Bank, as Agent.  (filed herewith)




<PAGE>

10.35         Fifth Amendment dated September 1, 1997 to the Fifth Amended 
              and Restated Credit Agreement dated as of July 31, 1994 among 
              Apparel America, Inc., Connecticut Development Authority, 
              Binghamton Savings Bank, A.I. Associates, Inc. and Binghamton 
              Savings Bank, as Agent.  (filed herewith)

22            Subsidiaries of Apparel America, Inc. (previously filed)

28.1          Bankruptcy Court Order dated November 25, 1987 Confirming Joint 
              Plan of Reorganization (filed as Exhibit 28.1 to the Company's 
              Annual Report on Form 10-K for the fiscal year ended January 
              31, 1988 and incorporated herein by reference.)